A broader impact on purchasing parity: Analysis of inflation in Bangladesh

In Bangladesh, a developing country, I witnessed a heart-wrenching incident last year at the marketplace. I saw someone in tears, huddled in a corner near a meat shop. Curiosity piqued, I approached him to find out what had happened. He explained that he could no longer afford to eat meat and was struggling to maintain a balanced diet due to the skyrocketing prices of food. Many individuals in Bangladesh are struggling to make ends meet and afford basic necessities. This is just one example of the larger issue of inflation that is affecting the country.

In general, every aspect of economics and the modular calculation of a sovereign economy revolves on the issue of inflation. As prices continue to rise, industries are accelerating toward another economic downturn. As a result, foreign buyers are switching to alternative options. This is because the relative affordability of importing goods from Bangladesh has decreased day by day (IMF, 3–5).

The ready-made Garments (RMG) sector was previously struggling to recover post-pandemic as they had to encounter a cancellation of orders worth $3 billion from almost every brand (Uddin, 2023). Apart from the fall in demand, freight costs rose by almost four times, and the price of raw materials spiked by 15%–20%. However, being the most prominent industry within the economy, RMG soon rebounded as they registered a record high volume of exports worth AUD $65.07 billion and kept the inflationary pressures under control. However, our focus is within the economy, and unlike RMG, there are other industries suffering from economic changes such as the rise in inflation, and we will be analysing those industries in depth (Uddin, 2023).

To begin with, we will be looking at the textile industry. The global economic downturn has led many major textile franchises to shut down and, in return, decreased the export rate in Bangladesh. It is the third tier according to consumer preference, and the rise in exports is uncertain with the current situation. EU market closures have added fuel to the fire, along with the gas price hike, as they increased the production cost from 5% to 8%, depending on the capacity of the firm (Uddin, 2023).

Industry professionals believe that due to the global price spike in the energy sector, Bangladesh will lose significant competitiveness in the market as there are other players, like Pakistan, thriving in the textile sector.

Furthermore, jute products once witnessed a boom within the economy but have seen a 21% decline in earnings in the current fiscal year for Bangladesh from the first three quarters last year. Top industry professionals believe that the high price of raw materials has led to a drop in income. They believe stockists drove the price of raw jute, which was previously ranging from BDT 2000 to BDT 2500 per maund (AUD $27.76 to $34.70). As a result, Turkey, the largest importer of jute from Bangladesh, switched to another renewable alternative as they have started using recycled clothing yarn instead of jute yarn to produce the lower parts of a carpet (Uddin, 2023).

Lastly, the leather industry has been in constant fluctuation, seeing ups and downs, but the export section of leather goods has observed a 20% fall. The President of the Leather Goods and Footwear Manufacturers and Exporters Association of Bangladesh has confirmed that the rising price and the Ukraine war situation were the dominant factors in the drop recorded in this sector. Similarly, the US market is no longer the highest importer of leather as sales have dropped due to the high inflation rate and they are currently clearing out the remaining inventories (Uddin, 2023). With the rising uncertainties, industrialists feel that alternative countries like Australia and Canada can be the next best export destinations for Bangladesh  (Uddin, 2023).

Given the high inflationary pressures brought on by the war between Russia and Ukraine, Bangladesh had a genuine period of stable inflation, but the streak is now over (IMF, 3–5). Controlling inflation and enhancing macroeconomic stability require a balancing act between managing inflation and economic growth. The International Monetary Fund (IMF) has performed a semi-structural quarterly projection model to deduce four drivers of the rising inflation in Bangladesh (IMF, 3–5). The drivers are as follows:

1. Bangladesh's inflation situation was triggered by the cost-push factors.
2. Passed-through exchange rate depreciation led to a constant surge in prices.
3. Inflation got entrenched due to the second-round effect.
4. Inflation expectations have remained constant.

These drivers were essential in order to find the instability and correct the situation. Proposing models and applying the semi structural Quarterly Projection Model, the IMF proposed some active scenarios and policies that Bangladesh Bank can adopt to persevere through this situation. The scenarios and policies are given below:

• Scenario 1: The “active policy” scenario assumes that Bangladesh Bank actively determines its policy rate in every quarter of the forecast horizon to minimise expected inflation deviation from the target, keep demand pressures checked, and ensure that the call money rate closely aligns with the policy rate.
• Scenario 2: The “hawkish policy” scenario that expects Bangladesh Bank to bring inflation down to the target range by the end of FY24.
• Scenario 3: The ‘’dovish policy’’ scenario expects Bangladesh Bank to continue with their current monetary policy until the end of FY24.

Inflation can lead to economic instability and have negative social consequences. It is crucial for policy makers to address and implement solutions to restore consumer confidence and meet their target for the rate of price increase.

Glossary:

1. Maund: refers to a traditional unit of weight used in Asia and Africa, while “mound” refers to a pile of earth or stones. The word “maund” has its origins in the Arabic word “man”, which means a weight of 100 pounds.
2. Call money rate: it is the benchmark interest rate that banks charge brokers who are borrowing the money to fund margin loans.
3. Policy rate: a powerful tool to control the inflation level and economic activity within a country or geographical area.
4. Economic Downturn: occurs when the value of stocks, property, and commodities fall, productivity either grows more slowly or declines, and GDP shrinks, stands still, or expands more slowly.
5. Quarterly Projection Model: it is one of the IMF’s workhorse models for monetary policy analysis.

Reference

1. International Monetary Fund. Asia and Pacific Dept. “Bangladesh: Selected Issues.” IMF eLibrary, Dec. 2023, https://doi.org/10.5089/9798400260728.002.A001.
2. Uddin, Jasim. “Ukraine War, High Inflation Squeeze Bangladesh’s non-RMG Exports.” The Business Standard, 6 Apr. 2023, www.tbsnews.net/economy/rmg/ukraine-war-high-inflation-squeeze-bangladeshs-non-rmg-exports-611990.
3. Uddin, Jasim. “RMG Orders Tumble 30% Amid Record Global Inflation.” The Business Standard, 17 July 2022, www.tbsnews.net/economy/rmg/rmg-orders-tumble-30-amid-record-global-inflation-459434.