Economic Consequences of Inflation in Bangladesh

A Research Study Presented to the Accountancy Department of De La Salle University -

Dasmariñas, Cavite

GROUP MEMBERS:

Kenzel Lawas

Shanelle Meñale

Mark Christian Tangalin

BSA11

PROFESSOR:

Ms. Alice Tibayan Valerio

Background of the Study ........................................................................................................... 1

Objectives of the Study .............................................................................................................. 3

Significance of the Research ..................................................................................................... 3

METHODOLOGY ....................................................................................................................... 4

Research Design ......................................................................................................................... 4

Research Instrument ................................................................................................................. 4

Data Analysis .............................................................................................................................. 4

RESULTS AND DISCUSSION ................................................................................................... 5

Results ......................................................................................................................................... 5

Discussion ................................................................................................................................. 10

SUMMARY ................................................................................................................................. 19

REFERENCES............................................................................................................................ 20
 INTRODUCTION

Background of the Study

High inflation growth is one of the major macroeconomic problems that Bangladesh is

currently facing even in the previous years. According to Trading Economics, the inflation rate of

Bangladesh in February 2023 is 8.78%, 0.21% higher than the recorded 8.57% inflation rate in the

previous month. Due to rising food prices, it was recorded as the highest inflation rate in the

previous three months.

A 2021 World Bank report showed that the nominal GDP of Bangladesh in 2021 is

estimated at $416.3 billion. However, due to overpopulation (estimated population is at 169.4

million in 2021), its GDP per capita in 2021 is only estimated at $2,457.92. Even though the World

Bank report showed that there is a 10.06% increase in GDP per capita of Bangladesh, which is

only estimated at $2,233, this is not enough to survive in a day-to-day situation in the country,

especially to cover up the rising inflation rate in the country.

According to Islam (2022), Bangladesh's high inflation is preventing people from saving

money and forcing them to withdraw from their savings, which is raising questions about flows of

bank liquidity and hurting National Savings Certificate sales. According to CEIC (n.d.), the data

shows that there is a total decrease of $14,618.713 in Bangladesh’s bank deposits in the year 2022

($175,556.349 in January 2022 to $160,937.636 in December 2022). According to bankers, the

current situation is worse than 2020, when the COVID-19 pandemic crippled the economy and

caused damage to live and livelihoods. Hossain Zillur Rahman, executive chairman of the Power

and Participation Research Centre (PPRC) think tank, stated that “Poor people currently have no

choice but to spend their previous savings, which has an impact on bank deposits.”.

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 Raihan (2022) stated in his article that real income is reduced by Bangladesh's current

inflation rate, which lowers the purchasing power of regular people. Not only those who are

marginalized, but also lower-middle and middle-class people, are under a lot of stress because of

rising inflation. Raihan (2023) mentioned in his article that the COVID-19 Pandemic made the

poverty situation grow worse because of the significant disruption to Bangladesh's labor market.

The extreme inflationary pressure that persisted throughout 2022 caused the largest increase in

living expenses in a decade and plunged families affected by the pandemic into new levels of

poverty. In addition, because of the ongoing war between Russia and Ukraine, the cost of several

kinds of commodities increased abnormally on the global market. Bangladesh experienced

significant inflationary pressure due to its high reliance on imports for a variety of goods, including

fuel, daily necessities, industrial raw materials, and machinery. Moreover, the increase in fuel

prices made a sizable contribution to the inflationary pressure in the economy of Bangladesh. So

that is why he stated in his article that ordinary Bangladeshi people are adjusting in their own ways,

such as reducing the amount spent on food, choosing less expense but less healthy food, and

reducing the amount spent on basic education, services, and other commodities. According to Desk

(2022), South Asian Network on Economic Modeling (SANEM) study shows that marginalized

people of Bangladesh experienced a doubled inflation rate than the official inflation rate released

by Bangladesh Bureau of Statistics (BBS) since a huge amount of income is spent on food

consumption. The SANEM study also stated that 61.59% of the daily income basis earned by the

marginal Bangladeshi people in urban areas are spent only on food due to food inflation.

Thus, this study aims to analyze the economic consequences of inflation rate in

Bangladesh. Through conducting the study, the researchers determined how high inflation rate

greatly affects the economy of Bangladesh. Also, the researchers arrived at some possible policies

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and recommendations based on the data gathered to address the high inflation rate that the country

is facing today.

Objectives of the Study

The main objective of this study is to identify and analyze the economic crisis brought by

the high inflation rate in Bangladesh. Particularly, this study aims to:

1. To examine the root causes of the high inflation rate in Bangladesh.

2. To analyze the economic impact of high inflation rate on the economic growth of

Bangladesh.

3. To determine the possible economic policies that can be implemented in Bangladesh to

address the economic consequences brought by high inflation rate.

Significance of the Research

The findings of this study will be useful into the following groups:

Bangladeshis. The Bangladeshis (people from Bangladesh) could determine what possible

actions they can do to lessen the impact of high inflation rate.

Bangladesh government. The Bangladesh government could determine possible economic

policies that they can do to solve the economic crisis brought by the high inflation rate.

Bangladeshi economists. The Bangladeshi economists will be able to make plans to reduce

high inflation rate as well as to contribute to the economic growth of the country.

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 METHODOLOGY

Research Design

The researchers utilized a literature type of explanatory research method in fulfilling its

objectives. The researchers used several research that were found via online to find out the root

causes of the macroeconomic problems that Bangladesh is currently facing and provide possible

solutions on how to address them.

Research Instrument

The researchers used the data available on the internet in data collection. In addition, the

researchers used several websites such as the World Bank, Trading Economics, and Bureau of

Statistics in gathering data to support the study.

Data Analysis

Descriptive analysis is used to summarize and describe the characteristics of various

macroeconomic indicators in Bangladesh, such as discussing the inflation rate trends over the past

decade and identifying the patterns and major changes that have happened in its history.

Prescriptive Analysis was also used to serve as a guideline for the researchers in addressing

the proper course of action to take against the macroeconomic problems of Bangladesh. It includes

ways to combat inflation, such as the use of monetary or fiscal policy tools.

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 RESULTS AND DISCUSSION

Results

Objective #1: To examine the root causes of the high inflation rate in Bangladesh.

Figure 1: 25-year historical line chart about Consumer Price Index (CPI) of Bangladesh

Based on Figure 1, it shows that there is a rapid increase in CPI of Bangladesh over 25

years. According to Trading Economics, it reached an all-time high of 335.29 index points in

February of 2023.

Figure 2: 25-year historical line chart about money supply of Bangladesh

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 Figure 2 shows a quick increase in the money supply of Bangladesh in the last 25 years.

The data also shows that the money supply of the country in 2000 is tripled than its 2020 money

supply.

Figure 3: 20-year historical area chart about exchange rate of $1 to Bangladeshi Taka

Figure 3 shows a 20-year depreciation of Bangladeshi Taka against the US dollar.

According to Swallow and Gruss (2016), theoretically, a depreciating currency raises the price of

imported goods and services, also referred to as exchange rate pass-through by economists, which

results in rise in inflation.

Figure 4: Bangladesh’s 25-year historical trade balance

Figure 4 shows that there is a rapid increase in the trade deficit of Bangladesh in the last

25 years, which means that the country imports more goods than exports, causing the costs of

goods and services to increase in that country, which leads to an increase in inflation rate.

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Objective #2: To analyze the economic impact of high inflation rate on the economic growth of

Bangladesh.

Positive effects:

Figure 5: 10-year historical line chart of Bangladesh’s consumer spending

Figure 5 shows an increase in consumer spending in Bangladesh in the last 10 years.

Through this, it helps Bangladesh’s economy to grow as the government collects more taxes on its

consumers, thus, helping the country’s economy to grow further.

Figure 6: 25-year historical line chart of Gross Domestic Product (GDP) of Bangladesh

Based on Figure 6, it shows a rapid increase in GDP over 25 years. This means that there

is an increase in production in the country over time and as a result, it prevents deflation and helps

to drive economic growth.

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Negative effects:

Figure 7: 10-year Bangladesh's Equity Market Index

According to Figure 7, it shows that there is a decline in the stock market index of

Bangladesh in the last 10 years. This means that investors’ confidence in investing in the stock

market decreases due to increase in stocks and decrease of certainty in generating a profit in stocks,

thus, reducing consumer spending as well as the economic growth of the country.

Figure 8: 30-year historical line of Bangladesh's Income GINI index for national, rural, and urban Bangladeshi

Figure 8 shows that there is a low GINI index for rural Bangladeshi in comparison to urban

Bangladeshi. This shows that there is a great income inequality for low-income groups rather than

in high-income groups, which causes reduction in economic growth of the country.

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Objective #3: To determine the possible economic policies that can be implemented in

Bangladesh to address the economic consequences brought by high inflation rate.

Figure 9: Contractionary Monetary Policy

Figure 9 shows the aggregate demand curve for Contractionary Monetary Policy. This

monetary policy is the well-known way to regulate rising inflation. According to Chen (2023), a

contractionary monetary policy is a monetary action taken by a central bank to slow down the rate

of monetary expansion or cut back on government spending. In this policy, the government has

three options: cut spending, increase taxes, or combine the two. Through this, it will cause the

aggregate demand curve to shift to the left. Thus, this kind of monetary policy will result in a

budget surplus if tax revenues are higher than government spending.

Figure 10: Price Control

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 Figure 10 illustrates the price control. According to Kenton (2022), The legally required

minimum or maximum prices set for specific goods are known as price controls, which are also

commonly required by the government in the free market to guarantee to maintain the affordability

of goods and services by the consumers. It is also employed to establish an open and equitable

market. Its main purpose is to reduce inflation and promote market equilibrium.

Figure 11: AD/AS diagram showing the impact of interest rates on Aggregate demand.

Figure 11 illustrates how raising interest rates affect aggregate demand. According to

Pettinger (2022), higher interest rates tend to increase borrowing cost. This will make the people

to spend less, which in turn, reducing the demand for goods and services which will lead to lower

economic growth and lower inflation.

Discussion

Objective #1: To examine the root causes of the high inflation rate in Bangladesh.

Based on the results, there are 4 main root causes of high inflation in Bangladesh:

Consumer Price Index, money supply, exchange rate of Bangladeshi Taka, and trade deficit.

10
 Figure 12: 20-year CPI growth rate of Bangladesh

Consumer Price Index is a well-known measure of inflation. Fernando (2023) defined

Consumer Price Index (CPI) as the measurement in general of the shift in consumer prices over

time using a representative basket of goods and services. Paul (2023) mentioned in her article that

the CPI is helpful because it can be used to assess the direct effects of inflation on households. A

higher consumer price index indicates higher cost of living. According to Trading Economics,

there is an increase of 1.95 index points from January 2023, which is 333.34 index points, to 335.29

index points in February 2023. According to Fernando (2023), a higher CPI frequently indicates

that less strict government regulations are usually in effect. It is also stated in the article of The

Business Standard (2022) that Bangladesh will experience both demand-pull and cost-push

inflation simultaneously because of the government's expansionary fiscal policy and the increase

in import costs.

Figure 13: 11-year historical area chart about broad money in Bangladesh

Money supply plays a vital role in controlling the inflation rate of the economy. It is defined

as the total quantity of cash and or currency in circulation within an economy. A high or low money

11
supply is not good for the economy. According to Gorton (2022), when a country's money supply

expands more quickly than its economic output, inflation results. He also stated that given that

more money is moving around the economy, economic growth is more likely to result in price

instability. On the other hand, a deflation will occur if there is shortage in money supply since

there is much lower demand for goods than its supply, in which it will result into reduction of

prices in goods that enables people to hold their money instead of spending it; thus, it leads to

decrease in spending of consumers. According to Bangladesh bank, the country's monetary policy

in this fiscal year 2023 was created last June 2022 to control the inflationary pressure mainly due

to pandemic associated expansionary policy monetary policies that give rise to supply-side

disruption due to ongoing war between Russia and Ukraine while promoting the country’s

investment and employment generating activities. The most recent credit and monetary policies

were developed in accordance with the fiscal year 2023 national budget's targets for real GDP

growth and CPI inflation. Islam & Kashem (2022) stated in their article that despite skyrocketing

inflation, the Bangladesh government wants to increase the money supply by 15.4% in the next

fiscal year. And according to The Financial Express (2022), the government projected to increase

further its money supply growth rate at 16% in the fiscal year 2023-2024 and 16.5% in the fiscal

year 2024-2025. So that’s why economists said that Bangladesh's inflation will further increase as

a result of this unplanned target for broad money growth. In addition, Rahman (2023) stated in his

article that businesses that depend entirely on imports are currently in a desperate situation because

they are not getting any dollars, causing it difficult for them to continue operating. Since the

Bangladesh Bank has been instructed by the International Monetary Fund to raise its foreign

exchange reserves, businesses get anxious that the situation may not get better even in the coming

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months. This implies that there is a chance the Bangladesh Bank will not have enough cash on

hand to meet demand.

Figure 14: 1-year historical data about rapid reduction in Bangladesh’s Foreign Exchange Reserves

Foreign exchange rate has a significant impact in contributing to inflation rate. Chen (2022)

the price at which one currency will be exchanged for another is what is meant by the definition

of an exchange rate, which also affects international trade and money transfers. According to Akın

& Monfared (2017), exports, as well as overall demands and prices, increase because of domestic

goods becoming more accessible to foreign consumers due to the rise in the foreign exchange rate.

As the price of currency increases, the rate of inflation also rises. On the other hand, the price of

imported goods declines if there is a reduction in the foreign exchange rate, as services that rely

heavily on imports, like transportation, thereby reducing the rate of inflation. According to

Mahmud (2023), Bangladesh has an extreme cash shortage because of its declining foreign

reserves and the sudden drop in the value of its taka currency relative to the dollar. In addition, the

central bank, Bangladesh Bank, reports that defaults occurred from July to December of the fiscal

year 2022 as evidenced by a 14 percent drop in new letters of credit year over year and a 9 percent

decline in payments on those debts.

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 Figure 15: 30-year historical line chart about current account balance (Balance of Payments, current US$) in Bangladesh

Trade deficit can have a great effect on the inflation rate of an economy. Bloomenthal

(2020) stated that when a nation's imports are greater than its exports over a specific time frame, a

trade deficit results. This is also called negative balance of trade (BOT). According to Alawin &

Oqaily (2017), a rise in the trade balance deficit brought on by increasing imports may cause a

greater level of domestic inflation due to the impact of imported inflation on domestic price levels.

As stated in the article of Bdnews24 (2023), Amid the Russian invasion in Ukraine, Bangladesh

began the fiscal year 2022–23 with a record 33.24 billion trade deficit and a $18.69 billion current

account deficit. In addition, according to the IMF's country report regarding Bangladesh's granting

of $4.7 billion in loans, Bangladesh's current account deficit rose significantly from 1.1 percent of

GDP in FY21 to 4.1 percent of GDP in FY22. So that’s why the government of Bangladesh

implemented spending limitations and sought long-term assistance from the International

Monetary Fund and other organizations to prevent a full-blown economic crisis as the war's

aftershocks, sanctions, and counter-sanctions continued to hurt the country's economy. In terms of

imports, Prince (2022) mentioned in his article that in the first quarter of fiscal year 2022-2023,

the nation's external trade deficit widened 11.3% to $7.54 billion year over year as exports declined

and import payments rose despite some declines in new purchases because of restrictions. The

report stated that in the months of July through September of fiscal year 2022-2023, imports came

14
to $19.34 billion, compared to $17.32 billion during the same time last fiscal year. Bangladesh's

exports of goods totaled $11.8 billion in this fiscal year, a rise from $10.5 billion from last fiscal

year. Moreover, from US$ (-) 4.57 billion to US$ (-) 18.69 billion in fiscal year 2022-2023,

Bangladesh's current account deficit increased by 308%. Even though this is being viewed as a

short-term shock due to changes in the global market, the lack of diversification in the exports and

imports of essential commodities, along with the impending risks, will disturb the macroeconomic

stability of the country in the context of its overall balance of payments (BOP) situation.

Objective #2: To analyze the economic impact of high inflation rate on the economic growth of

Bangladesh.

The results showed that high inflation rates have affected Bangladesh's economic growth

in both positive and negative ways.

Figure 5 shows one positive effect of high inflation rates which is the rise of consumer

spending. According to a report in The Daily Star (2022), Bangladesh is predicted to rank as the

ninth-largest consumer market in the world by 2030 because of this increase in consumer

expenditure. Nonetheless, it can be claimed that when it comes to consumer spending, inflation is

a double-edged sword. One way that rising inflation rates can boost consumer spending is by

encouraging individuals to stock up on goods and services before prices continue to climb. But, if

inflation rates rise further, they may eventually get out of hand, creating a situation in which

individuals find it difficult to keep up with the rate of price increases. It is, therefore, essential to

strike a balance between economic growth and inflation rates.

Similarly, Figure 6 shows a rapid increase in the GDP of Bangladesh over the past 25 years.

According to a report by the Asian Development Bank (ADB), because of the Russian invasion of

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Ukraine inflation is expected to accelerate from 6.2% in 2022 to 8.7% in 2023 but despite that

Bangladesh’s GDP is still expected to grow in FY 2023. But if the inflation rate continues to rise

it can lead to investors to be more hesitant in investing in Bangladesh due to the uncertainty caused

by high inflation rates. To ensure the sustainable development of Bangladesh, the government and

policymakers are implementing measures to balance economic growth and the inflation rates. ADB

Country Director for Bangladesh Edimon Ginting says that, “Accelerating key reforms during

these difficult times would help the country sustain higher growth in the medium term. These

reforms include strengthening public financial management and domestic resource mobilization,

deepening the financial sector, and enhancing competitiveness to promote the creation of

productive jobs in the private sector,”.

In contrast, as seen in Figure 7, the stock market index of Bangladesh has declined over

the past decade. This can be because high inflation rates make it difficult for investors to predict

the future value of their investments. However, according to Fama, inflation and real stock returns

are negatively correlated as hypothesized by. The rationale provided by Fama is that a high

inflation rate indicates low growth rate of real economic activity decreasing demand for real cash

balances that subsequently increases future and current expected inflation. The relationship

between inflation and stock returns is negative because high stock returns indicate a high growth

rate of overall economic activity. This means by nature, the stock market is not a good hedge

against inflation both actual and expected, especially in the short run (Bodie, 1976; Mandelker

1976; Nelson, 1976, Gallagher & Taylor, 2002). For a developed economy, interest rate increase

indicates an increase in expected inflation. The interest rate goes up, the discount rate goes up and

the stock price goes down since the present value of future cash flows will decrease. This shows

an interesting interaction of stock market and inflation rate where real returns from investing in

16
stock market is diminished by rise in inflation rate, especially if market incorporates expectation

of inflation in a slow growing economy as is the case with developed, mature industrialized

nations.

Objective #3: To determine the possible economic policies that can be implemented in

Bangladesh to address the economic consequences brought by high inflation rate.

Based on the results, there are three (3) economic policies that can be implemented in

Bangladesh to address the economic consequences brought by high inflation rate: Contractionary

Monetary Policy, Price Control, and Raising Interest Rates.

The first possible and probably the best economic policy to address the high inflation rate

in Bangladesh is the Contractionary Monetary Policy. As stated in the article of Islam & Kashem

(2022), by controlling aggregate demand, economists advise, one can decrease the money supply.

According to economist Ahsan H Mansur, there is a need for the money supply to be limited in

order to combat inflationary pressure because unrestricted money flow will result in higher prices

for goods and services due to an increase in demand. In addition, Ahmed (2022) mentioned in his

article that the contractionary monetary policy seeks to stop the Taka from depreciating against

the dollar and control rising inflation. By doing this, it will also help to reduce the trade deficit due

to devaluation of the exchange rate that enables export to cost less and imports cost high. However,

it also runs the risk of hurting the creation of new jobs by discouraging entrepreneurs from starting

new businesses. The monetary policy statement (MPS) released by Bangladesh Bank in fiscal year

2023 states that the Bangladesh Bank has pledged to make sure that the necessary amount of money

is flowing to the most important and productive sectors to support supply-side activities.

17
 Second possible economic policy is price control. As stated by Pandit (2023) in his article,

there was a 3.16% increase in cost of living in 2022, which is 10.08, than the cost of living in 2021,

which is only 6.92%. So that is why according to the article of Dhaka Tribune (2023), Sheikh

Hasina, inaugurated Prime Minister of Bangladesh, stated that “The business leaders must find

ways to return the costs of basic goods to normal levels to take into account the suffering of the

general population. They need to act appropriately. Or else, they have the risk of losing their own

markets if they don't act immediately.”, since she stated that the high cost of necessities and

inflationary pressure are causing suffering for the Bangladeshi. Raihan (2023) mentioned in his

article that it is also important to lower the cost of fuel on the domestic market in order to control

inflation since Bangladesh is an import-dependent country. He also stated that the economy is

anticipated to become more resilient because of quicker and cost-effective implementation of some

megaprojects and SEZs.

The third possible economic policy is raising interest rates. According to Lehman (2023),

raising interest rates lessens the borrowing of money and motivates debtors to clear the balances

off their credit card or mortgage loans carrying floating rates. It is for this reason that since the

government fund rates will be increased, the banks will be forced to inflate the interest rates of

their short-term loans thus making it more difficult for individuals or businesses to borrow money.

Paul (2023) stated in her article that with the previously mentioned situation, individuals and

businesses would cut on their spendings leading to a lower demand that is commensurate to supply.

A Also, Begum (2023) mentioned in his article that based on the monetary policy statement this

fiscal year 2023 released by Bangladesh, Bangladesh Bank has used Keynesian economic tools

like increasing policy rates (quantitative tightening). This approach might encourage stray funds

to be deposited in the banking system.

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 SUMMARY

Bangladesh is currently facing a high inflation growth in previous years. This major

macroeconomic problem reduces the real income earned by the Bangladeshi, especially in the

middle to lower class families, as well as reduction in purchasing power of these people due to

increasing prices of basic commodities, which forces them to withdraw all their savings. As a

result, this also decreases the bank deposits, thereby, lowering the economic growth of the country.

With this, the researchers conducted research to determine the economic consequences of high

inflation rate in Bangladesh. Throughout the conduct of research, the researchers determined the

root causes of inflation in Bangladesh, analyzed the economic impact of high inflation rate on the

economic growth of Bangladesh, and determined the possible economic policies that can be

implemented in Bangladesh to address the economic consequences brought by high inflation rate.

Based on the results, there are 4 main root causes of high inflation in Bangladesh: Consumer Price

Index, money supply, exchange rate of Bangladeshi Taka, and trade deficit. In terms of economic

impact, inflation has positive and negative effects in the economy of Bangladesh. For the positive

effects, the country has seen an increase in consumer spending over 10 years, and an increase in

GDP over 25 years. However, the negative effects are that there is a decline in the stock market

index of Bangladesh in the last 10 years, and there is a great income inequality for low-income

groups rather than in high-income groups, which causes reduction in economic growth of the

country. And throughout the conduction of research, the researchers recommend 3 economic

policies that can be implemented to reduce inflation rate in the country: contractionary monetary

policy, price control, and raising interest rates. The details of these are discussed intensively in the

research paper.

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