Macroeconomic Challenges and Policy Options in Bangladesh
By
Background
Bangladesh economy is facing multiple challenges on the macroeconomic front: inflation is running high with negative impacts on the standard of living of most of the households; balance of payments imbalances are creating tensions in the exchange market; and government interventions to stabilise the exchange rate have contributed to a rapid loss of reserves. The balance of payments (BOP) imbalances resulting from supply disruptions in the aftermath of the Covid-19 pandemic, the commodity price shocks at the outbreak of the Ukraine-Russia war and inadequate domestic policy response. The difficult BOP situation has been manifested through
rapidly declining foreign exchange reserves of Bangladesh Bank (Chart 1);
a sharp depreciation of Bangladesh Taka against the US dollar and other major currencies; and
a surge in inflation as measured by the increase in the consumer price index (Chart 2)
The decline in foreign exchange reserves is a major concern since it has contributed to a sharp depreciation of the exchange rate and also contributed to the surge in domestic inflation. After a long period of exchange rate stability, the exchange market has become unstable initially due to post-pandemic supply side disruptions and Ukraine-Russia war. But subsequently the problem continued due to domestic issues.
After remaining fairly stable in the 6%–7% range, inflation started to surge since 2022, and still remains high at close to 10% level. While the surge in inflation was broad-based, food inflation surged to 12% contributing to the price pressure.
