S&P cautions B'desh against inflation pressure

Dhaka: Global rating agency Standard & Poor's (S&P) has cautioned Bangladesh that further depreciation of its currency would mount domestic inflation pressures and make external debt servicing costs more expensive.

Bangladesh liberalised further its trading mechanism in June 2022 and since then nominal exchange rate of Taka, the local currency, has depreciated by about 10 per cent against the US dollar, marking a notable shift in the country's foreign exchange dynamics. "Depreciation in the currency will add to domestic inflation pressures, and make external debt servicing costs more expensive," the rating agency said in its latest research update.

The S&P said the measure weakened Bangladesh's external profile following a marked rise in its current account deficit, driven by surging domestic demand and higher commodity prices. "These trends have driven net outflows of foreign exchange from the economy, resulting in declining reserves and depreciatory pressure against the taka," it said.

The S&P report came as the inflationary surge in Bangladesh tends to follow the trends in the movement of commodity prices in global and domestic markets.

The annual inflation rate in Bangladesh is underpinned by soaring prices of both food and non-food items while the Russia-Ukraine war and associated sanctions are also contributing to rising inflation in Bangladesh as global commodity prices surge. Simultaneously, the inward worker remittances that have long acted as a crucial support to Bangladesh's external financial flows fell in June to June 2021-2022 fiscal as fewer workers could repatriate their assets with gradual normalisation in global labour markets.

Bangladesh this year also saw less production of rice which experts fear would increase price of the staple.

Financial analysts said they saw no sign of an immediate respite from spiraling prices.

Bad times are looming large as the general point-to-point inflation may hit 10 per cent in the coming months, financial think-tank Policy Research Institute (PRI) Executive Director Ahsan H Mansur said, adding that the monetary policy was not working well to contain the inflationary pressure.

He said the government was trying to face the challenges of inflation through supply-side boost but the deficit in balance of payments was unlikely to go away very soon even if export earnings and inward remittances were increased, imports declined, and a desirable balance in foreign trade could be ensured. The S&P, however, said Bangladesh's economy accelerated in 2022 and underlying momentum remains sound and added that the normalisation of the global economy continued to drive a strong pick-up in the country's garment sector, contributing to a 12.3 per cent expansion in manufacturing activity in the outgoing

fiscal year.