Inflation eases, but VAT hikes threaten price surge
Despite a slight decrease in inflation over the past six months under the interim government, economists warn that additional Value-Added Tax (VAT) and supplementary duties imposed on numerous products and services—including biscuits, juice, soft drinks, clothing, and imported fruits—could lead to a significant price spike during Ramadan, which begins in March.
This development threatens to exacerbate the financial strain on ordinary citizens, who have already struggled to keep up with rising living costs.
Inflation trends: A mixed picture
According to data from the Bangladesh Bureau of Statistics (BBS), inflation has shown signs of easing since the interim government took office. In July 2024, when the Awami League was still in power, overall inflation stood at 11.66%, with food inflation at 14.10% and non-food inflation at 9.68%. After the Sheikh Hasina government fell on August 5, the interim administration led by Professor Dr. Muhammad Yunus assumed control, and inflation began to decline gradually.
August 2024: Overall inflation decreased to 10.49%, though food inflation rose slightly to 11.36%.
September 2024: Overall inflation dropped further to 9.92%.
October–December 2024: Fluctuations persisted, with overall inflation ranging between 10.87% and 11.38%.
January 2025: The latest general inflation rate stands at 9.94%, with food inflation at 10.72% and non-food inflation at 9.32%.
While these figures indicate some relief, they remain far from the desired levels. BBS Director General Mohammad Mizanur Rahman explained, "Our job is to collect and publish data. Inflation has decreased slightly compared to before, but it could decrease even more if the supply chain is streamlined." He noted that goods often pass through multiple intermediaries before reaching consumers, contributing to inflated prices.
Concerns over VAT impact during Ramadan
The interim government's decision to impose additional VAT and supplementary duties on over a hundred products and services has raised concerns about another round of price hikes. Traders have already announced increases for certain items, while others are expected to follow suit. Economists predict that this trend will intensify during Ramadan, traditionally a month of heightened consumer demand.
Supply situation
A large quantity of chickpeas, peas, lentils, and other essential commodities has been imported in anticipation of Ramadan. Additionally, unsold stock from the previous year remains available in warehouses, ensuring an adequate supply of staples like pulses, dates, onions, and wheat. However, experts caution that proper supply chain management and market oversight are crucial to preventing unnecessary price spikes.
Expert opinions
Former Director General of the Bangladesh Institute of Development Studies (BIDS), Dr Mustafa K Mujeri, expressed concern about the timing of the VAT increase, "Taxes have been increased during a period of high inflation. Our market system is chaotic, and prices fluctuate unpredictably without clear justification. Currently, the market is controlled by powerful syndicates or vested interests who manipulate prices for personal gain. With inflation already squeezing low-income, middle-class, and even poorer households, the upcoming VAT-induced price hikes risk worsening the situation. It feels like adding salt to a wound—an economic sore on the back of an already struggling populace."
Dr Zahid Hossain, former chief economist of the World Bank's Dhaka office, offered a cautiously optimistic outlook: "I hope prices will remain manageable during Ramadan. If supplies are sufficient and competition exists in the market, we may avoid excessive price increases. However, maintaining consistent power supply and monitoring LC issuance for imports will be critical. While traders might attempt to exploit the festive season, timely interventions can mitigate irrational price hikes."
Dr Mostafizur Rahman, a fellow economist at the Center for Policy Dialogue (CPD), echoed similar views: "Although VAT imposition will likely raise prices for affected items, its impact can be mitigated through robust supply and market management. Ensuring smooth LC processes and timely credit availability for traders is essential to prevent disruptions in product accessibility. If the government ensures transparency and monitors trader behaviour closely, there’s no reason for irrational price surges this Ramadan."
He added, "Prices of items subject to VAT will undoubtedly rise, but vigilance can curb broader inflationary pressures. We must ensure traders don’t exploit shortages or seasonal demand to inflate prices unnecessarily."
Challenges ahead
Economists agree that while inflation has decreased marginally, structural issues persist. Rising production costs, currency fluctuations, and inefficiencies in the supply chain continue to pressure prices. Moreover, the psychological tendency of traders to capitalise on festivals like Ramadan complicates matters further.
To address these challenges supply chain should be optimised streamlining logistics and reducing intermediaries can help lower costs, markets needs to be monitored with close supervision of trader activities and enforcement of fair pricing practices, and creating public awareness educating consumers about legitimate price fluctuations versus exploitative pricing can empower them to make informed decisions.
As the nation prepares for Ramadan, the interim government faces the dual challenge of addressing long-term inflation trends while preventing short-term price manipulation. Success hinges on effective policy implementation and collaboration with stakeholders to ensure affordability and accessibility of essential goods for all citizens.
