Inflation in Bangladesh Essay.
Inflation is a general increase in prices and fall in the purchasing value of money. “Too much money in circulation causes the money to lose value”-this is the true meaning of inflation.
What is Inflation.
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
(Investopedia) a. Kinds of Inflation
Inflation means a sustained increase in the general price level. However, this increase in the cost of living can be caused by different factors. There are many types of inflation but the main two types of inflation are; 1. Demand pull inflation: This occurs when the economy grows quickly and starts to ‘overheat’ Aggregate demand (AD) will be increasing faster than aggregate supply (LRAS). 2. Cost push inflation: This occurs when there is a rise in the price of raw materials, higher taxes, etc.
1..Demand Pull Inflation
This occurs when AD increases at a faster rate than AS. Demand pull inflation will typically occur when the economy is growing faster than the long run trend rate of growth. If demand exceeds supply, firms will respond by pushing up prices. Simple diagram showing demand-pull inflation
The UK experienced demand pull inflation during the Lawson boom of the late 1980s. Fuelled by rising house prices, high consumer confidence and tax cuts, the economy was growing by 5% a year, but this caused supply bottlenecks and firms responded by increasing prices.
This graph shows inflation and economic growth in the UK during the 1980s. High growth in 1987, 1988 of 4-5% caused an increase in the inflation rate. It was only when the economy went into recession in 1990 and 1991 that we saw a fall in the inflation rate. 2..Cost Push Inflation
This occurs when there is an increase in the cost of production for firms causing aggregate supply to shift to the left. Cost push inflation could be caused by rising energy and commodity prices. Simple Diagram showing cost push inflation.
3. Wage Push Inflation
Rising wages tend to cause inflation. In effect this is a combination of demand pull and cost push inflation. Rising wages increase cost for firms and so these are passed onto consumers in the form of higher prices. Also rising wages give consumers greater disposable income and therefore cause increased consumption and AD. In the 1970s, trades unions were powerful in the UK. This helped cause rising nominal wages; this was a significant factor in causing inflation. 4. Imported Inflation.
Depreciation in the exchange rate will make imports more expensive. Therefore, the prices will increase solely due to this exchange rate effect. A depreciation will also make exports more competitive so will increase demand.
5. Temporary Factors.
The inflation rate can also increase due to temporary factors such as increasing indirect taxes. If you increase VAT rate from 17.5% to 20%, all goods which are VAT applicable will be 2.5% more expensive. However, this price rise will only last a year. It is not a permanent effect.
6. Core Inflation
One measure of inflation is known as ‘core inflation’.This is the inflation rate that excludes temporary ‘volatile’ factors, such as energy and food prices. The graph below shows inflation in the EU. The headline inflation rate (HICP) is more volatile rising to 4% in 2008, and then falling to -0.5% in 2009. However, the core inflation (HCIP – energy, food, alcoholand tobacco) is more constant.
b. People who are being affected by inflation
Macro Economic Effect in Bangladesh:
The inflationary situationin Bangladesh is on the rising trend, especially since August 2009, primarily owing to the soaring increase in food prices. The food price hike has accelerated the general inflation rate in the country. If the food price level rises at an existing rate of 1.31 percent per month and if adequate anti inflationary measures are not taken, the overall general inflation might touch a „double digit figure‟.
Impact on women and children
In Bangladesh, of total 143.91 million population, 69.81 million are women, reflecting 48.5 per cent of totalpopulation. About 86 per cent of women in Bangladesh live in rural areas. Between 2005 and 2006, total femalelabourforce accounts for 12.1 million, of them 2.8 million live in the urban area while 9.3 million in the rural area.In rural areas, they take part in economic activities and earn income through cattle rearing, gardening, poultry etc.About 80 per cent of workers in total labour force are women in the RMG sector. They work at a low rate of wagewhile 26 per cent of female workers earn less thanTk3000 only. Only 3.7 per cent of female workers earn morethanTk 5,000. With the low income and rising price of essentials, it has become very difficult for these women to provide their families with the basic requirements.
1. Increasing prices of foods reduces the real income of households thereby rationing spending on children’s schooling. This as a consequence is likely to reduce the literacy rate among girls in near future. The evidences suggest that in Bangladesh, it is the female children who are firstly taken out of schools if the family is in financial setback. 2. As education, skills and knowledge influence women’s status in the society and at home, they loose their bargaining power thereby their ability to take part in the decision making process shrink eventually. 3. There is a greater disparity in nutrition intake among men and women. Men consume more nutrients than women. The female members in households especially in rural areas take their meals after their male members and children. Studies suggest that it is one of the main reasons of early childhood malnutrition.
4. Moreover there are many other factors that can be attributed to the maternal nutritional factors, for example, low birth weight of infants, infant mortality etc. 5. In recent years the rise in the price of baby foods has made it difficult for households to provide theirchildren with required nutrition. This is evident even among the middle income groups. According to a government report, the prices of baby food and powdered milk have risen by 30 to 38 per cent over theyear 2006 and 2007. The inability of families to provide proper nutrition for the children may result in undernourishment of children which contributes to increasing child mortality.
6. In Bangladesh, women are subject to violence in the society. Due to rise in the price of food and other essentials, as income of the family falls, tension rises within households and the women are often subject to violence by the male members of the family. 7. It is a common phenomenon that women take the role to provide food and nourishment to the members of family by arranging and preparing food. As a result, they have to bear the burden of rise in the price of food.
Inflation erodes income of the poor
One obvious consequence of inflation is the erosion of real income of the people resulting from the general increasein prices. The burden of income loss, however, differs across different income groups. No doubt, the householdgroups who are employed in the formal sector and whose salaries/wages are fixed in nominal terms and are re-fixedperiodically are the worst sufferers. The same is true for those employees in the informal sector who have incomefixed in nominal terms. In Bangladesh, a major concern, however, is the inflation-induced loss of real income ofthe poor.
Food Inflation Raises Poverty and Inequality
Food inflation has a profound nexus with poverty and inequality. Food inflation hits the poor hardest since their purchasing power decreases due to the erosion in real income. From the economics theory, when the real wage decreases demand for labor increases. Therefore, the employment should rise since there is a tradeoffbetween inflation and unemployment. The result depends on whether the employment effect of inflation outweighs the real wage effect on poverty. But theBangladesh empirical data indicates that the real wage effect on poverty outweighs the employment effect of inflation There exists a positive relationship between food inflation and poverty. .
Affect on saving & Investment:
Excess inflation has its negative impact on savings and investment. Impact on savings has its direct reflection in the area of investment. Investment, both domestic and foreign, is essential for Bangladesh and it is important for growth and economic development.
Affect on invertors:
An unfavorable and unpredictable movement of inflation often creates lack of confidence among the investors. Many potential investments face bleak prospect and avoid the game of facing risk and uncertainty.
Affect on bank& other financial intermediary:
Inflation has its implications for the banking sector as well. Both for the banks and their customers inflation causes a reshuffle in the flow of activities. Rates of interest offered by the banks seem less attractive to the depositors. Bank lending has also a great role in the economy. In recent years there is an increasing trend of providing consumer credit by the banks. It will add to the demand side. But if itscontribution to the supplyside remains weak there will be alack of balance and the bankingindustry will face challenge. Other saving lending channels also face the same consequences from supply side to handle their investment demand.
Affect on money supply:
The challenge of central bank is to balance between growth and inflation. High inflation always put central bank under pressure to take contractionary
monetary policy that might reduce growth.
Mainly the people of middle class and poor are greatly affected by the higher inflation rate. A developing country like Bangladesh have higher inflation rate. It creates poor more poor and higher class of the society more higher.
2. Causes of Inflation
In developing countries, in contrast, inflation is not a purely monetary phenomenon, but is often linked with fiscal imbalances and deficiencies in sound internal economic policies. Beside, factors typically related to fiscal imbalances such as higher money growth and exchange rate depreciation arising from a balance of payments crisis dominate the inflation process in developing countries. There were different schools of thought as to the causes of inflation.
A. Quality theories of inflation
The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the quantity equation of money that relates the money supply, its velocity, and the nominal value of exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production After analyzing two theories of causes we have got here some physical cause to face which cover both theories depending on a number of factors. These are given below-
B. Excess of money
Inflation can happen when governments print an excess of money to deal with a crisis. As result, prices end up rising at an extremely high speed to keep up with the currency surplus. This is called the demand-pull, in which prices are forced upwards because of a high demand. C. Rise in production cost
Another common cause of inflation is a rise in production costs, which leads to an increase in the price of the final product. For example, if raw materials increase in price, this leads to the cost of production increasing, which in turn leads to the company increasing prices to maintain steady profits? Rising labor costs can also lead to inflation. As workers demand wage increases, companies usually chose to pass on those costs to their customers. D. International lending & national debt
Inflation can also be caused by international lending and national debts. As nations borrow money, they have to deal with interests, which in the end cause prices to rise as a way of keeping up with their debts. A deep drop of the exchange rate can also result in inflation;as governments will have to deal with differences in the import/export level. E. Government taxes
Finally, inflation can be caused by federal taxes put on consumer products such as cigarettes or fuel. As the taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that once prices have increased, they rarely go back, even if the taxes are later reduced.
Wars are often causing for inflation, as governments must both recoup the money spent and repay the funds borrowed from the central bank. War often affects everything from international trading to labor costs to product demand, so in the end it always produces a rising prices.
3. Measures of Inflation Control
There are three measures to control the inflation.
They are: General Policy of The Government
Direct – Action Measures of The Government
1. General Policy of the Government:
Government follows three general policies to control the inflation such as – Fiscal Policy
Policy of Price Ceiling
a. Fiscal Policy:
If the government charges more tax on the goods then the particular product’s price will also be high. We will face price inflation.
To Summarized issues relating to Deficit Budget:
Financed by foreign assistance is dependence and uncertain,
Financing by public, not inflationary,
Borrowing from commercial banks not inflationary.
Borrowing from Bangladesh Bank is inflationary
Characteristics of Fiscal System in Bangladesh:
Tax base is narrow,
Dominance of indirect tax,
Customs + VAT (import) 50% of total tax
Vulnerable to external fluctuations
Growth in Non-development expenditure
Heavy dependence on Foreign Aid
Dependence on Deficit Financing
b. Monetary Policy:
Monetary policy is the main macro-economic policy formulated and implemented by the central bank. Bangladesh Bank has the authority to increase or decrease the volume of money in the economy and therefore, is responsible for formulating and implementing the monetary policy for the country. The wheel of development moves by taking forces from this policy. The aim of monetary policy is to keep inflation low and steady. Though, in a developing country like Bangladesh, the effectiveness of monetary policies is always uncertain, but effectiveness of these policies is treated as signal for policy makers.
The Central Bank is the highest authority employed by the government for formulation of monetary policy to guide the economy in a certain country. Monetary policy is defined as the regulation of the money supply and interest rates by a central bank. Monetary policy also refers to how the central bank uses interest rates and the money supply to guide economic growth by controlling inflation and stabilizing currency. Like any other central bank, Bangladesh Bank is performing the role to formulate monetary policy in Bangladesh. The main objectives of monetary policy of Bangladesh Bank are:
• Price stability both internal & external
• Sustainable growth & development
• High employment
• Economic and efficient use of resources
• Stability of financial & payment system
Steps of the Monetary Policy:
Restriction of broad money growth path
Adjustment in cash reserve ratio (CRR)
Statutory liquidity requirements (SLR)
Restriction in the capital accounts
Objectives of the Monetary Policy:
The promotion of price stability
Ensuring full or near full employment
Supporting national and global economic and financial stability
C. Policy of Price Ceiling:
Price ceiling is a government policy whereby the government sets the maximum price of a product above which price is not allowed to rise further. Normally in a inflationary situation when prices will constantly be going high and high and tending to be going beyond the means of common people. Then government will implement price ceiling policy in order to protect the interest of the customers.
Price Ceiling Control:
Government must have to be ready to supply the required quantity of goods from its own production land and distribute product at its early declared price as per the requirement if any. Government will have to be ready to import the required quantity of goods under its own mechanism and distribute the product in the market accordingly. Government can ask the private entrepreneurs to import the required quantity of goods under their own management by offering them some attractive benefit packages such as decrease rate of interest, lower import cost, decrease tariff, non-stop support. Government can urge the countrymen to set up import substitute industry with some attractive incentive schemes and can have the supply of required products for a long time basis. Government can supply the required quantity of goods from buffer stock created earlier by the government and sell the product in the market accordingly.
2. Direct Action Measure: It is an extreme measure. If the money supply increases, then to reduce inflation, Government can cease the money.
3. Other Measure:
*Moral persuation: Convincing the consumer by the national leaders morally. They convince the public to consume less. *Government can urge the country man to restrict the consumerism. *Government can urge the business people to set the product at a reasonable price and restrict to sell at a high price.
Limitation: In case of elastic demand such as baby food, that is not controlled by the consumer.
4. Effects of Inflation:
All people will not be affected by inflation in the same way. Some will welcome it. Some people becomes upset and some acts indifferent. For the business people it will motive the entrepreneure and it is a good news for the producers. People who earn much, inflation is not a problem but who earn poor , they will be very much affected and their product consuming amount will be decreasing.
An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature (e.g. loans and bonds). For example if one takes a loan where the stated interest rate is 6% and the inflation rate is at 3%, the real interest rate that one are paying for the loan is 3%. It would also hold true that if one had a loan at a fixed interest rate of 6% and the inflation rate jumped to 20%one would have a real interest rate of -14%.
High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving and inflation can impose hidden tax increases. In case of international trade, higher inflation in one economy than another will cause the first economy’s exports to become more expensive and affect the balance of trade.
Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. It puts impact on Labor-market adjustments, Room to maneuver, Mundell-Tobin effect, Instability with Deflation etc.
5. Global Scenario of Inflation
As an important worldwide phenomenon, global inflation varies largely, owing to the trend components of inflation as well as due the fluctuations arising in the frequencies of the commercial cycles. In 2013, the rate of global inflation is surprisingly low. Global economic prospects have improved, but the bumpy recovery and skewed macroeconomic policy mix in advanced economies are complicating policymaking in emerging market economies. Inflation was remarkably stable in the wake of the Great Recession and, in fact, has become less responsive to cyclical conditions. Today’s fast-growing, dynamic low-income countries are likely to maintain their momentum and avoid the reversals that afflicted many such countries in the past.
Inflation expectations have remained strongly anchored to inflation targets during the Great Recession and the sluggish recovery. Long-term inflation expectations in advanced economies remain close to targets despite wide variation in actual inflation rates. Even in Japan, expectations remain close to the 1 percent target announced in February 2012 despite a prolonged period of deflation. Furthermore, coincident with greater central bank credibility, this anchoring is found to have increased over time. In the figure bellow the inflation rate of emerging, developed and BRIC countries are graphically shown:
In 2013, we have seen that, South Sudan has the lowest inflation rate and Syria has the highest. In South Sudan, current inflation rate is -2.90 which was -8.80 in the previous year. The highest and the lowest inflation rates in the history of this country were 79.90 and -14.00 respectively. On the other hand, in Syria current inflation rate is 49.50 which was 49.90 in the previous year. The highest and the lowest inflation rates in the history of this country were 79.90 and -11.95 respectively.
6. Inflation in Bangladesh
The Gross Domestic Product (GDP) in Bangladesh expanded 6.01 percent in the fiscal year 2012/2013 from the previous year. GDP Growth Rate in Bangladesh is reported by the Bangladesh Bank. From 1994 until 2013, Bangladesh GDP Growth Rate averaged 5.6 Percent reaching an all-time high of 6.7 Percent in June of 2011 and a record low of 4.1 Percent in June of 1994. Bangladesh is considered as a developing economy. Yet, almost one-third of Bangladesh’s 150m people live in extreme poverty. In the last decade, the country has recorded GDP growth rates above 5 percent due to development of microcredit and garment industry.
Although three fifths of Bangladeshis are employed in the agriculture sector, three quarters of exports revenues come from producing ready-made garments. The biggest obstacles to sustainable development in Bangladesh are overpopulation, poor infrastructure, corruption, political instability and a slow implementation of economic reforms. This page provides – Bangladesh GDP Growth Rate – actual values, historical data, forecast, chart, statistics, economic calendar and news. 2014-04-05
Historical Trend Analysis
The government introduced policy and institutional reforms encompassing the fiscal, financial, exchange rate, trade and industry, public resource
management and public enterprise sectors. But some of those measures were not strongly pursued and some of the intended structural reforms were postponed. Monetary control in the initial years had appositive impact on the control of inflation. The regarded decision are taken below-
To increase investible funds with the banks, the minimum cash reserve requirement and statutory liquidity requirement were reduced gradually from 8 and 23 per cent respectively on 25 April 1991 to 5 and 20 per cent respectively. This decision has reduced the inflation rate. In 1991 the lending rate was 14.99 which was high during 1992 but then it started tobe reduced at 14.39 (1993) and 12.22 at 1995. With the flexible use of the monetary instruments, broad money growth (Money Supply) was brought down from high rates of growth (14.1 percent) in the mid-1992to 10.6 per cent in June 1993 to reduce the rate of inflation. In the year 1995 government was thinking to increase the money supply which was brought to 16 percent for that reason inflation rate increased In the year 1995 government was thinking to increase the total domestic credit which was brought to 17.6 percent from 4.9 percent (1994). For this reason the inflation rate increased.
In the year 1995 government liberalized Credit to the private sectors in fiscal year1995 by reducing lending rates including those in the three selected sectors of agriculture, exports, and small and cottage Industries had to be restrained due to the rise in price levels. For this reason inflation rate has increased With a view to ensuring an adequate flow of finance to productive sectors and to boosting economic activity, Bank ratewas gradually lowered from 9.8 per cent on30 June 1990 to 5.5 per cent on 3 March 1994 to control the inflation rate. On 24 March 1994 Bangladesh accepted the Article VIII obligations of the International Monetary Fund, a commitment to declare its currency convertible for current account transactions and liberalize exchange transactions on current account. Foreign exchange controls, which had constrained transactions for a longtime, were lifted for the majority of current account transactions. An interbank foreign exchange market has been established. The exchange rate policy is being managed flexibly so as to avoid appreciation of the real exchange rate and to maintain macroeconomic stability.
Moderate economic growth and modest change in the wage index contributed to the relatively low rate of inflation (i.e., lower than 5 per cent) in 1990-1994. Higher money supply growth and lower deposit rate in FY95 contributed to the comparatively higher inflation rates in 1995. In 1996 the lending rate was 13.41 which were accelerated to 14.16 in 1999. Supply shortages in the rural areas originating from political instability in FY96 and disruption due to floods in 1998 caused serious shortfall of food and also hampered all other agricultural production, which ultimately caused higher inflation rates in1996, 1998 & 1999. A lower growth rate, because of lower production and relatively higher depreciation of the exchange rate due to food imports, also contributed to the higher inflation rate in the flood affected years. Larger depreciation of the exchange rate has accelerated the inflation rate 2.79(2002) to 4.38 (2004). Exchange rate might have played a significant role in causing inflation in 2005-2006 because of the introduction of flexible exchange rate regime since May 2003.
A higher growth of money supply (13.84 at 2004 to 19.51 at 2006) added a lot to inflation in 2005-2006 In 2001 the lending rate was 13.75 which were lowered to 10.93 in 2005. In 2001-2006 high inflation in food (more than 5 percent) sector at international market was so much responsible for the fluctuation of inflation. Typically import occupies a significant place in the Bangladesh economy, accounting for as high as above 20 percent or more of GDP in FY06. At the margin, most of the essential food items (for example, sugar, rice, wheat, onion and edible oil) and, more generally, machineries, intermediate goods and raw materials used in production are imported. Cost of imports can, therefore, be expected to have substantial influence on domestic inflation (during 2001-2006) directly (through final goods) or indirectly (through intermediate goods). Unfair cartel among the suppliers might seriously hamper the course of the economy by engendering inflation via the creation of a false supply shortage even during a period of robust growth in production. Such an undesirable event allegedly occurred in FY06 when the food inflation remained high (7.76 percent) in the same fiscal year despite the growth in food production (4.49 percent8 vis-à-vis 2.21percent in FY05).
Monopolistic control of several food items such as sugar, onion, pulses and edible oil by market syndication seems to have led this situation.9Obviously such manipulation is a type of supply side disturbance. Inflation has emerged as a global phenomenon in recent months largely reflecting the impact of higher food (The IMF food price index was 44.4 percent at June 2008)and fuel prices and strong demand conditions especially in the emerging economies. In line with global trends, Bangladesh also experienced rising inflation with the 12-month average CPI inflation touching 9.94 percent in June 2008. In the fiscal year 2009, global oil price has shifted upward dramatically so fast.
So that the price of fuel & power has driven very sharp impact on our economy by increasing the price of Industrial product and reduces the output of industry. Though our government has taken needed initiatives to minimize the inflation rate but they have failed up to the expectation. In the fiscal year 2010, global food price has shifted upward dramatically so fast. So that the price of food has driven very sharp impact on our economy. Though the inflation has decreased to a reasonable rate (5.4 percent), the price of food is beyond to the normal people. Because of the insufficiency of credit to productive sectors it is unable to invest money in productive sectors whereas the money are using in less productive sectors which causes a high rate of inflation.
The inflation rate in Bangladesh was recorded at 7.44 percent in February of 2014. Inflation Rate in Bangladesh is reported by the Bangladesh Bureau of Statistics. The general point-to-point inflation rate slightly rose to 7.48 percent in March from 7.44 percent in February 2014 compared to 7.71 percent in March 2013.Inflation Rate in Bangladesh averaged 6.63 Percent from 1994 until 2014, reaching an all-time high of 12.71 Percent in December of 1998 and a record low of -0.02 Percent in December of 1996. In Bangladesh, the inflation rate measures a broad rise or fall in prices that consumers pay for a standard basket of goods. This page provides – Bangladesh Inflation Rate – actual values, historical data, forecast, chart, statistics, economic calendar and news.
According to Asian Development Bank growth moderated last year, inflation declined, and the current account returned a larger surplus. This year, growth will slip again, reflecting slower expansion in exports, falling worker remittances, and political unrest before parliamentary elections. Higher inflation and a modest current account deficit are expected. The garment industry faces challenges in adopting tough compliance and safety standards. Growth should improve in the following year, but a major boost will come only with ramped up investment in infrastructure. Economic performance
As officially estimated, gross domestic product (GDP) in Fiscal Year 2013 (ended 30 June 2013) grew by 6.0%, less than the 6.2% recorded in FY2012. Agriculture growth slipped to 2.2% from 3.1% in FY2012 as crop output was held down by higher input costs, lower output prices, and unfavorable weather. Services growth slowed to 5.7% from the previous year’s 6.0% owing to stagnant imports and frequent hartals (political demonstrations) that disrupted supply chains and affected retail and wholesale trade. Industry growth rose slightly to 9.0% from 8.9% in FY2012, with contributions from construction and small-scale manufacturing.
The forecasts for FY2014 and FY2015 rest on several assumptions: Political stability will be restored following the January 2014 national elections, improving consumer and investor confidence. The central bank will be watchful, in line with the January 2014 monetary policy statement, to keep inflation in check while helping direct steady credit flows to the private sector. Electricity and fuel prices will be raised to lower subsidy costs. It will be possible to mobilize more foreign financing, thus limiting government bank borrowing. Food grain and oil prices will remain stable on the international market. And the weather is normal. GDP growth is expected to slow to 5.6% in FY2014, owing to a decline in remittances (which have been equivalent to about 15% of private consumption spending) and as export growth tapers off in the coming months.
Domestic demand was depressed in the first half of the year because the prolonged political unrest ahead of parliamentary elections in January 2014 dented consumer and investor confidence. This is reflected in lower private credit growth, a decline in imports of consumer goods and capital machinery, and modest growth in imports of raw materials. Growth is expected to rebound to 6.2% in FY2015, aided by higher remittance and export growth, as well as by prospects for continued economic recovery in the US and the euro area. A likely rise in consumer and investor confidence as the political situation stabilizes is also expected to stimulate demand and strengthen growth momentum. Source: ADB. 2014. Asian Development Outlook 2014. Manila.
Effects of Inflation in Bangladeshi Economy
Inflation, which some economists have dubbed as the “cruelest tax of all”, is eroding purchasing power of consumers, especially the fixed and low income groups of people in net commodity importing countries, around the world. Following the persistent high-inflation regimes in the late 1970s and early 1980s (largely due to two oil shocks), inflation rates have varied an average of two to three percent in the industrialized countries and fell to single-digit levels in many developing countries since the 1990s.1 It is widely viewed that globalization has had a positive impact on prices for over one and a half decade by heightening competition both on the demand and supply side. However, the specter of inflation has once again become a major concern for central bankers and policy makers around the world, as many countries have been experiencing high inflation largely owing to a notable increase in commodity prices. The prices of cereals, petroleum products, edible oil, and metals are skyrocketing in the international markets in recent years. Consequently, the commodity price indices have shown an upward trend lately
A widely discussed plausible cause of high inflation in Bangladesh is the impact of global price hike. As a food and petroleum importing country, Bangladesh has to bear the brunt of global price hike of these items. Since the beginning of the current decade and up to 2008 global prices of fuel and food followed an increasing trend which got transmitted into the country’s domestic economy. There has been some respite from high inflationary pressure towards the end of 2008 and 2009 due to the global meltdown and the resultant price fall of major commodities in the global market. With the turn round of the global Economy from the recession towards the end of 2009 and beginning of 2010, inflation started to shoot up. This trend was also observed in Bangladesh. The major source of high inflation in Bangladesh is high food inflation.
The reason behind this assumption is that food carries a large weight in the CPI of Bangladesh. The weight of food items in the CPI commodity basket of Bangladesh is as high as 58.8 per cent of which the share of rice is 20.1 per cent. Hence the rise in food inflation affects the overall inflation significantly. Based on BBS data, it has been estimated that the contribution of rice inflation to the overall inflation was 23.41 per cent in FY 2011-12. Inflation appears to have emerged as a permanent phenomenon in the economic landscape of Bangladesh over the recent past. It has started to increase since the second quarter of FY2009-10 and continued to rise throughout FY2009-10 and FY2010-11. During the first three months of FY2011-12 there has not been any change in the direction of inflationary movements. The 12-month point to point consumer price index (CPI) inflation has reached as high as 11.97 percent in September 2011 compared to 7.61 per cent in September 2010. This is the highest inflation in last one decade. As in most years, food inflation was higher than general inflation. Food inflation reached to 13.75 per cent in September 2011 as opposed to 9.72 per cent in September 2010.
High food inflation had a knock on effect on non-food inflation as well, pushing it upward to settle at 8.77 percent in September 2011 from as low as 3.69 per cent in September 2010. In Bangladesh the average inflation (general) in FY 2000 was 1.94% while it is found 9.76% in FY 2011. But during these years changes in inflation did not follow any monotonic pattern. Bangladesh faces a tougher challenge in bringing down burgeoning inflation. The latest Bangladesh Bureau of Statistics (BBS) data shows that inflation had increased to 11.97 % (on point-to-point or monthly count) in September, the highest in 10 years. Food inflation, which was 12.7 per cent in August, had increased to 13.90 % in September while food inflation in urban areas had increased to 14.69 % in the same month from 12.94 % in August. The data on inflation reveal that inflation in Bangladesh is influenced by food and fuel prices.
Higher food and fuel prices obviously affect inflation rate. The recent declining trend in food and non-food inflation may be explained by the decline in global commodity prices like petroleum, rice, pulses, onion, edible oil and other food items and higher domestic production of food due to favorable weather condition and some effective measures taken by the Government which included conducting open market operation, exemption of duties on essential commodities, sufficient import of food grains, strengthening of internal procurement and its supply, expansion of subsidies on fuel and fertilizer and widening of social safety net program etc. Another feature of recent inflation in Bangladesh is that rural food inflation has been closer to urban food inflation which was not the case in Bangladesh till August 2010.
The likely causes for high rural inflation could be increasing demand due to higher purchasing power of the rural population through rising agricultural production, higher labor wages, expanded social safety net program and inflow of remittances. If compared with other South Asian countries Bangladesh stands second, next to Pakistan, in terms of the record of inflation rate in the region. Despite higher food price in the international market, India has been able to keep its food price index down through higher production of major crops and by ensuring adequate supply in the domestic market. Pakistan epitomizes the case of a conflict economy with a high inflation rate and a very low growth rate.
Higher food prices exert an upward pressure on inflation particularly in South Asian countries where such prices account for a major proportion of the inflation basket. High inflation is a major challenge in South Asia, where inflation has been in double digits in recent years and was 10.9 per cent in 2010. Some deceleration in inflation to 8.4 per cent is estimated in 2011. As inflation affects the poor disproportionately, it is a major cause of concern. High budget deficits in general are causing inflation.
A few factors are believed to have contributed to the ongoing inflationary pressures in Bangladesh. The price hike of fuel and non-fuel commodities in the international markets is widely blamed for the current inflation. The depreciation in the country’s currency unit, the BDT against its major trading partners, the expansion of M3 and credit have also played a part in raising prices. Bangladesh faced two major natural disasters (summer floods and cyclone Sidr) in 2007 which damaged standing crops, among others, and escalated food prices. The current caretaker governments’ drives against corruption have exacerbated the problem. Last but not least, Bangladesh is not self-sufficient in terms of food production and the country has had a long history of food problems, if not crises. Moreover, in recent years, growth in the agriculture sector has been sluggish.
Current indications show that commodity prices in the international market are likely to rise during the coming months of FY12. With greater global economic integration, inflation in Bangladesh is more open now than before to external pressures coming from outside the country. The reasons lie in many factors including high import dependence, increased global pressure of excess demand, weak productivity growth in the domestic economy, and persistence of significant structural and institutional rigidities. The last inflation episode that Bangladesh faced was not policy induced, but was fueled more by domestic supply shocks and global price hikes.
But the current buildup of inflationary pressure can partly be attributed to the liquidity expansion that took place in the first half of FY12. With rapid buildup of net foreign assets (NFA) and in the absence of sterilization, liquidity expansion has created some pressure particularly in asset markets (stock and real estate markets) and in non-food prices. These issues need more explicit consideration in Bangladesh Bank’s monetary policy response along with clear signals for the future.
2013 is over but the pains and consequences of inflation are not over yet for the millions of people of Bangladesh. 2013 is a year of political disasters, with record level political violence and frequent abuses of human rights in Bangladesh. At the same time inflation has added as another disaster in the lives of millions of people. High inflation is never good for the economy, let alone the millions of working people of the country. Most of the people country are straightaway experiencing the blunts of high inflation, but these people are the majority and the vital forces of the economy of the country.
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