Despite global drop, why is inflation still high in Bangladesh?
TBS spoke to economists to find out the reasons behind this stubborn inflation and how it can be reined in
Even though inflation is continuing to fall all over the world, in Bangladesh, inflation seems to be hovering at 10% over the last six months.
For example, in the US, inflation declined from 8.5% in July of the previous year to 4.6% this July. Similarly, in the European Union, inflation dropped to 5.3% in July of this year, a significant decrease from nearly 9% a year ago. However, in contrast, Bangladesh experienced a surge in inflation by more than two percentage points, rising from 7.4% in July of the previous year.
Low and middle-income individuals are struggling with the persistently high prices of essential commodities such as fish, meat, eggs, and sugar in Bangladesh. The Business Standard spoke to three noted economists to find out the reasons behind this stubborn inflation and find a way out of this situation.
'To rein in inflation, we must first increase the supply of dollar'
Dr Zahid Hussain
Former Lead Economist, World Bank Dhaka Office
Inflation is dictated by holistic supply and holistic demand. In the same global scenario, inflation has gone down elsewhere but not here. So why are we seeing two different trends in the same global scenario, that is the biggest question. The blame cannot be placed on the global situation, that much is clear.
Now we need to see how other countries have reigned in demand. Other countries used tools like monetary policy and we have done the opposite. In other countries, the interest rate at the market level has been increased while we have kept it fixed for years — 9% in all cases. We have not used this weapon. We have adjusted the repo rate, but kept the path to its effect blocked.
In countries like the US and India, if the policy rate increases, the mortgage rate also goes up along with other lending rates. But we haven't done so. Banks now had to pay more to get money but they couldn't raise their interest rate to decrease the demand for money. This, in turn, would have decreased overall demand. This mechanism, called the monetary transmission mechanism, did not come into effect here due to the fixed interest rate.
We have also not walked on the correct path when it comes to money supply. If you look at the rate at which money is being pumped into our economy, formally called broad money growth, is in single digits, however when it comes to domestic credit, especially loans given to the government, we are heading to the path of printing money.
The government taking loans from the central bank is equivalent to directly injecting money into the economy. Last year, our government took out the most amount of loans from Bangladesh Bank. So, instead of doing what needed to be done in terms of monetary policy, we did the exact opposite.
The other aspect for controlling demand is fiscal policy or budget. If government spending goes down, overall demand also goes down. In this year's budget, we have increased indirect taxes which are applied on products and services, which directly increase prices, fueling inflation. We also have a big budget deficit, which will also increase inflation. How we fund this budget deficit of Tk260,000 crore will dictate exactly how much effect it will have on inflation. Borrowing from the Bangladesh Bank will have the worst effect on inflation.
Another issue is the markets for many of our products like sugar, edible oil, even rice are controlled by a handful of massive companies. They are using this power whenever they can, so even during harvest season the price of rice is going up; this is nothing but manipulation because during harvest, demand does not go up by a lot.
We have curbed the demand for dollars by decreasing imports. However, we have also in turn decreased the supply for raw materials and other things needed for production. This move has also decreased supply, aiding inflation.
To rein in inflation we must first increase the supply of dollars because then we won't have to control imports, we will be able produce goods at maximum capacity, and supply will rise. The biggest hurdle to dollar supply now is the fixed exchange rates; if we moved on to a market-based rate, then we would have gotten the supply response.
We needed to exercise more austerity when it came to the budget. But instead, the government employees are getting more funds to buy cars, they are getting 5% more salary adjustment on top of the existing 5%. We are talking about austerity, but no big steps are being taken.
The adjustments being made to the monetary policy is not enough either. Increasing the interest rate to 10-11% — this the extent of changes here. We should also decrease the budget deficit and instead of taking loans from the Bangladesh Bank, the government should try to mobilise revenue and collect the funds from other banks and also from individuals.
'This is the result of holding onto the exchange rate for too long'
Dr Sayema Haque Bidisha
Research Director, South Asian Network on Economic Modeling (Sanem)
One of the biggest contributors to this persistently high inflation is imported inflation. And a major reason behind it is that there is a shortfall in our balance of payments. As the value of the dollar has risen, we have had to spend more on our purchases. We are spending more on whatever we want to buy.
This is the result of holding onto the exchange rate for a long period of time. We have to let it float. The process of letting it float will be a painful one, but we will have to accept the pain; there is no other option.
What can the government do? The government can do two things. The government can increase the monitoring to see whether there are any syndicates in the market. Because the exchange rate will not be fixed overnight.
Secondly, the government can provide comfort to the people by including some more commodities in Open Market Sales (OMS) and reducing the price of these commodities. The government gives incentives to the readymade garment industry. So, it can ask the garment factory owners to provide rations to the workers. These kinds of measures can be taken to reduce the pain of inflation.
It is natural that if the value of the currency falls, the whole population of the country will suffer from it. The currency fall has come to the spotlight recently as the value of dollars has long been held by devaluating the taka.
We can now make it up by increasing incomes, but we will have to increase export, remittance and foreign direct investment. These things will not happen in a short time. That is the thing — there is no short-term solution. We need to strengthen the macroeconomic footing. It cannot be done in a very short time.
In the short run though, we can enhance market monitoring and support low-income people with the help of OMS activities at low prices.
'Market management is to blame'
Professor Mustafizur Rahman
Distinguished Fellow, Centre for Policy Dialogue (CPD)
Our point-to-point inflation is still more than 9% — a major headache for people with limited income — but it is coming down in other countries. So, why are we not seeing the reflection of the global market scenario?
This, in my opinion, is an issue of market management. Inflation is related to issues like how much is our demand, how much is our supply, what are we importing, when are we importing and at what price are we importing. It is also connected with the price hike of gas and electricity. The other local reason is depreciation of taka, which is happening continuously.
We need to focus on market management, we should carefully monitor supply and demand, be on the lookout for market indications, and our Directorate of National Consumer Rights Protection and competition commission needs to be more active. Secondly, the scope of open market sales by Trading Corporation of Bangladesh (TCB) needs to be broadened. And the family card operation aimed at people with fixed and limited incomes needs to be strengthened.
I believe this will help bring high inflation down. Inflation has dropped in the international market and many countries are already seeing its impact, but it has yet to be reflected in the local market. Since taka has already depreciated and is reaching market rate and global inflation has gone down, I think inflation will decrease here as well.
But even if the rate comes down from 9% to 6%, the base is already very high. Tk100 becomes Tk110 with 10% inflation, now with 6% inflation it will still be Tk116, so the base effect is important. People's purchasing power will still erode and we will still need a robust social safety net.