What to do when inflation refuses to go away
Inflation is defying all forecasts, fooling global central banks, including the most powerful Federal Reserve of the USA. US inflation has overshot its central bank's ceiling by several times and the UK has seen three prime ministers in seven weeks amid soaring cost of living and infighting within the party. Even the IMF's inflation forecasts have been off the mark compared to the rude realities until this month when the international agency anticipated that global inflation will peak to 8.8% later this year.
In Bangladesh too, inflation well exceeded the central bank's target ceiling. In its latest monetary policy statement, Bangladesh Bank, analysing the price trend of core and non-food components, predicted that a higher inflation trajectory will continue in FY23 because of increasing price pressures from supply-demand imbalances, Russia-Ukraine war, elevated global commodity prices, massive upward adjustments in domestic fuel prices and pressure of depreciating local currency. In addition, high inflation in India and worsening inflation forecast in China would put pressure on Bangladesh's supplies from these two largest trading partners, further contributing to the surge in inflation.
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The central bank has used its monetary tools, revising some of its key rates upward and imposing some curbs on less-important imports. Some fiscal measures were also initiated by the revenue authorities that reduced duties on some essential imports. The government has widened its subsidised sales of food items to protect the more vulnerable people from price shocks. Still, Bangladesh has the third highest inflation in South Asia and economists allege that the official inflation rate–-over 9%-- is miscalculated given the real prices of commodities in the market. Since there are factors from both domestic and external fronts, how tough will the fight be and what more should be done when inflation refuses to go away?
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Our Senior Correspondent Jahidul Islam tries to find an answer speaking with analysts in economy and business.
Hiking policy rate won't work if lending rate cap exists
Dr Salehuddin Ahmed
Former Governor of Bangladesh Bank
The US Federal Reserve and other central banks, especially from the developed world, increased major policy rates, aiming to fight inflation.
Such initiatives reduce price levels by reducing aggregate demand as an effect of the money supply control.
I doubt the long-term result of such initiatives to reduce the money supply in Bangladesh will ease inflation.
The Bangladesh Bank also increased its policy rate three times and the money supply in the economy has not exceeded the desired level. Despite a cap on lending rates, private sector credit growth has still remained a little below the monetary ceiling of 14.1% set for the current fiscal year.
Such tightening initiatives in money supply will not work in Bangladesh to reduce price levels as the inflationary pressure arises primarily from the supply side.
Price levels of essentials reached a level that fixed-income people are now unable to pay for their cost of living. A large number of people are managing their livelihood by breaking savings.
Money supply is not too much in the economy, but there are some problems regarding the direction of money flow.
The banking sector should ensure credit flows to productive sectors, especially SMEs. Financing for small business will increase production and generate employment, which will help to reduce price levels and increase purchasing power as well.
Spending on mega projects will ensure flows of money supply only to contractors. Aggressive public borrowing from the banking sector to implement projects will hamper the efforts to tame inflation as well as increase production as it may crowd out the private sector from the credit market.
The banking sector should finance the agricultural sector on a priority basis. Production in agriculture, livestock and fisheries would help to ease inflationary pressure.
The banking sector has a significant role to reduce import payments. It should discourage LC opening for less-essential commodities. Importing luxury goods should be restricted.
The Bangladesh Bank is playing an impractical role in keeping deposit and lending rates capped (6% and 9% respectively) at a level. An increase in repo rate several times failed to generate any outcome due to fixed-interest rates.
Market monitoring key to fighting inflation
Professor Dr Mustafizur Rahman
Distinguished Fellow, CPD
The prices of all commodities are soaring all over the world owing to disruptions in production and supply chains caused by the Russia-Ukraine war, at a time when economies started turning around from pandemic impacts. The ongoing global trend is mostly triggering anxiety in Bangladesh, but there are some internal factors too, which are adding to the price rally at a greater pace.
The value of the Bangladeshi currency has depreciated more than that of other currencies due to a free fall because the dollar rate has finally been left to the market after having maintained the value of Taka artificially for a long time.
Higher depreciation of the exchange rate is causing a higher rate of inflation from the import side.
Moreover, with an indirect tax-dependent revenue policy in place, higher import duties on essentials are causing prices of commodities to soar in the domestic market. Higher taxes on imported fuel are also feeding into costs of manufacturing and transportation.
The inefficiency in managing the domestic market is the biggest reason behind high inflation in Bangladesh. Our local production costs are rising because of various irregularities, including profiteering and hoarding syndicates, monopolies, extortion and corruption. In the process of reaching out goods to consumers from producers or importers, there are several types of manipulation in the market management.
The government institutions responsible for ensuring fair competition in the market by controlling all these misdeeds are not performing well due to limitations and in the absence of good intentions.
The tremendous price hike is seriously putting a dent on pockets of lower-and middle-income people. Some people are even breaking their savings to buy daily essentials, while some of them are procuring lower amounts than their needs.
Such belt tightening not only is affecting their quality of life and nutrition intake, but it is also forcing them to reduce spending on everything from education to health. Some of the people are bound to shift to lower-rent houses.
A report of the World Bank revealed that a large number of people are bound to sleep with hunger. People are having lower amounts of meals or eating comparatively inferior food to maintain their lives.
Such types of compromises would hamper the development of human capital and reduce productivity of the future generation, which would adversely affect their future income.
Now, the government should have some serious initiatives to protect the lives and livelihoods of people from the inflationary pressure.
First of all, the government should rearrange macroeconomic policies, especially for currency management.
A stable exchange rate would rein in inflation further from the view of imports. But it would be determined as a midterm initiative. Balance of payment support from the IMF, budget support from the World Bank and Asian Development Bank would help to stabilise the exchange rate through ensuring a sustainable foreign exchange reserve.
The government should ensure efficiency and functionality of its several institutes, such as the Competition Commission, Directorate of National Consumers' Right Protection, and the Tariff Commission, to properly manage the market.
We also need to take measures under criminal law against the people involved with extortion, if necessary.
The government also has to develop a database of essentials in terms of demand, local production, imports and shortages to decide which amount of goods needs to be sourced from other countries.
Any uncertainty regarding availability puts a new pressure on food prices. So, the government should increase food stocks before a crisis starts. Our reserve is not at a lower level that we would fail to import food.
The government needs to enhance social safety net initiatives in terms of coverage, amount and durability.
Make sure that tax cuts benefit consumers
Dr Muhammad Abdul Mazid
Former chairman of National Board of Revenue
The National Board of Revenue (NBR) has an effective tool to reduce price levels by cutting indirect taxes immediately and reform tax policies in the medium- and long-term.
Recently, the NBR reduced VAT and other duties on imports of edible oils, rice and some other commodities, and consumers have had some relief.
The government should reduce or eliminate such VAT and taxes on some other essentials at the import stage to maintain a smooth livelihood.
Prior to deciding such a massive tax cut, considering the sufferings of poor consumers, two big logical questions usually arise – how will the government manage its operating expenses following a fall in revenue generation because of this move? How much such tax cuts will benefit the consumers?
The government requires a huge amount of money to ensure proper development and manage operating expenses as well. As the NBR has failed to mobilise revenue at a desired level, a further tax cut will deepen the crisis on the fiscal position.
Usually, the business community grabs the major portion of such tax cuts, while the government faces risk of lower revenue earnings.
As the NBR has no authority to manage and control the market, traders frequently take a long time to adjust prices even after the lowering of VAT and taxes. As a result, the government loses revenue, but people do not get the desired benefits.
Considering these issues, the tax on essentials should be reduced to some extent, ensuring proper monitoring of the market.
It is unfortunate that the government set import and other indirect taxes, such as VAT, as the main tools of revenue generation.
Indirect taxes always play a role to increase the price level of commodities and it reduces purchasing capacity of consumers. The NBR should reform tax policies prioritising direct taxes, which touch only the people who have income.
But generating direct tax is so difficult in the absence of accountability and transparency.
Govt, businesses must collaborate to cut logistics costs
Rizwan Rahman
President of Dhaka Chamber of Commerce and Industry
Reduction in costs of production and imports is the key to maintaining a stable commodity market. For this, the government and the private sector have to increase collaboration in terms of formulating and implementing policies, sharing data, stabilising exchange rate, to keep prices within reach of all people.
As high business costs mainly lead to an increase in prices of goods, the government should also ensure proper infrastructure and reduce obstacles to investments, such as high logistic costs, traffic congestion, and energy crisis.
Dependence on local production of essential food grains and usable items needs to be increased instead of imports. Similarly, we must find cheap alternative sources for the items to be imported.
To ensure lower-cost imports, the Bangladesh Bank should rationalise the dollar rate and ensure a uniform exchange rate in imports and exports to reduce the market imbalance.
Adverse to traditions, prices of foods and non-food products are increasing. The cost of healthcare, education, social service and transport, and utilities need to be rationalised to help maintain the living standard of people.
Businesses also need to monitor the international market for the outlook regarding prices, production and supply trends for essential commodities to get early warnings about any possible price hikes. So, rationing in investment can be made.
To reduce costs of the supply chain, e-commerce and virtual market platforms need to be developed to reduce the intermediaries and unnecessary costs between producers and buyers.
