Published on The Financial Express
Inflation has appeared to be a major strain on the economy of the country in the recent past. Though Bangladesh was enjoying lower inflation rates of below 6 per cent during the early years of the current decade inflation started to rise since the beginning of 2004. After a short spell of benign trend in terms of lower inflation and prices during 2008 and 2009, the country has again started to feel the pinch of high inflation which is sneaking into the day to day lives of common people. Since the second quarter of FY2009-10, inflation started rising and the uptrend continued throughout FY2009-10 and FY2010-11. During the first five months of FY2011-12 there has not been any change in the direction of inflationary movement. The 12-month point-to-point consumer price index (CPI) inflation has reached as high as 11.58 per cent in November 2011 compared to 7.54 per cent in November 2010. As in most years, food inflation was higher than general inflation reaching 12.47 per cent in November 2011 as opposed to 9.8 per cent in November 2010. High food inflation had a knock-on effect on non-food inflation as well, pushing it upward to settle at 10.19 per cent in November 2011 from as low as 3.33 per cent in November 2010. This reflects the fact that prices of food and non-food items tend to move along the same direction though at a different pace. 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 until 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 labour wages, expanded social safety net programme and inflow of remittances. 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 turnaround 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 other major source of high inflation in Bangladesh is high food inflation. The reason behind this assumption is that food weighs heavily in the CPI of Bangladesh. The share of food items in the CPI commodity basket of Bangladesh is as high as 58.8 per cent, of which rice alone represents 20.1 per cent. Hence the rise in food inflation affects the overall inflation significantly. The contribution of rice inflation to the overall inflation was 23.41 per cent in FY 2011-12. Growth in money supply is considered to be another contributing factor of high inflation in Bangladesh. An examination of the trends of these factors during the last 10 years reveals that the relationship between growth in money supply and inflation has not been unidirectional all along. Though they moved along the same direction over the major part of the period between 2001 and 2011, no causal relationship could be established between growth of money supply and inflation in the short run (Figure 2). The other two possible sources of high inflation could be growth in credit to the private sector and growth in consumption. As in the case of money supply these two factors do not follow the same growth path as inflation in the short period. Now coming to the food scenario, it is observed that the historical trend of rice production is an increasing one. That is the average annual growth in production of rice was 3.71 per cent in the 1970s, 3.03 per cent in the 1980s, 3.09 per cent in the 1990s, and 3.83 per cent in the 2000s. In FY 2011-12 food production is projected to increase by 3.5 per cent, of which the growth of rice will be 3.6 per cent. In light of previous experiences the government is increasing its procurement. Recently, there is a focus on public import of foodgrain instead of relying solely on private import. In FY2010-11, the share of foodgrain import by the government was approximately 41 per cent. Prices of essential commodities have been on the rise since 2008 and the rice market in Bangladesh continues to remain volatile. However, the retail price of coarse rice in local market has shown a declining trend and has reached Tk 30-32kg at present compared to Tk.35.3kg in January 2011 and Tk 34.57kg in April 2008. However, this is still higher than that of the recent past. In fact, since November 2009, rice prices started to decline and reached the lowest level at Tk20.42kg in April 2010. Between July-May of FY08 and July-May of FY11 rice price increased by 23 per cent in the local market. Prices crossed Tk30kg again in July 2010 and the trend has persisted until now. Available statistics and a closer look at the balance sheet of foodgrain availability indicate that during the last few years domestic food production exceeded the demand requirement of the country. The continuous growth in rice production since the independence of Bangladesh can be attributed to higher productivity which can be explained by a number of factors. First, efficient utilisation of land area has contributed to increased rice production even though land area for cultivation has declined. The average growth in rice producing area has decreased to 1.08 per cent in the current decade (FY02 to FY11) from 1.24 per cent in the decade of FY72-82. However, yield rate of rice has increased from 1.20 MThectare in the decade of FY72-82 to 2.61 MThectare in the current decade (FY02 to FY11). This impressive performance in rice production may be due to the better access to technology, availability of agricultural inputs and continuous government support for higher production. Second, the use of chemical fertilizer has increased significantly between the periods of FY71 and FY11. The government started to provide heavy subsidy for chemical fertilizer since the beginning of 1990s. The average growth rate of chemical fertilizer use in the 1990s was 5.75 per cent. Though lower than the 1990s it is still 4.36 per cent in the current decade. The use of chemical fertilizer has increased 2.26 folds between FY90 and FY10. Third, availability of agricultural credit also played significant role in raising rice productivity in the last 30 years. For instance, the amount of agricultural credit has increased 16.19 folds between FY90 and FY10. The average growth of agricultural credit was 13.6 per cent throughout the last 3 decades. Fourth, rice area under irrigation has increased significantly in the last two decades. An area of 2,406 thousand hectares of land was under irrigation in FY90 which almost doubled (4,784 thousand hectares) in FY08. Ironically, even though the production of rice followed historical trends in the last couple of years, prices in the local market followed different patterns. It is unfortunate to note that even after a comfortable level of per capita food availability the prices are on the rise. For example, the price of coarse rice in retail market went 6.49 folds higher between FY81 and FY11. The average growth rate of rice price was 3.0 per cent in the 1990s which increased to 9.35 per cent in the 2000s and was 16.15 per cent in the last five years. Thus even with a comfortable level of production, why such huge volatility of prices is being observed in the local market is a matter to be scrutinised. The apparently paradoxical situation of demand and supply of foodgrain in the country and the food prices raises a number of questions as regards the size of the population, per capita food intake and the accuracy in the estimation of domestic foodgrain production. Such a situation calls for an investigation into the dynamics of the foodgrain market as well as various statistics on the production and population of the country. In its Monetary Policy Statement (MPS) for the period July to December FY11, Bangladesh Bank targeted for an inflation rate of 7.0 per cent by the end of FY11 primarily through discouraging credit flow to unproductive sectors. At the time of the announcement of the MPS, monetary aggregates were already on increasing trends. In a move to control diversions and unproductive use of funds Bangladesh Bank has been using its monetary policy tools more frequently in recent times than before. The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) were increased twice, and rates of repo and reverse repo raised thrice in the last fiscal year. To discourage loans to unproductive sectors and to control inflation, Bangladesh Bank has also withdrawn the lending cap for most sectors. These moves were not immediately effective in controlling liquidity expansion due to delayed response on the part of the central bank. However, there has been a moderate decline of broad money and credit to the private sector in October 2011 as a result of restraining monetary policy stance of Bangladesh Bank. The growth of credit to the public sector has, however, been significantly high between October 2010 and October 2011. Increased borrowing by the government from domestic sources has contributed to continuing high inflationary trend notwithstanding the reduction in money supply. In order to ensure food security the government has been implementing a number of fiscal measures for some time. These include reduction of import duty on rice and wheat, provision of credit to food importers at subsidized rates, cash transfer, allocation of funds to increase supply and expansion of the operation of public food distribution system (PFDS). Total distribution under the PFDS has increased due to the higher level of distribution under priced channels, even though distribution under non-priced channels has decreased sharply. Distribution through priced channels has observed a significant rise due to government’s intensive open market sale (OMS) and Fair Price drive. The government is also distributing food grain among the fourth-class government employees since February 2011. Foodgrain distribution is taking place among the Fair Price Card holders across the country through which each card holder can purchase up to 20 kilograms of foodgrain at a cheaper rate. During the last 3 fiscal years about 30 per cent of total budget for the social safety net (SSN) programmes has been allocated for food security (Table 1). There is no denying that PFDS has eased the pressure of high inflation on the low income households. However, given the large number of people living below the poverty line, and the limited nature of the effort of the government which is concentrated mostly within the periphery of urban centres, it is likely that significant numbers of the poor people remain outside the coverage of PFDS. While efforts are needed to expand programmes to ensure food security, preemptive and decisive monetary policy should also be in place to rein the high inflation. In view of the slower growth of money supply in the recent period compared to the last fiscal, the effectiveness of the recent monetary policy has been proved to some extent. This, however, is not a panacea to contain inflation, particularly in the medium term as the demand for domestic investment by the private sector remains high and constraints to access credit will further affect the investment scenario which in turn will have adverse consequences for the overall growth of the economy. Monetary policy will have to be implemented in tandem with effective fiscal management to reduce the inflationary pressure, ensure food security and achieve economic growth.