Originally posted in The Business Standard on 2 August 2022
Inflation not cooling down before next year end: Finance
A finance ministry report projects a peak in inflation in Jul-Sep quarter of FY23
Bangladesh may have to wait one and a half years more for the rising inflation to melt away as global prices for energy, grains and metals have soared substantially since the Russia-Ukraine war and taka continued to lose value against the dollar, according to a finance ministry report.
“Considering these developments, coupled with Bangladesh Bank’s current monetary policy stance, domestic inflation is expected to peak in the short term (3rd quarter of 2022) and abate later towards the end of 2023 with the projected easing of global commodity prices,” said the report titled “Inflation outlook for Bangladesh” prepared in June this year, assuming that inflation expectations remain well-anchored.
According to another internal report of the ministry, Bangladesh set inflation target at 5.6% for FY23, but now, it is not possible to gauge at what level the inflation rate will reach in this current fiscal year because global commodity prices, including fuel and food, still remain above the pre-war levels alongside devaluation of taka.
In the changed situation, if subsidies on fertiliser, fuel and electricity do not go up, the inflation rate will shoot up to 9% in the July-September quarter this year, while an increase in subsidies will keep the inflation at around 7%, as estimated in the report.
Similarly, if the entire burden of rising prices of gas and oil is passed on to consumers, food inflation will go up to 9.4% in July-September. With no hike in prices of gas, electricity and oil, the inflation rate will stand at 6.7%.
However, according to the Bangladesh Bureau of Statistics, inflation rose to 7.56% in June – the highest in the last nine years.
“These projections assume the model-embedded endogenous reactions of domestic output growth, interest rates, driven by the assumptions on the global economy including increases in commodity prices,” the report says.
However, there are large uncertainties in these projections due to the uncertain impact of the ongoing war in Ukraine, agriculture outcomes in Bangladesh, and reactions of inflation expectations, it reads.
Prices of various products, including food, fuel and fertilisers, registered record highs following the Russia-Ukraine war that began in February this year and subsequent economic sanctions imposed by the United States and the European Union on Moscow. As a result, like all other countries in the world, Bangladesh is also dealing with the adverse impacts of global inflation.
To keep inflation in check, the government increased allocations for food, electricity and fertiliser subsidies by 52%. It is also providing food items, such as edible oil, sugar and pulses, at subsidised prices to 1 crore poor families under the “family cards” programme.
To tighten money flow and tame inflation, the Bangladesh Bank raised the policy rate, which is also known as the repo rate, by 50 basis points to 5.50% from 5% – a record hike in recent history – in the new monetary policy for FY23.
In spite of all such measures, inflation has not abated; it has rather increased further.
To ease subsidy pressures, the government on Monday raised the price of urea fertiliser by Tk6 to Tk22 a kilogram for farmers.
Besides, rolling load shedding across the country is now in effect to save costly fuel used in power plants.
As in Bangladesh, inflation worries prevail worldwide, with economies struggling to prevent inflation from surging further. Has inflation peaked? How long will high inflation continue? These are now economists’ guesswork all over.
In its latest global outlook, the International Monetary Fund (IMF) cut global growth forecasts again to 3.2% in 2022 and warned that downside risks from high inflation, if not checked, could lead to global recession. But it did not make any projection on how long the scourge will persist.
Dr Fahmida Khatun, executive director at the Centre for Policy Dialogue, told The Business Standard that setting inflation at 5.6% for FY23 in the budget was unusual in the face of soaring global commodity prices, depleting reserves because of high import payments, and continued devaluation of taka against the dollar.
She thinks inflation is unlikely to come down significantly until the war between Russia and Ukraine ends.
“Our inflation has increased mainly because of high imports. According to the IMF, the global crisis will not end even in 2023. We cannot hope that the country’s economy will turn around quickly,” Fahmida noted.
A fall in global commodity prices following reduced domestic demand triggered by a recession in developed countries is a positive sign, she said, casting doubt on how much Bangladesh will benefit from it.
“The benefits of falling prices in the global market are not available in our country owing to mismanagement,” she pointed out.
The rich countries have reined in prices of goods to some extent by taking up various measures, such as increasing interest rates, tightening money supply and controlling internal demand, Fahmida continued.
“The repo rate in our country has been raised, but the lending rate remains the same. Taka is losing its value rapidly after having remained artificially overvalued for a long time,” she added.
The finance ministry report says, “Striking a delicate balance between containing inflation and supporting recovery requires a mix of appropriate fiscal and monetary policy. Allowing for the pass-through of global commodity prices with targeted support for the most remains the first best policy option.”
However, in the absence of sufficient mitigation policies to protect the poor, continued blanket subsidy should be considered only as a temporary measure to absorb the immediate first round effect of the dual commodity price shock, the report adds.
In the near term, the pace of adjustment to domestic prices should be gradual to protect the poor and avoid drastic changes in affordability and living standards, it continues.
In the medium term, reducing fiscal costs linked to subsidies would be desirable. In this context, the interim solution of an automatic pricing mechanism would allow a full pass-through of international price movements over the medium term while protecting domestic consumers from sudden sharp increases and preventing an escalating subsidy bill, according to the report.
The Bangladesh bank should closely monitor inflation pressures and stand ready to normalise the monetary policy stance to address second-round effects (wage increase) and to avoid de-anchoring of inflation expectations, it notes, adding that gradually increasing the exchange rate flexibility would also help buffer the economy against external shocks and improve monetary transmission.
Trying to control wages could, in theory, help to reduce inflationary pressures but the government has not used it after the 1970s, the report adds.
In a report on macroeconomics and debt management, the Finance Division said, “Rising inflation in trade partner countries, soaring fuel prices, devaluation of taka, disruptions in global supply chains and the Russia-Ukraine war are beyond our control.”
However, to keep inflation under control and to continue necessary credit flow to the private sector, dollar supply to the market is increasing alongside money flow, it also said.
The Finance Division has also taken opinions from various economists on macroeconomic management and how to strike a balance between inflation control and subsidy pressure amid the ongoing global situation.
Suggesting that the Finance Division do not increase fuel prices, Prominent economist Mohiuddin Alamgir said, “An about 20% hike in fuel prices will surely increase the cost of paddy production. But there is little scope for them to get fair prices. This is the new equilibrium.”
He also recommended holding aggregate demand and the new aggregate supply without affecting prices any further.
The government may wish to see a rollback in the general price level, he noted.