Originally posted in The Business Standard on 30 October 2022
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. 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?
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.