Originally posted in The Daily Star on 7 February 2022
People around the world are grappling with inflationary pressure. Many have lost their jobs or are earning a lower income. Prices of daily essentials and fuel have spiralled, further draining people’s purses. Businesses have also been affected, particularly small businesses, who are yet to recover from pandemic-induced shocks. Though countries are on the path to recovery, the emergence of Omicron coupled with the high inflationary pressure might slow down their recovery in the short term. Meanwhile, since global economy is recovering, demand has gone up while supply could not match the demand.
Bangladesh has been in the recovery trajectory, too. However, like other countries, high inflation has been a major concern for Bangladesh. The inflationary pressure on Bangladesh’s economy started around June 2020 following the outbreak of the pandemic. According to Bangladesh Bureau of Statistics (BBS), point-to-point inflation rose to 6.05 percent in December 2021 compared to 5.29 percent in December 2020. Food inflation went up to 5.46 percent in December 2021, as opposed to 5.34 percent in December 2020.
The price hike in Bangladesh is often linked with the global price hike. Bangladesh is a net importer of fuel oil. It also imports edible oil, food, sugar, intermediate goods and raw materials for production. Therefore, any price increase in the global market is felt in Bangladesh almost immediately. This is a regular phenomenon and has been the case for decades. During periods of crisis, it becomes even more prominent. It may be recalled that during 2000-2008, increasing global fuel and food prices were transmitted into Bangladesh economy. The inflationary pressure started to ease following a global meltdown towards the end of 2008 and in 2009, which caused prices of major commodities to fall. However, inflation started to rise once the global economy started to turn around towards the end of 2009 and beginning of 2010. In the following decade, till the outbreak of the pandemic, the inflationary trend fluctuated.
In 2011, the global food price index increased significantly. After a decade, food prices are alarmingly high again. The Food and Agriculture Organization (FAO) estimates that the FAO Food Price Index in 2021 was 28.1 percent higher than in 2020.
Globally, the cost of logistics such as shipping and airlines as well as fuel prices have led to high prices of crops, even though global crop production has been as high as 2.8 billion—a record production. This high cost of rice, wheat, soybean oil and other commodities is then passed onto the end users. People in the low-income countries such as Bangladesh are the most affected in this regard.
On the domestic front, supply shortage is one of the reasons for high prices. A key component of high inflation in Bangladesh is high food inflation in the domestic market. Since food comprises about 60 percent of the total Consumer Price Index in Bangladesh, higher domestic food price is a dominant factor for high inflation both in urban and rural areas. Lower production is a key reason for the high price. Before the harvesting season, there is a lean period when supply is relatively low. This is a time when prices tend to go up. However, often markets do not follow the rule of demand and supply. For example, vegetable prices continued to be high even after the winter supply came in. The impact of higher supply was not reflected in prices. The cost of transportation and other logistics also contributed to this. For non-perishable commodities, there are market manipulators, hoarders, and syndicates—all of them take advantage of moments of crisis.
The global prediction for agriculture production is not promising in view of the impact of climate change, which is manifested not only through flood and cyclones but also through drought and wildfire. In the absence of high growth and good agricultural production, the inflationary pressure will continue to prevail. Indeed, due to uncertain climatic conditions, high input costs and the ongoing pandemic, the FAO sees little hope for food market stability in 2022. This is a warning for the food importing countries. During a crisis, food producing and exporting countries would give priority to domestic demand and tend to impose ban on export of food grains. The importing countries will not be able to import from the global market, as it happened in the past. Even if they can, they will have to pay an exorbitant price.
Therefore, Bangladesh needs to take measures well in advance. As a climate vulnerable country, it faces a high risk in terms of production disruption. On the other hand, the demand for rice and other food items is increasing. Hence, to have a proper market signal and price stability, a correct demand estimation for rice is needed. It is also essential to monitor the role of market players, including rice millers and importers, who control prices by manipulation.
Inflationary pressure always has an adverse impact on the consumers through reduction of their purchasing power and income erosion. High inflation, particularly high food inflation, affects the poor and people in the fixed income group. They are yet to absorb the burden of diesel price hike in November 2021. Now, with the continuous price hike of essential commodities, they find it difficult to live a decent life. The government’s support measures in the form of direct cash transfer to the poor, social protection to low-income families as well as stimulus for the small businesses, can provide some respite in the short term. In the medium term, higher production through higher investment will help create jobs and income, which is crucial for absorbing price shocks.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author’s own.