Originally posted in The Daily Star on 17 May 2022
The prices of essentials continue to rise at a fast pace. Bangladesh has been feeling this inflationary pressure since June 2020, which recently became unbearable for the poor and fixed income groups in the country. The pressure has been compounded further due to the Russia-Ukraine war that began in February. High prices of fuel, edible oil, food, wheat, sugar, and intermediate goods and raw materials have been passed on to the Bangladeshi markets as we import these items at high prices. Edible oil prices have been on the rise since March 2021. Despite the government reducing the value-added tax (VAT) on imports of some commodities, including edible oil, the price hike remains unabated. Food inflation went up to 6.2 percent in March 2022 from 5.3 percent in July 2021, according to the Bangladesh Bank. However, the real pressure of high prices is felt much more than what the official statistics depict.
On the heels of such high prices and supply shortages comes the announcement of India banning wheat exports. Before the Ukraine war, Bangladesh would import about 45 percent of its wheat demand from Russia and Ukraine, 23 percent from Canada, 17 percent from India and 15 percent from other countries. Following the war, Bangladesh became heavily dependent on its neighbour, with almost 63 percent of its wheat import coming from India. As expected, this announcement has immediately pushed wheat prices up in Bangladesh. If the ban continues and alternative sources are not managed, our food security will be at stake, since Bangladesh imports almost 86 percent of its wheat requirement annually.
In view of this situation, our policymakers have to act promptly. It may be noted that India is not a regular exporter of wheat. It exports only when there is excess production. So, Bangladesh should explore and make agreements with other wheat-surplus countries. Official discussions with India should be continued as well, since India has indicated that it would keep its window open for its neighbours and vulnerable countries.
This decision may be temporary, but the impact has already been felt in the markets here. As always, prices have gone up in no time, and have also had an impact on rice prices, which have been on the rise for the last two years. There is also the artificial crisis that is created by a small group of traders. Therefore, the government must ensure adequate supply in the market through procurement from domestic and international sources. The Food and Agriculture Organization (FAO) has predicted that, due to uncertain climatic conditions, high input costs and the pandemic, the international food market is likely to remain unstable in 2022. When it comes to commodity imports, the Trading Corporation of Bangladesh (TCB) is often responsible for importing consumer items. However, the organisation does not have enough capacity and is often blamed for lack of transparency. Instead of being involved in imports, it should focus on better distribution of commodities by increasing its organisational capacity. It can also work towards enhanced market monitoring.
Increased supply of commodities to the market will require more public resources and their efficient utilisation. Our policymakers will need to work on several fronts. First, domestic resource mobilisation must be improved by collecting more taxes. The tax-GDP ratio in Bangladesh is only 7.7 percent; it needs to be increased to at least 18-20 percent in the next few years, particularly before the country graduates from the Least Developed Country (LDC) status. Currently, much of the revenue is collected from import tariffs, which is now very high because of high import prices. However, the major source of revenue should be direct income tax, and there are huge scopes for increasing the tax net and the volume of tax.
Second, good governance must be ensured in case of public expenditures. During an economic downturn, expansionary public expenditures are suggested since spending money on productive activities can create employment and income, which in turn increases aggregate demand, which is essential for economic recovery. But now it is time to be cautious about public expenditures. Suspending foreign travels of government officials for the next six months unless urgent, putting import-based projects on hold, and spending only on the maintenance of the existing roads instead of building new roads are all welcome moves. There should also be more transparency on project expenditures so that their expenses remain within their initial budgets and wastes are curtailed. Projects that are going to be completed soon should be prioritised.
Third, the government should use foreign exchange reserves cautiously. In the face of expensive imports and lower export income, the forex reserve is declining. Remittance flow is also declining and is not able to improve the current account deficit, which stands at about USD 10 billion now. In the coming years, there will be more pressure on the forex reserves as loan repayment of some of the large projects—such as the Rooppur Nuclear Power Plant and the Padma Rail link—will begin. If the current account deficit persists for a long period, it will create pressure on the foreign exchange market. As a result, the value of taka will decline and lead to further inflation. The central bank has taken a number of positive measures to save the forex reserves, including using forex supply only for the most important sectors.
The discussion on reining in inflation is incomplete without addressing the above-mentioned issues. Controlling high prices requires comprehensive policy measures. This is all the more important in view of the fact that inflationary pressure will not wither away soon—nationally or globally. If not addressed immediately through appropriate measures, inequality will widen further in Bangladesh. The government will have to adopt a holistic approach to deal with this crisis.
Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author’s own.