Identifying economy-friendly policy next challenge
Recent global shocks, Covid-19 and the Russia-Ukraine war have created an economic crisis not only in Bangladesh but also in other countries.
The impact of the shocks is already visible to us through inflationary pressure, fall in GDP, unemployment, and the reserve crisis. Under the circumstances, all of the countries are taking different macroeconomic policies to reduce the impact. Addressing the visible effects, the policies should be economic growth-friendly, least costly compared to other policies, and poor-friendly.
Nearly one in five individuals in Bangladesh was considered living below the poverty line, according to the Household Income and Expenditure Survey of 2016, and the coronavirus outbreak added to the woes as many people were added to the existing poor population. The inability to maintain a sufficient standard of living and high inflation will push some people into poverty. Here I am just evaluating and focusing on the recent fuel price increase by the government.
As far as economic theories offer, it is generally accepted by all of us that the increase in fuel price will be reflected in the prices of goods and services. It was realised immediately when the rise in fuel price pushed the price level up the next day.
The recent phenomenon of inflation indicates that the inflationary pressure will deepen in the upcoming days
Even the price of non-fuel-based commodities has also gone high. In layman's terms, it was an illegal act by the sellers. However, as an economist, we are trained to see what others can't.
In this case, sellers always think about the relative prices of the goods they are selling as well as buying. That means a profit markup on the prices of goods is always maintained by a seller.
The recent phenomenon of inflation indicates that the inflationary pressure will deepen in the upcoming days. The expectation regarding inflation is very crucial because once the high expectation of inflation is generated, it will be high inflation in reality.
Not surprisingly, our future journey will be more challenging than ever before. The recent fuel price hike will create cost-push inflation, which, in turn, creates a lot of hurdles for policymakers to find out the actual path of recovery because the trade-off between inflation and unemployment will no longer work. Hence, GDP growth will be hampered and the economy will not be able to generate enough jobs.
The energy ministry said that Bangladesh Petroleum Corporation had lost Tk 8,000 crore over the last six months, and the government is no longer able to provide subsidies in the sector.
The government should try to understand why the academicians are strongly criticising the recent macroeconomic policies. The government has just considered the subsidy on fuel as money, nothing else. But they need to have a very strong focus on the aggregate macroeconomic variables related to fuel prices.
If the removal of subsidy is in any way related to the condition imposed by the International Monetary Fund, they have to realise that we are not in the normal economic situation now to withdraw the subsidy suddenly.
Comparing the net benefit of the fuel subsidy with other development projects, the government can postpone some projects for a year or more. It may also seek policies to reduce cost-push inflation. But the journey will be costlier and more difficult than imagined!
The author is a lecturer in the economics department at the University of Dhaka