Fighting Inflation

The people of Bangladesh for the last 7 years have been inflicted by rising inflation. It is a major concern for a country like us where a large number of people hover around the poverty line. The government of Bangladesh is trying its best to address this issue. However, its contractionary monetary policy and expansionary fiscal policy have complicated the situation and made the possibility of getting out of it an elusive one.
The consumer price index (CPI) (12 month point-to-point) reached a level of 11.97% in September 2011. At the same time, food inflation rose to 13.75% which shows clearly that food inflation has been a major driver of overall inflation. Food inflation drives people to demand more in wages and this finally pushes up non-food inflation. So, in fighting inflation, food inflation should be the main thrust for our government. Our food inflation has a structural problem inherent in it which gets clear by observing the trend over the last few years. There was bumper production of paddy, rising hope that this year food inflation will be lower than the last year. But what we are faced with is just the opposite of our expectation. Food inflation has risen to a record level and leading a normal life with three meals a day has become a very challenging task for the poor. We know that, normally inflation starts rising when demand is higher than supply. According to the statistics, we were in surplus condition but we still had to import food grain. So why has this happened?
The answer could be multiple ones among which one is that our calculation of population is underestimated and so by considering per capita demand, we have a misleading conception of more per capita supply than per capita demand. If we believe in available statistics (and also if we don't believe), the answer will be found in the economic reasoning behind inflation.
According to Structuralist school of thought, inflation arises from two bottlenecks, namely agricultural bottleneck and foreign exchange bottleneck. Economists of this school believe that in developing countries there are structural problems enshrined in the agricultural system which allows food price to rise pushing up the cost of living. This leads to an increase in the wages and salaries with the presence of expected inflation. When this rising demand from an increasing population outpaces the growth in food supply, food price increases. Here is the problem. Our demand is not outpacing the growth in food supply, but still we are faced with this nagging problem. The market structure may provide the answer. With the absence of strict market regulation, there is anarchy in the market. Just consider the price of vegetables which you will find varying shockingly from one market to another. Here strengthening of Trading Corporation of Bangladesh (TCB) can go a long way into mitigating this problem. Again, if a system could be introduced where farmers will directly sell to the end-market, the middlemen's share in food items will greatly reduce and hence will work to reduce inflation.
Foreign exchange bottleneck mainly stipulates that it causes deteriorating terms in balance of payment condition. Bangladesh exports mainly primary products which have a low elasticity of demand for import. Again it imports products with high elasticity of demand, so in the end, import is always bigger than the total export. Add to this, a very large amount of import payment for our rental power plants which has resulted into deteriorating terms of trade. In the first quarter of this fiscal year although export increased by 22.5%, import increased by 42%. As a result, currency devaluation further increased the overall price level as the price of imported goods and their substitutes get increased. This has been particularly true for the last few months as high oil prices due to the conflict in Middle East has exerted a debilitating effect on the price level.
These are structural problems and what about our government's policies taken for the last couple of months. As it has been mentioned in the beginning of this article about our government's contradictory policies, they are giving rise to pressure on macroeconomic indicators. The bank borrowing of the government for meeting its fiscal expenditure was Tk. 95.75 billion as of October 19, of which Tk. 60.75 billion was borrowed from Bangladesh Bank. Now as borrowing from central bank normally means printing money, this will result into four times the expansion of this amount of money (as the money multiplier for Bangladesh is assumed to be 4 units). Thus, we may say that it will result into the injection of Tk. 243 billion into the market. This will directly result into excess liquidity problem and has all the potential to increase the price level higher.
Here lies the major crisis at one end, government is trying to meet its fiscal needs which are resulting into excess liquidity and at the other end, Bangladesh Bank (BB) is taking contractionary measures by increasing Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and repo and reverse repo. While our government is not playing a positive role for fighting inflation, BB is trying its best to address it through the instruments in its possession.
Bangladesh government is now seriously thinking about austerity measures which will include drastic cut in spending and increase in power tariff and fuel price. This austerity measure should also include cut in frequent visit by bureaucrats and buying of expensive cars. It has been reported in an English newspaper that one high government official didn't think that it would matter. This is where we have to be mindful of our responsibilities as a part of the government, bureaucrats have to lead the way of shunning needless cost thus driving the phantom of consumerism from our shoulder.
For relieving people from the burden of inflation, some steps have to be taken by our government without further ado. The austerity measures are timely ones and we hope our government will be able to successfully identify the unproductive sectors and stop spending there. Furthermore, instead of setting up rental power plants, we should finalise the coal policy and go for its extraction. Food market should be strongly monitored and the influence of middlemen should also be removed. It is beyond doubt that we can't stop inflation within a day or two. What we can do individually is to be strong as the austerity measures can bring harder time in future. Now the onus is no government and BB to help reduce inflation in near future (if not now).

The writer is a development researcher and a member of Institute and Faculty of Actuaries, UK. He works at Eminence. E-mail: [email protected]