WB warns against rising inflation

The World Bank (WB) has cautioned that inflation rate, now on a northward trip, may hurt economic growth, if not arrested right now.

It also said it would be critical to keep inflation under bridle.

In its latest economic update, the WB also said inflation appears on the rise, albeit from a low base. The overall inflation rate through October 2002 almost doubled to 4.5 per cent from 2.4 per cent in FY02.

During the first quarter of FY03, the WB said, inflation increased further to 4.6 per cent.

"This is still modest by international standards," said the WB but cautioned if the trend is not prevented it may hurt economic growth.

"Building on the improvements in fiscal and monetary outcomes achieved in the second half of FY02, targets will be critical for preventing inflation from rising to a level where it starts hurting economic growth," the bank said.

Non-food inflation has picked up relatively more, doubling from 3.1 per cent in the first quarter of FY02 to 6.3 per cent in the first quarter of FY03.

"Fuel and transport components increased most sharply, suggesting that the increase in non-food inflation could be reflecting the lagged effects (direct as well as indirect) of administered energy price adjustments," said the bank.

It said the food inflation more than tripled from one per cent in the first quarter of FY02 to 3.5 per cent in the first quarter of FY03.

"Over the last two months, the prices of essential commodities, especially rice, vegetables, edible oil, spices and fish have reportedly increased significantly throughout the country due to bad weather as well as hoarding by traders. Media reports note that prices of most vegetables nearly doubled since June. Furthermore, the prices of all varieties of rice increased significantly despite another bumper crop last season. Thus, food inflation picked up as well," said the WB.

The bank also suggested the government to cut down the size of the national development outlay (ADP) for FY03 to around Tk 15,000 crore from the original Tk 19,200 crore.

It expressed concern over the composition and quality of this fiscal's ADP.

"The government's ADP rationalisation process could allow pruning the revised FY03 ADP to around Tk 140-150 billion, compared with the Tk 192 billion proposed in the original FY03 ADP. An ADP of Tk 150 billion would still be over 10 per cent higher than the actual FY02 ADP expenditure of Tk 136 billion," the WB said.

"Irrespective of size, ADP resources should only be allocated to projects that meet strict quality standards and satisfy a minimum rate of return criteria," it further said.

It also said rationalisation and prioritisation of the ADP and stronger domestic resource mobilisation are top priorities to enable the government to better contribute to achieve the national poverty reduction target.

"The composition and quality of ADP remains a concern. Also, the investment portfolio supported under the FY03 ADP is large in relation to implementation capacity. It includes too many low priority projects of poor quality.

A very large proportion of projects is in initial stages of implementation with very thin allocations. Investment projects that are new, unapproved or have zero implementation are natural candidates for dropping, deferring or restructuring," said the WB.