Pay hike may not fuel inflation

Biru Paksha Paul

The proposed pay hike of government employees will not fuel inflation if productivity improves, the newly-appointed chief economist of the central bank has said.

Biru Paksha Paul said Bangladesh Bank is now examining whether the raise will put an impact on inflation.

Containing money supply is important to keep inflation at a tolerable level in the long term, he said.

“Money supply is an input to restrain inflation. It works like the accelerator of a car,” Paul said. 

In a study on Bangladesh and India, he found the rise or fall in inflation is mainly driven by money supply. 

“The inflation differential between Bangladesh and India is mainly a monetary phenomenon,” Paul told The Daily Star on the sidelines of a conference on economic research in Dhaka yesterday. 

During 1980-2012, Bangladesh registered, on average, an annual growth of 16.87 percent in money supply and 6.81 percent in inflation, he said.

Paul, also an associate professor of economics at the State University of New York at Cortland, said he is not against an increased supply of money in emerging economies like Bangladesh.

“Bangladesh's economy has been growing at around 6 percent for the last several years. So there will be some inflation. If we don't pump money into the economy, it will not grow,” Paul said.   

Giving an example, he said: “It will not create any inflation if we print a Tk 100 note, and at the same time, produce the same amount of goods.”

Prudential management of money supply will keep inflation in check or at a desired level, he said. 

Paul also said inward remittances should be managed properly so that prices of essentials do not go up.

“Inward remittance does not create inflation. It creates inflation when it is not properly managed by the central bank.”

Bangladesh's inflation has been on a downward curve -- it came down to 6.21 percent in November, which was the lowest in 24 months.

Food inflation was the biggest driver behind the drop in overall inflation last month, sliding to 6.44 percent from 7.16 percent in October, according to the Bangladesh Bureau of Statistics.

In October 2012, inflation was 5.16 percent, which rose to 6.55 percent in November the same year. The government has set the inflation target at 6.5 percent, on average, for the current fiscal year. Paul said he will lead a 40-member team at the BB for researches on macroeconomic issues. “I will mainly assist the BB governor in decision-making.”

He earned his master's degree in economics from Dhaka University in 1987, and later completed MBA in finance from the University of Technology, Sydney.

Paul completed his master's in applied economics from the State University of New York and earned his PhD in economics from the same university.

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