Taming inflation after pay hike

The Pay and Service Commission has recommended an increase in salary of public servants by 100 per cent on an average. Its full implementation would raise the government spending on salary and allowance by 63.7 per cent. According to the proposed pay scale, the government needs an additional amount of around Tk 300 billion to implement it. The report also recommended that the government provide each employee with a special package, including a flat and health benefits. The commission, led by its Chairman Mohammad Farashuddin, former governor of the Bangladesh bank, said that the pay hike was done to attract meritorious and efficient people to join government service. This is why, the committee recommended a 120 per cent raise in the basic salary of cadre officers at the entry level. The new pay scale will also put pressure on the private sector.

The biggest challenge for the year 2015 would be enhancing investments in productive and service sectors. Also the country should attract foreign direct investment (FDI) as well as local investors by ensuring business-friendly environment to reach the targeted goals.

The current GDP growth of the country is hovering around 6 per cent, which should be about 10. To that end, the government should lower bank interest rates to single digit, which prevents private sector borrowers from making new investment.

The Bangladesh Bank has made a forecast while making its own assessment about the whole economic performance of the country. It also projected the economic possibilities in the new calendar year 2015 against the background of the new pay scale, possible oil price hike because of political tension in the Middle East and finally, the demand pull impact on the price level because of output growth. As regards concerns on inflation, the central bank should keep these issues in mind and design the upcoming monetary policy accordingly.

There are mixed reactions among economists to possible rising inflation due to the proposed pay hike. It is learnt that there are more than four million workers in the ready-made garments (RMG) sector alone. During the last five years, there has been a 299 per cent increase in the wages of the workers of this sector.

Specialists favour rise in salaries of the government employees. But there is a general practice in our country that whenever there is any big change in the governmental arrangement, it has its effect on the private sector too. So, the government will have to have the mechanism to control the market prudently after the pay-hike. Otherwise, because of the pay-hike, 160 million people including 50 million workers will have to suffer. It can also make the entire socio-economic condition unstable. One cannot foretell that there will not be any effect of pay rise of 2.5 per cent government employees on the 97.5 per cent people of the private sector. The pay scale should be made in such a way that it does not have any effect on the private sector. Although there is an attractive pay-scale in some segments of the private sector, there are some serious anomalies too. Especially, workers of road and water transports, jute and other sectors are not getting fair salaries.

According to the latest figures of the Bangladesh Bureau of Statistics, inflation was at 6.21 per cent on a point-to-point basis in November this year. It is maintaining a downward trend in India too but it has influenced inflation here as several of our food items are imported from there.

Apart from this, prices of fuel and several food items including edible oil and sugar are falling in the international market. It has positively impacted inflation in Bangladesh. We are hopeful that inflation would decline to 6 per cent at the end of 2014-15 FY.  If investment increases leading to more production, inflation will not be a serious problem.

The writer is a lecturer of the Bangladesh Institute of Bank Management (BIBM)  [email protected]