Economists discard 'syndicate' formula behind rising inflation

FE Team | Published: September 09, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

FE Report
Economists at a dialogue Saturday debunked the myth of syndicates' nexus in fuelling the country's recent inflationary pressure, saying "wrong-headed policy interventions", rocketing external food prices and the exchange rate policy rather contributed to the creeping inflation.
The rising inflation was not driven by growth of money supply, steady flow of remittances, and relative prosperity of the people, either, they argued as they spoke at the CPD-sponsored dialogue.
Boosting food production, expanding the social safety net for the vulnerable and bolstering supply of essentials are among the steps suggested by the economists to fend off inflation.
Centre for Policy Dialogue (CPD), a civil society think tank, organised the dialogue on "Interpreting recent inflationary trends in Bangladesh and policy options" in the city, with its executive chairman Rehman Sobhan in the chair.
Bangladesh Bank (BB) governor Salehuddin Ahmed was the chief guest in the dialogue while noted economist Wahid Uddin Mahmud and former BB governor Mohammad Farshuddin were the special guests.
Zahid Hussain, a senior economist at World Bank, and MK Mujeri, a senior research fellow at Bangladesh Institute of Development Studies, were the designated speakers.
SR Osmany, a professor of economics at University of Ulster, fired a broadside at the policy variables, noting that it was entirely a wrong-headed idea to scare the private sector away in stockpiling commodities in the name of anti-hoarding drive.
"To frighten the businesses away in stockpiling commodities in the name of campaign for curbing hoarding is completely wrong-headed," Osmany told the elite audience, as he analysed the reasons behind the soaring trend of inflation in the Bangladesh economy since 2001.
He went on: "Among the supply side explanations, the market syndicate argument is a non-starter as it confuses between 'level' and 'change' of prices."
Osmany's argument was further supported by his fellow economist Wahid Uddin Mahmud, who teaches economics at Dhaka University.
"It was a popular notion that inflationary pressure was aggravated by the unholy nexus of big players in the private sector. But one should bear in mind that unfair means adopted by syndicates can't last long," Mahmud said.
As some economists suggested releasing some amount from the reserves to keep inflation at check and cut import cost, the BB governor said it could invite disaster for the foreign exchange reserves.
"If we use the tool at this moment, there're some risks … It can cause a massive disaster for the reserves," he said, adding that it's very difficult to assess the exact impact of depreciation of taka on the economy. "It can have a reverse impact too."
Ahmed explained that steps towards appreciation of the taka, in case of any miss-alignment, could adversely affect the exports and remittance, causing massive disaster. "That's why the Bangladesh Bank is very cautious," he said.
In response to a rationale that India appreciated its currency against the dollar, he discarded the approach saying that it also has risk if Bangladesh appreciates its currency to follow India as Bangladesh set its eyes on other markets like Australia and Argentina to import essential items.
The central bank boss said the relation between exchange rate and inflation is very insignificant in the economy. "Exchange rate manipulation is not really the way of achieving macroeconomic target (inflation)."
Ahmed said that although inflation in Bangladesh on point-to-point basis rose to over 9.0 per cent recently, the rates in Sri Lanka and Pakistan were 17 per cent and 8.0 per cent. However, inflation in India came down to 4.3 per cent on the basis of wholesale price index, he added.
He said the major challenge of the economy is not to let the inflation rise further through increasing supply in a situation when the economy is facing a kind of slowdown, if not stagflation.
Taking part in the discussion, a former finance minister M Syeduzzaman said he does not feel the reserve, hovering at US$5.0 billion, is comfortable as only one shock of energy price or food price could deplete the forex reserve position.
Turning to suggestions for fighting inflation, Mahmud stressed the need for giving more concentration on cereal production due to recent phenomenon of diversification of farm products on expectation of more prices.
Wahid Uddin Mahmud suggested variable duty rate on import of essential items in a manner when local production will be increased, higher import duty should be imposed and when prices on the international market will appreciate and import duty should be reduced.
He also suggested developing buffer stock to avert sudden short supply of food.
Disagreeing with a recent study on inflation conducted by CPD, Mahmud pointed out syndicates can be active for a shorter period, but they cannot keep pushing up commodity prices for long.
In his paper, Osmany, who is also a visiting professor at BRAC university, said any explanation of the recent inflationary experience in Bangladesh will have to account for the rising relative price of food, and it must do so within the framework of a "small open economy" model.
He also said that the exchange rate policy, pursued by the Bangladesh Bank (BB), allowing local currency (Taka) to depreciate involves a trade-off from the point of the poor: it has potentially positive income effect and negative price effect.
If the central bank cannot prove that the balance of the trade-off favours the poor, it should consider revising the policy, allowing the exchange rate to approximate the market equilibrium.
But the BB governor Salehuddin Ahmed did not agree with the views, insisting manipulating monetary and exchange rate policies are not the best way of achieving macro-economic targets.
He said as the country's import regime has been more diversified over the years, appreciation of taka keeping food imports from India in mind will not be pragmatic solution.
Former Bangladesh Bank governor Farashuddin Ahmed echoed the suggestion of increasing local production and building up food stock as he experienced better results during his tenure as the governor when forex reserve dropped as low as US$ 1.3 billion.