Food inflation needs to be tamed

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Shahiduzzaman Khan
Impact of food inflation is being felt all across the country. The prices of essential commodities, especially the food-related items, have gone up abnormally high and so the cost of living in Bangladesh. Country's vast multitude of the poor and the unemployed people are having a difficult time to survive.
Slowly but steadily the situation is getting worse. According to a report published in the media last week, inflation rate on food items has increased in August due mainly to high prices in the international market and low domestic production. The overall inflation rate on point-to-point basis reached 10.12 per cent in August, which was 0.02 per cent higher than that of July, according to the Bangladesh Bureau of Statistics (BBS) data. Inflation rate of food items reached 11.62 per cent in August measured on a point-to-point basis. The recent floods also affected production of aus and aman paddy, resulting in a rising trend of rice prices in the local market.
After Eid holidays, city's kitchen markets witnessed some abnormal hikes in prices of essentials -- especially rice, vegetables and edible oils. Scanty supply of essential commodities is one of the reasons for the price spiral. BDR's 'Dal-Bhat' programmes and market monitoring by the taskforce in cooperation with the joint forces were closed during Eid holidays. Although some BDR outlets have started functioning, the kitchen markets are yet to become normal.
However, inflationary trend is likely to aggravate further if there are increases in service charges, gas and power tariff and utility prices to cover up the losses and to generate the revenue, needed for the related bodies to operate at break-even point, given the existing level of their operational efficiency. The engine of private sector growth would not be in a position to move at the desired pace unless effective measures for promoting good governance, and checking misuse of public funds are taken.
Some economists predicted that the situation would aggravate further in the coming days due to lower-than-expected agricultural output and global commodity market volatility. The government will face severe problems until the next budget as food situation does not look bright with static local production and supply shortage in the international market. They said that the government should continue direct market intervention measure at least for the next two crop seasons -- aman and boro.
Incumbent finance adviser on several occasions stressed the need for increased agricultural production to contain inflation. In the budget for the current fiscal year, he announced a number of measures aiming to keep supply and prices of essential food items stable. Import duties on a number of essentials were withdrawn and the government announced the plan of setting up four wholesale markets in Dhaka and giving easy trade loan to importers. The finance adviser referred to the higher rates of inflation in South Asian neighbours to defend the country's galloping inflation. He said inflation rates in India, Pakistan and Sri Lanka were 6.9 per cent, 8.1 per cent and 19.3 per cent respectively. In this context, 6.9 per cent inflation in Bangladesh is not abnormal, he argued. But the fact remains that inflation in those countries declined, while it rose abnormally in Bangladesh.
The latest inflation rates in India, Pakistan and Sri Lanka were 3.79 per cent, 6.37 per cent and 17.3 per cent respectively, official statistics posted in the websites showed. India's inflation dipped to 16-month low on the back of cheaper prices of some food items, while Bangladesh saw its highest inflation since independence mainly due to skyrocketing prices of food items, frustrating all budgetary steps to keep food prices in check.
Many economists are of the opinion that the country's inflation rate in the country has gone up following enforcement of the donor-driven prescription to liberalise imports, not because of huge money supply. The conditions that Bangladesh swallowed to get $490 million Poverty Reduction Growth Facility (PRGF) loan has led to such an inflation, according to them.
The fact that inflation, for whatever reasons, has gone up markedly remains uncontestable. The earlier decision to adopt contractionary monetary policy by the central bank has not helped much to curb inflation. High costs of import and also high cost of production of essentials, not for increased money supply, have ignited inflationary pressures. When the country needs an investment-friendly environment to generate employment and production to eradicate poverty, a tight demand management policy, as the businesses have noted, will have some strong destabilising effects on the economy. In that case, low investment, low capital formation, low output and low employment will persists and may, thus, cause stagflation.
Some economists have noted that the Bangladesh Bank has basically been trying to keep the inflation rate at the level of the past three years, not really putting its emphasis on putting down the inflationary rate. In the fiscal years 2004 and 2005, the average annual consumer production index (CPI) inflation rates were 6.49 per cent and 7.16 per cent respectively. This rate was 7.02 per cent in April, 2007. If the BB is knowingly endeavouring to contain the inflation rate around 7.0 per cent, it should take the responsibility of the current inflationary pressure in the economy, they said.
Facts here do suggest that the broad money supply, far from shortening any contractionary trend, has been expanding. The year-on-year percentage change in broad money increased from 14.2 per cent from June 2005 to 18.2 per cent in May 2007. As a result, the real interest rate decreased to approximately zero or negative, leading to higher consumption and investment spending, huge government borrowing, and, thus, higher inflation.