Inflation management is the biggest challenge

FE Team | Published: October 20, 2011 00:00:00 | Updated: February 01, 2018 00:00:00

Shahiduzzaman KhanBangladesh faces a tougher challenge in bringing down burgeoning inflation. The latest Bangladesh Bureau of Statistics (BBS) data shows that inflation had increased to 11.97 per cent (on point-to-point or monthly count) in September, the highest in 10 years. Food inflation, which was 12.7 per cent in August, had increased to 13.75 per cent in September while food inflation in urban areas had increased to 14.69 per cent in the same month from 12.94 per cent in August. The government in the budget for the current financial year had a plan to keep inflation at 7.5 per cent. Reports in the media this week say the country is experiencing all-time high inflation during the tenure of the present government, exceeding the highest inflation rate earlier last month. However, reportedly, Finance Minister AMA Muhith appeared not to be worried about inflation at all. He is only worried about investments. A number of economists expressed their surprise at his observation, reportedly saying even if the minister is worried about how to increase investment, he should be worried about increasing inflation as it affects investment adversely. They said the finance minister might not be worried, but the double-digit inflation was practically a matter of concern adversely affecting the livelihood of the people. The inflation is turning towards stagflation as the inflation rate is high with investments flattening. The depreciation of the taka against the dollar is one of major concerns, too. The inflationary pressure is exacerbated by excessive money supply on the market as the government's borrowing from the domestic banking sector in particular has increased. It had already borrowed around Tk 90 billion in only three months of the current fiscal year (FY) against the annual borrowing target of Tk 190 billion. If the current inflationary trend persists, it will gradually be difficult for the people for their both ends to meet as they need to cut down on their essential expenditures to cope with the situation. Especially, the marginal people living just above poverty line may go down it again, after being hit by high food prices. Food price-rise appears to be the main cause of the overall inflation in the country. And behind food inflation, price volatility in the international market has been one of the major reasons, though there is evidently some downtrend about the commodity prices in the global market. In rural areas, food inflation has crossed double digit growth long ago and is having a negative impact on the poor people. According to the International Monetary Fund (IMF), the double digit inflation in Bangladesh is hurting the poor and eroding their purchasing power and the external competitiveness of its economy. None will contest the fact that rising inflation is posing a serious threat to the country's economy. It is the number one problem, and can create social and political instability. Some economists believe it is approaching a danger zone where it becomes self-propelling and is turning increasingly difficult to contain. It can no more be attributed to global inflation or to the market situation of specific items like food grains. Declining remittances and falling foreign exchange reserves, coupled with increasing government borrowing, have put country's macro-economic stability under strains. The deficit in the country's overall balance of payments (BoP) has further widened, leading to draw-down of its foreign exchange (forex) reserves, notwithstanding some positive valuation efforts in the FY '11. Meanwhile, non-food inflation remains a real concern as it has also moved upward, given second-round of effects, and the outcome of, pro-cyclical policies. The gap between actual flow of remittance and the government's target, articulated in the medium-term macroeconomic framework (MTMF), is on the rise and might grow sharply in the upcoming years. In FY 2010-11, the actual receipt of remittance totalled $11.65 billion, compared to MTMF projection of $14 billion, a shortfall of $2.35 billion. For the last two years in succession, the government has been borrowing heavily from the banking system of the country, finding no other option to foot its rising expenditures. The deficit financing resorted to by the government through borrowing in the last two years led significantly to expansion of money supply, not matched by commensurate rise in production activities. This has fuelled inflation further. The effects of higher inflation -- rising prices and charges of goods and services respectively -- on the conditions of living of the poor, not-so-poor and even the middle income groups of people, present a disconcerting picture. This is hardly compatible with the targets of poverty alleviation or making the population more resourceful to encourage sustainable savings, both at individual and national levels, to help spur investment operations. Under the circumstances, key challenge for the government will be to put a brake on public spending in not so priority areas at this stage. The relevant authorities need to act promptly on prioritising public expenditures and avoiding making such expenditures in areas other than priority ones. The implementation of an action plan to this effect should brook no delay. szkhan@dhaka.net