Bracing for a double-digit inflation
Wednesday, 17 March 2010
Maswood Alam Khan
With inflation of 2.3 per cent in June, 2009 jumping to 4.6 per cent in September and then again to 8.5 per cent in December the same year, it is possibly now a double-digit inflation going up in the first quarter of 2010. The trend is worrisome indeed.
Bangladesh Bank, it seems, is also concerned and has rightly made a contingency plan to introduce some policy measures for mopping up excess liquidity from the market with an aim to curbing the inflation, lest it gets unbridled. The salient features of the central bank's measures are: resuming auction of its 30-day bills, raising interest rates on government bonds and holding Reverse Repurchase Agreement (Reverse Repo) for buying securities and agreeing to sell the same in the future.
Bangladesh Bank is eyeing at about Taka 350 billion lying with the country's scheduled banks which is only one segment of excess liquidity in the market; but perhaps more than 50 per cent of the whole of liquid cash resting in people's pockets are all black money that are hardly recorded in books of accounts.
Sucking up excess liquidity from both the banks and the black market, honest to goodness, is not so easy on the part of the central bank alone, when corruption in our country has taken the shape of a roaring industry, when bribes converted into US Dollar in cash are stashed away in lockers at home and abroad, when a businessman cannot think of surviving without shortchanging buyers, when manufacturers are busy adulterating foods and medicines and when foisting shoddy goods under fake brands is a common business practice. The market is already flooded with easy and liquid cash, all bribes and black money that are largely unaccounted for.
Anybody who is a little educated knows by default that inflation is a numerical identity expressed in percentage of a digit that speaks about price fluctuations within a set of goods and services over a period of time. When inflation rate is single-digit like 2 or 3 per cent it is not a bad sign, rather at times a good sign signifying economic activities. But when the figure balloons to a higher degree and especially when it nears a double-digit figure it is alarming. Once the inflation rate finally settles at a double-digit scale of 10 or above the economy is truly sick and warning bells start ringing around.
There are many causes behind a rise in inflation depending on a number of factors. For example, printing an excess of money, a rise in production and labour costs, borrowings of the government from within the country and also from overseas sources, a deep drop of the exchange rate, more taxes put on consumer products, a war and also unnecessary spending to win gullible citizens for political gains that compels a government to recoup the money spent and repay the money borrowed. These are all basic knowledge a student garners from his teacher. But there are other hidden causes and chaotic patterns of inflation that are also responsible for rises in prices of consumer products and services.
Anyone who has not been living in a cave for the last few years knows how oil prices soared and consequently pushed up prices of the whole spectrum of commodities starting from clothes and house rents to cooking oil and napkins. Growing evidence suggests consumers, businesspeople, and political leaders in Bangladesh and in many other countries of the world should be bracing for double-digit inflation for a year or two.
That the consumers are panting for breath is evident in a shopping mall in Dhaka city. A piece of apparel, for ladies or gents, which could be bought a year back for not more than Taka 1,500 is now carrying a Taka 3,500 price tag. Manufacturers and traders are being forced to pass price increases on to the consumers.
Higher price of a shirt or a can of cooking oil is not what the government alone is to blame for. It is a corollary to price rise at sources at home and abroad. Manufacturers and retailers in Bangladesh and, for that matter, in any country of the world including the USA offset rising costs by sourcing products from countries, mostly from China, where the products could be made cheaply. Such outsourcing kept prices down for consumers and restrained pressures on wages, abetting price stability.
But costs in China are rising quickly, where its currency--Renminbi-- had to be floated upward by more than 20 per cent against the dollar since depegging it five years back. The Chinese government had also to increase its value-added tax and remove rebates of the tax for most exporters. New labour laws in China have pushed up labour costs by about 50% over the last couple of years. Chinese production costs rose by more than 10% and the Chinese producers are demanding-and getting-price increases of 20% to 25% on goods they make and sell abroad.
We have no reason to feel down with the dismal picture of our economic status as we are not alone in the thick of fiscal chaos. Rather, we are far better off than many other developing countries. As regards the real growth rate, Bangladesh has been faring better than even some developed countries. Whereas GDP real growth rate of the world was 5% in 2007, 2.9% in 2008 and -1% (negative) in 2009, our growth rate of 5.7% in 2009 decreasing from 6.2% and 5.8% in 2007 and 2008 respectively is not bad at all by comparison, given the recent global recession that affected badly almost all the economic sectors in all the countries in the world. Compared to GDP real growth rates of different neighboring countries like Pakistan (5.7%), Myanmar (1%), Sri Lanka (3.5%), and negative growths in Malaysia (-2.85) and Cambodia (-1.5%), the growth rate of Bangladesh's is still better.
With clouds of gloom gathering ominously over the horizon of the world economy, what now we have to do is not try to lower the prices but to raise the buying capacity of our consumers. Belt-tightening tactics to lower commodity prices may compel the sellers to adulterate their products to keep their profit margin intact. What is needed however is immediate investment in core industries which have the potential to generate employment in large scales and help enhance the purchasing power of the masses. Instead of passing the blame of price-rise on the government we should work on a war footing and find out how through inclusive growth based on self-reliance and lesser dependence on imported raw materials we can brace for a nasty inflation that seems brewing up all over the world.
maswood@hotmail.com
With inflation of 2.3 per cent in June, 2009 jumping to 4.6 per cent in September and then again to 8.5 per cent in December the same year, it is possibly now a double-digit inflation going up in the first quarter of 2010. The trend is worrisome indeed.
Bangladesh Bank, it seems, is also concerned and has rightly made a contingency plan to introduce some policy measures for mopping up excess liquidity from the market with an aim to curbing the inflation, lest it gets unbridled. The salient features of the central bank's measures are: resuming auction of its 30-day bills, raising interest rates on government bonds and holding Reverse Repurchase Agreement (Reverse Repo) for buying securities and agreeing to sell the same in the future.
Bangladesh Bank is eyeing at about Taka 350 billion lying with the country's scheduled banks which is only one segment of excess liquidity in the market; but perhaps more than 50 per cent of the whole of liquid cash resting in people's pockets are all black money that are hardly recorded in books of accounts.
Sucking up excess liquidity from both the banks and the black market, honest to goodness, is not so easy on the part of the central bank alone, when corruption in our country has taken the shape of a roaring industry, when bribes converted into US Dollar in cash are stashed away in lockers at home and abroad, when a businessman cannot think of surviving without shortchanging buyers, when manufacturers are busy adulterating foods and medicines and when foisting shoddy goods under fake brands is a common business practice. The market is already flooded with easy and liquid cash, all bribes and black money that are largely unaccounted for.
Anybody who is a little educated knows by default that inflation is a numerical identity expressed in percentage of a digit that speaks about price fluctuations within a set of goods and services over a period of time. When inflation rate is single-digit like 2 or 3 per cent it is not a bad sign, rather at times a good sign signifying economic activities. But when the figure balloons to a higher degree and especially when it nears a double-digit figure it is alarming. Once the inflation rate finally settles at a double-digit scale of 10 or above the economy is truly sick and warning bells start ringing around.
There are many causes behind a rise in inflation depending on a number of factors. For example, printing an excess of money, a rise in production and labour costs, borrowings of the government from within the country and also from overseas sources, a deep drop of the exchange rate, more taxes put on consumer products, a war and also unnecessary spending to win gullible citizens for political gains that compels a government to recoup the money spent and repay the money borrowed. These are all basic knowledge a student garners from his teacher. But there are other hidden causes and chaotic patterns of inflation that are also responsible for rises in prices of consumer products and services.
Anyone who has not been living in a cave for the last few years knows how oil prices soared and consequently pushed up prices of the whole spectrum of commodities starting from clothes and house rents to cooking oil and napkins. Growing evidence suggests consumers, businesspeople, and political leaders in Bangladesh and in many other countries of the world should be bracing for double-digit inflation for a year or two.
That the consumers are panting for breath is evident in a shopping mall in Dhaka city. A piece of apparel, for ladies or gents, which could be bought a year back for not more than Taka 1,500 is now carrying a Taka 3,500 price tag. Manufacturers and traders are being forced to pass price increases on to the consumers.
Higher price of a shirt or a can of cooking oil is not what the government alone is to blame for. It is a corollary to price rise at sources at home and abroad. Manufacturers and retailers in Bangladesh and, for that matter, in any country of the world including the USA offset rising costs by sourcing products from countries, mostly from China, where the products could be made cheaply. Such outsourcing kept prices down for consumers and restrained pressures on wages, abetting price stability.
But costs in China are rising quickly, where its currency--Renminbi-- had to be floated upward by more than 20 per cent against the dollar since depegging it five years back. The Chinese government had also to increase its value-added tax and remove rebates of the tax for most exporters. New labour laws in China have pushed up labour costs by about 50% over the last couple of years. Chinese production costs rose by more than 10% and the Chinese producers are demanding-and getting-price increases of 20% to 25% on goods they make and sell abroad.
We have no reason to feel down with the dismal picture of our economic status as we are not alone in the thick of fiscal chaos. Rather, we are far better off than many other developing countries. As regards the real growth rate, Bangladesh has been faring better than even some developed countries. Whereas GDP real growth rate of the world was 5% in 2007, 2.9% in 2008 and -1% (negative) in 2009, our growth rate of 5.7% in 2009 decreasing from 6.2% and 5.8% in 2007 and 2008 respectively is not bad at all by comparison, given the recent global recession that affected badly almost all the economic sectors in all the countries in the world. Compared to GDP real growth rates of different neighboring countries like Pakistan (5.7%), Myanmar (1%), Sri Lanka (3.5%), and negative growths in Malaysia (-2.85) and Cambodia (-1.5%), the growth rate of Bangladesh's is still better.
With clouds of gloom gathering ominously over the horizon of the world economy, what now we have to do is not try to lower the prices but to raise the buying capacity of our consumers. Belt-tightening tactics to lower commodity prices may compel the sellers to adulterate their products to keep their profit margin intact. What is needed however is immediate investment in core industries which have the potential to generate employment in large scales and help enhance the purchasing power of the masses. Instead of passing the blame of price-rise on the government we should work on a war footing and find out how through inclusive growth based on self-reliance and lesser dependence on imported raw materials we can brace for a nasty inflation that seems brewing up all over the world.
maswood@hotmail.com