Country vulnerable to alien inflation: BB
Wednesday, 5 November 2008
Shakhawat Hossain
The country remains vulnerable to inflation in overseas countries as the higher prices of import-concentrated commodities dominate its market due to its open and small-size economy, according to a Bangladesh Bank (BB) analysis.
"The dominance of import prices, especially in recent times, indicates the vulnerability of a small open economy, such as Bangladesh, to foreign inflation," said the analysis titled 'Estimating Inflation Rates of Import-Concentrated Commodities.'
Focusing on the inflation in its 13 major trading partner nations such as China, India, Kuwait, Singapore and Hong Kong, which account for more than 70 per cent of the country's import, the analysis said: "Bangladesh economy is a price taker in the world market."
The country has been witnessing a persistent and high level of inflation over the last eight consecutive years since FY '01. While the general inflation rate was 1.94 per cent in FY '01, it stood at 9.94 per cent in FY '08.
Reviewing the prevailing high inflation from various angles the BB analysis said steep price hike of commodity items in the local market has been dominated by the import-concentrated commodities, especially of food items.
The ratio of total imports of goods and services to private consumption expenditure was 26.4 per cent in FY '03. But the ratio reached 37.0 per cent in FY '08.
The central bank analysis said the average food inflation was 1.38 per cent compared with the non-food inflation rate of 3.04 per cent in FY '01.
The food inflation reached 12.28 per cent in FY '08 compared to the non-food inflation rate of 6.32 per cent. The gap between 12-month average food and non-food inflation further expanded in July 2008, as food inflation rose to 12.50 per cent and non-food inflation to 6.13 per cent.
It suggested several recommendations at trade policy levels, which were very important for curbing the high food inflation in future.
At present, it said, policy responses of the government with respect to trade policies are confined mostly to tariff reduction and import subsidy on food items in cases where importers are already regulated or imports are controlled by a few large suppliers.
"In this context, it is important to consider that these are short term measures and can be highly distortive and higher food demand exacerbates adverse terms of trade effect of higher import prices."
It is also important to consider the prices of exportables as higher prices of imported inputs can have adverse effect on the country's international competitiveness which is important to compete with trading partners, it added.
The analysis said the role of BB is important for encouraging the banking system to increase credit support to the agriculture sector rather than increasing the budgetary support to the government.
The former is more supportive to higher agricultural production, higher employment generation, and is less inflationary, which are urgent requirements for ensuring macro-economic stability.
"On the other hand, budgetary support to the government may have higher inflationary impact on the economy and the outcomes in regard to agricultural production are not clearly visible," it added.
The country remains vulnerable to inflation in overseas countries as the higher prices of import-concentrated commodities dominate its market due to its open and small-size economy, according to a Bangladesh Bank (BB) analysis.
"The dominance of import prices, especially in recent times, indicates the vulnerability of a small open economy, such as Bangladesh, to foreign inflation," said the analysis titled 'Estimating Inflation Rates of Import-Concentrated Commodities.'
Focusing on the inflation in its 13 major trading partner nations such as China, India, Kuwait, Singapore and Hong Kong, which account for more than 70 per cent of the country's import, the analysis said: "Bangladesh economy is a price taker in the world market."
The country has been witnessing a persistent and high level of inflation over the last eight consecutive years since FY '01. While the general inflation rate was 1.94 per cent in FY '01, it stood at 9.94 per cent in FY '08.
Reviewing the prevailing high inflation from various angles the BB analysis said steep price hike of commodity items in the local market has been dominated by the import-concentrated commodities, especially of food items.
The ratio of total imports of goods and services to private consumption expenditure was 26.4 per cent in FY '03. But the ratio reached 37.0 per cent in FY '08.
The central bank analysis said the average food inflation was 1.38 per cent compared with the non-food inflation rate of 3.04 per cent in FY '01.
The food inflation reached 12.28 per cent in FY '08 compared to the non-food inflation rate of 6.32 per cent. The gap between 12-month average food and non-food inflation further expanded in July 2008, as food inflation rose to 12.50 per cent and non-food inflation to 6.13 per cent.
It suggested several recommendations at trade policy levels, which were very important for curbing the high food inflation in future.
At present, it said, policy responses of the government with respect to trade policies are confined mostly to tariff reduction and import subsidy on food items in cases where importers are already regulated or imports are controlled by a few large suppliers.
"In this context, it is important to consider that these are short term measures and can be highly distortive and higher food demand exacerbates adverse terms of trade effect of higher import prices."
It is also important to consider the prices of exportables as higher prices of imported inputs can have adverse effect on the country's international competitiveness which is important to compete with trading partners, it added.
The analysis said the role of BB is important for encouraging the banking system to increase credit support to the agriculture sector rather than increasing the budgetary support to the government.
The former is more supportive to higher agricultural production, higher employment generation, and is less inflationary, which are urgent requirements for ensuring macro-economic stability.
"On the other hand, budgetary support to the government may have higher inflationary impact on the economy and the outcomes in regard to agricultural production are not clearly visible," it added.