Is economy heading towards stagflation?
Sunday, 28 October 2007
Moazzem Hossain
Is the economy getting in the throes of stagflation -- a situation marked by inflationary conditions amid slowed-down, if not stagnating, pace of activities in its real sectors?
Despite the efforts by the caretaker government to resuscitate the flood-damaged economy, the current indicators raise fresh concern over its likely course in the immediate future.
Inflation continues to hit the common people below the belt. Foodgrain prices have already come under fresh upward pressures in the recent days. All other kitchen items have likewise recorded a renewed surge in prices. The unofficial estimates about the latest rate of inflation, particularly those relating to food and other essential items, would, on a rough reckoning, suggest a 5.0 per cent rise, at the least, in the post-Eid-ul-Fitr days.
Prices showed some stability, though on a level higher than that of the last year, during the month of Ramadan this year. But that phase of relative stability is now apparently over and the inflationary fuel is now conspicuous by its presence in the market.
While prices of essentials are now up again, the growth performance of the real sectors, as the available indicators would show, is slowing down. Retailers in most shopping complexes are complaining about a significant drop in their business turnover. If that provides any real index about the state of the economy, then disclaiming recessionary conditions thereof is difficult to substantiate. And again, if the latest statistics about excess liquidity or surplus funds with the banks give any signal about the economic activities, the picture remains quite disconcerting. Notwithstanding the instructions of the central bank and the policy measures of the government to buoy up growth-supporting activities through stepped-up lending operations by the banks, credits, particularly to private sector, are yet to pick up. The amount of excess liquidity with the banks stands now at over Taka 140 billion. And banks are reported to be encountering the growing burden of non-performing loan (NPLs) because of the difficulties that they are facing from some of their large borrowers.
Further, most banks, being awash with excess liquidity, are now cutting their deposit rates. Such cuts in a situation where inflationary pressures are already markedly up, will lower the real effective rate of interest for the savers. That will be a disincentive for the latter (i.e., savers) to keeping their surplus funds with the banks. On their part, the banks will neither be in a position to lower their lending rate because of provisioning requirements for the new NPLs under the present situation. Besides, lowering lending rates will not automatically create fresh demand for bank credits as both economic and non-economic factors continue to put fetters on the expansion of investment and related economic activities.
As far as the performance of the real sectors is concerned, the scope for recouping the production losses to the food crops in the agricultural sector this year in the forthcoming Aman harvesting season that begins in the middle of the next month is limited because of successive floodings in the main growing areas. Seedlings were badly damaged then, blighting the prospects for recovery during the Aman season. Much will now depend on production activities during the Boro crop season, subject to availability of all related agri-inputs in time. The Boro crop is now the largest food crop of the country. The farmers who have shown their resilience, time and again, are expected to be encouraged this year by higher domestic prices and, thus, to make efforts to bring more land under Boro farming. How far their efforts will be successful, will, however, depend largely on the extent of supports they receive from the Department of Agricultural Extension (DAE) and all other agencies to encourage increased use of high-yielding variety seeds by ensuring adequate supply of seed and necessary inputs, including fertilisers and insecticides.
Yet then, there remains a great deal of doubts over how far the Boro crop this year will make room for compensating the flood losses that were incurred this year. Agricultural growth during fiscal 2006-07 stood at 3.2 per cent lower than the post-flood higher growth of 4.9% in fiscal 2005-06.
A clear picture about the production performance this year of non-cereal minor crops, livestock and fisheries sub-sectors is difficult to project at this stage. However, even cautious optimism here does not lend much credence to any robust hope about a major difference to the agricultural growth performance without output of Boro crop expanding this year.
For the industrial sector, the production index was earlier projected to grow at 12.48%, 11.76% and 11.92% respectively in June 2007, December 2007 and June 2008 against actual growth of 15.70% in June, 2006. But the latest available figures, unofficial ones, do, of course, suggest a slackening of industrial output expansion so far during the current fiscal. The import statistics relating to industrial raw materials, the export operation in the first quarter of the current fiscal, credit flows etc., make it doubtful whether the projected annual industrial growth rate can be achieved during the year without supportive steps coming at the earliest to gear up production-oriented activities in the sector. Furthermore, construction activities which fall in the category of industrial sector, are yet to recover from setback, particularly in the private sector, in the fourth quarter of the last fiscal.
Meanwhile, the growth in the service sector that contributes around 50% of the country's growth domestic product (GDP) will be critically dependent on the level of performance of manufacturing and agriculture sectors in fiscal 2006-07. This sector recorded a growth of 6.7%, up from 6.4% in fiscal 2005-06. This growth was then supported by rapid growth in industry and expansion in foreign trade. Also then, wholesale and retail trades, transport, telecommunication, community, social and personal services increased substantially in a situation when the cellular phone industry expanded driving the growth of telecommunication and emergence of new private television channels supported higher activities in the services sectors. But the situation so far this year remains lacklustre, raising doubts over whether expansion of activities in the services sector will take place at the projected level in fiscal 2007-08.
All these developments in the economy blur the prospects for a turnaround of the economy from slowed-down activities. And here the latest round of price-hikes of oil and many other commodities in the international market would signal that abatement of inflationary pressures, particularly those relating to imported items, are unlikely in the near future.
Such a situation would rightly call for extra-ordinary efforts, not words of assurances, to tame the price situation and to achieve the projected growth momentum of the real sectors of the economy. Otherwise, fears about stagflation may become real, not a perceived one.
Is the economy getting in the throes of stagflation -- a situation marked by inflationary conditions amid slowed-down, if not stagnating, pace of activities in its real sectors?
Despite the efforts by the caretaker government to resuscitate the flood-damaged economy, the current indicators raise fresh concern over its likely course in the immediate future.
Inflation continues to hit the common people below the belt. Foodgrain prices have already come under fresh upward pressures in the recent days. All other kitchen items have likewise recorded a renewed surge in prices. The unofficial estimates about the latest rate of inflation, particularly those relating to food and other essential items, would, on a rough reckoning, suggest a 5.0 per cent rise, at the least, in the post-Eid-ul-Fitr days.
Prices showed some stability, though on a level higher than that of the last year, during the month of Ramadan this year. But that phase of relative stability is now apparently over and the inflationary fuel is now conspicuous by its presence in the market.
While prices of essentials are now up again, the growth performance of the real sectors, as the available indicators would show, is slowing down. Retailers in most shopping complexes are complaining about a significant drop in their business turnover. If that provides any real index about the state of the economy, then disclaiming recessionary conditions thereof is difficult to substantiate. And again, if the latest statistics about excess liquidity or surplus funds with the banks give any signal about the economic activities, the picture remains quite disconcerting. Notwithstanding the instructions of the central bank and the policy measures of the government to buoy up growth-supporting activities through stepped-up lending operations by the banks, credits, particularly to private sector, are yet to pick up. The amount of excess liquidity with the banks stands now at over Taka 140 billion. And banks are reported to be encountering the growing burden of non-performing loan (NPLs) because of the difficulties that they are facing from some of their large borrowers.
Further, most banks, being awash with excess liquidity, are now cutting their deposit rates. Such cuts in a situation where inflationary pressures are already markedly up, will lower the real effective rate of interest for the savers. That will be a disincentive for the latter (i.e., savers) to keeping their surplus funds with the banks. On their part, the banks will neither be in a position to lower their lending rate because of provisioning requirements for the new NPLs under the present situation. Besides, lowering lending rates will not automatically create fresh demand for bank credits as both economic and non-economic factors continue to put fetters on the expansion of investment and related economic activities.
As far as the performance of the real sectors is concerned, the scope for recouping the production losses to the food crops in the agricultural sector this year in the forthcoming Aman harvesting season that begins in the middle of the next month is limited because of successive floodings in the main growing areas. Seedlings were badly damaged then, blighting the prospects for recovery during the Aman season. Much will now depend on production activities during the Boro crop season, subject to availability of all related agri-inputs in time. The Boro crop is now the largest food crop of the country. The farmers who have shown their resilience, time and again, are expected to be encouraged this year by higher domestic prices and, thus, to make efforts to bring more land under Boro farming. How far their efforts will be successful, will, however, depend largely on the extent of supports they receive from the Department of Agricultural Extension (DAE) and all other agencies to encourage increased use of high-yielding variety seeds by ensuring adequate supply of seed and necessary inputs, including fertilisers and insecticides.
Yet then, there remains a great deal of doubts over how far the Boro crop this year will make room for compensating the flood losses that were incurred this year. Agricultural growth during fiscal 2006-07 stood at 3.2 per cent lower than the post-flood higher growth of 4.9% in fiscal 2005-06.
A clear picture about the production performance this year of non-cereal minor crops, livestock and fisheries sub-sectors is difficult to project at this stage. However, even cautious optimism here does not lend much credence to any robust hope about a major difference to the agricultural growth performance without output of Boro crop expanding this year.
For the industrial sector, the production index was earlier projected to grow at 12.48%, 11.76% and 11.92% respectively in June 2007, December 2007 and June 2008 against actual growth of 15.70% in June, 2006. But the latest available figures, unofficial ones, do, of course, suggest a slackening of industrial output expansion so far during the current fiscal. The import statistics relating to industrial raw materials, the export operation in the first quarter of the current fiscal, credit flows etc., make it doubtful whether the projected annual industrial growth rate can be achieved during the year without supportive steps coming at the earliest to gear up production-oriented activities in the sector. Furthermore, construction activities which fall in the category of industrial sector, are yet to recover from setback, particularly in the private sector, in the fourth quarter of the last fiscal.
Meanwhile, the growth in the service sector that contributes around 50% of the country's growth domestic product (GDP) will be critically dependent on the level of performance of manufacturing and agriculture sectors in fiscal 2006-07. This sector recorded a growth of 6.7%, up from 6.4% in fiscal 2005-06. This growth was then supported by rapid growth in industry and expansion in foreign trade. Also then, wholesale and retail trades, transport, telecommunication, community, social and personal services increased substantially in a situation when the cellular phone industry expanded driving the growth of telecommunication and emergence of new private television channels supported higher activities in the services sectors. But the situation so far this year remains lacklustre, raising doubts over whether expansion of activities in the services sector will take place at the projected level in fiscal 2007-08.
All these developments in the economy blur the prospects for a turnaround of the economy from slowed-down activities. And here the latest round of price-hikes of oil and many other commodities in the international market would signal that abatement of inflationary pressures, particularly those relating to imported items, are unlikely in the near future.
Such a situation would rightly call for extra-ordinary efforts, not words of assurances, to tame the price situation and to achieve the projected growth momentum of the real sectors of the economy. Otherwise, fears about stagflation may become real, not a perceived one.