Tackling the rising inflation
Saturday, 17 November 2007
M Azizur Rahman
BANGLADESH economy has been slowing down due to a host of factors including falling investment, credit crunch, rising unemployment and inflation galloping to about 15 per cent under the impact of various unfavourable developments, particularly global trends. There is no denying that sky high international inflation has a direct bearing on our domestic economic scenario. However, the contribution of some domestic factors, both economic and non-economic cannot also be ignored here.
Domestic inflation, caused by local as well as global factors, is, thus, adversely impacting the national economy. Its most unwelcome effect on income distribution is a cause for serious concern. Inflationary environment of Bangladesh, even a few years ago, used to reflect the benefits of relative macro stability in which the prices rose, but slowly and predictably.
Now a slow rate of economic growth is marked by lower production of goods and services, high and rising unemployment, idle production capacity and declining income. The rising inflation and unemployment, now going hand in hand, are mainly driven by increasing production cost. Increasing cost of production is attributable to energy and oil prices soaring since the US invasion of Iraq four years ago. Oil price is now about US$100 a barrel compared to $6.0 per barrel in 1973.
The economic scenario has been complicated this year by crop losses caused by a cycle of droughts, floods, erosion and untimely rainfall or lack of it. The political situation and outlook could be an added factor. The engine of production is not functioning at its best. Supply of goods and services is erratic. Investment is shaky and shy due to unfavourable or contradictory actions of the government that cannot facilitate trade or industry. Investors are hesitant, not sure whether they can go for investments or imports, or stay out of trouble that could require them to show the source of wealth. A failure involves the risk of being caught for having black money. Cure is getting worse than the disease. Playing it safe or not doing anything remains the best option for a businessman. For the surgeon or the physician there must be a more pragmatic way to provide better treatment to the patient, that does not kill him. It is applicable to our economy as well. One path would do the economy good. Another would ruin it. And already the economy is in trouble which is bound to aggravate without remedial steps.
But it is encouraging to see the government is thinking of setting up a truth commission for a way out of the present situation. This could be a good idea to salvage the economy. Without corrective steps, the GDP growth rate may decline to 4.0 per. Due to decreased competitiveness and higher costs, exports of our apparels have fallen by 24 per cent. Foreign investment in Bangladesh has already dropped significantly. Purchasing power of domestic consumers has shrank considerably and remains on the decline.
Tackling inflation should be a priority. Usually a policy to control prices and incomes could tackle cost driven inflation. It achieves the goal by controlling the pressure to raise wages and also curbing the scope for the producers and suppliers to increase prices. The option of market intervention to lower the pressure for wage increase and control of prices is, however, difficult to exercise under the given circumstances because of worldwide increase in prices due to higher energy prices. Import prices of intermediate goods have also increased in the exporting countries. Many essential imported goods have recorded a price surge. It is, indeed, a daunting challenge to rein in prices when pressures thereof are largely exogenous, limiting our capacity to bring prices down. Resisting the pressure for increasing wages would not be easy as the wages are proving to be too low for the workers to afford even bare necessities. Social and political concerns are growing due to purchasing power of domestic consumers declining by the day.
Increasing output to restore the supply situation could be the only option for tackling the rising inflation. The government would have to provide all possible supports to raise production of essential goods including food items. Here, the capacity of the government for extending cash incentives to the growers will be because all the more limited in the event of shortfall in revenue earnings, the possibility for which cannot be ruled out in a situation where economic activities in productive sectors are slowing down. While all concerned will support the move by the government to expand the tax net requiring each and every citizen with taxable income to pay their taxes, the relevant authorities should also require to take into consideration the ability of the tax-payers, actual and potential, to foot the swelling public expenditures. Furthermore, the government has already, or will require to, to cut tariff rates for the import of essential consumer goods and intermediate items to keep their prices at reasonable levels. Also important here is to ensure stability of exchange rate so that the consumers as well as producers can afford imported goods and inputs respectively. These are no easy tasks. The government will have to demonstrate its farsightedness for improving economic governance. Its policies should help create confidence among all economic operators.
By all counts, purchasing power of the consumers will have to be increased to enable them to afford essential goods and services. This is more of a cost-push rather than a demand-driven inflation. Hence, economic policies should be formulated and put into operation, keeping the demands of the situation into consideration.
(The writer is Vice Chancellor, Uttara University)
BANGLADESH economy has been slowing down due to a host of factors including falling investment, credit crunch, rising unemployment and inflation galloping to about 15 per cent under the impact of various unfavourable developments, particularly global trends. There is no denying that sky high international inflation has a direct bearing on our domestic economic scenario. However, the contribution of some domestic factors, both economic and non-economic cannot also be ignored here.
Domestic inflation, caused by local as well as global factors, is, thus, adversely impacting the national economy. Its most unwelcome effect on income distribution is a cause for serious concern. Inflationary environment of Bangladesh, even a few years ago, used to reflect the benefits of relative macro stability in which the prices rose, but slowly and predictably.
Now a slow rate of economic growth is marked by lower production of goods and services, high and rising unemployment, idle production capacity and declining income. The rising inflation and unemployment, now going hand in hand, are mainly driven by increasing production cost. Increasing cost of production is attributable to energy and oil prices soaring since the US invasion of Iraq four years ago. Oil price is now about US$100 a barrel compared to $6.0 per barrel in 1973.
The economic scenario has been complicated this year by crop losses caused by a cycle of droughts, floods, erosion and untimely rainfall or lack of it. The political situation and outlook could be an added factor. The engine of production is not functioning at its best. Supply of goods and services is erratic. Investment is shaky and shy due to unfavourable or contradictory actions of the government that cannot facilitate trade or industry. Investors are hesitant, not sure whether they can go for investments or imports, or stay out of trouble that could require them to show the source of wealth. A failure involves the risk of being caught for having black money. Cure is getting worse than the disease. Playing it safe or not doing anything remains the best option for a businessman. For the surgeon or the physician there must be a more pragmatic way to provide better treatment to the patient, that does not kill him. It is applicable to our economy as well. One path would do the economy good. Another would ruin it. And already the economy is in trouble which is bound to aggravate without remedial steps.
But it is encouraging to see the government is thinking of setting up a truth commission for a way out of the present situation. This could be a good idea to salvage the economy. Without corrective steps, the GDP growth rate may decline to 4.0 per. Due to decreased competitiveness and higher costs, exports of our apparels have fallen by 24 per cent. Foreign investment in Bangladesh has already dropped significantly. Purchasing power of domestic consumers has shrank considerably and remains on the decline.
Tackling inflation should be a priority. Usually a policy to control prices and incomes could tackle cost driven inflation. It achieves the goal by controlling the pressure to raise wages and also curbing the scope for the producers and suppliers to increase prices. The option of market intervention to lower the pressure for wage increase and control of prices is, however, difficult to exercise under the given circumstances because of worldwide increase in prices due to higher energy prices. Import prices of intermediate goods have also increased in the exporting countries. Many essential imported goods have recorded a price surge. It is, indeed, a daunting challenge to rein in prices when pressures thereof are largely exogenous, limiting our capacity to bring prices down. Resisting the pressure for increasing wages would not be easy as the wages are proving to be too low for the workers to afford even bare necessities. Social and political concerns are growing due to purchasing power of domestic consumers declining by the day.
Increasing output to restore the supply situation could be the only option for tackling the rising inflation. The government would have to provide all possible supports to raise production of essential goods including food items. Here, the capacity of the government for extending cash incentives to the growers will be because all the more limited in the event of shortfall in revenue earnings, the possibility for which cannot be ruled out in a situation where economic activities in productive sectors are slowing down. While all concerned will support the move by the government to expand the tax net requiring each and every citizen with taxable income to pay their taxes, the relevant authorities should also require to take into consideration the ability of the tax-payers, actual and potential, to foot the swelling public expenditures. Furthermore, the government has already, or will require to, to cut tariff rates for the import of essential consumer goods and intermediate items to keep their prices at reasonable levels. Also important here is to ensure stability of exchange rate so that the consumers as well as producers can afford imported goods and inputs respectively. These are no easy tasks. The government will have to demonstrate its farsightedness for improving economic governance. Its policies should help create confidence among all economic operators.
By all counts, purchasing power of the consumers will have to be increased to enable them to afford essential goods and services. This is more of a cost-push rather than a demand-driven inflation. Hence, economic policies should be formulated and put into operation, keeping the demands of the situation into consideration.
(The writer is Vice Chancellor, Uttara University)