The many causes of inflation
Friday, 7 September 2007
Md Abdul Jabbar
PEOPLE from all sections of society extended welcome to newly formed caretaker government after the change-over of 1/11 this year due to particularly their drive against corruption. This is the first government which dared to make accountable the big-shots like some businessmen and ex-ruling party members, MPs, and ministers. They have been highly appreciated for it and it has brought mass people supports for them though their main job is to hold a fair and free general election.
Despite the laudable job, the government faces a critical question from the same people due to some unhealthy trends in the economy that are surfacing gradually, particularly like that of price hike of essentials. The continuous price hike of essentials has put an inflationary pressure on the economy. People have become irritated due to the effects of persistent inflation. Sometimes, they feel disappointed that it might lead to inability of the government to govern the country under such an environment.
The Bangladesh Bank, the central bank of the country, has been pursuing a contractionary monetary policy to contain inflation, to acquire sustainable GDP growth and to create more employment since 2005. But it is alleged that the expansion of private sector investment is affected which not only reduces the production of real goods in the market but also the employment generation in the country where about 40 per cent of the active people are unemployed. Against the above backdrop, more conscious and restrained monetary policy is said to be pursued by the Bangladesh Bank without any result.
The Bangladesh Bank failed to take effective steps to contain inflation due to its failure to identify whether the inflation is caused by demand-push or supply push factors. The demand-push inflation works in case of an economy having full employment. In this situation, more money supply in the economy would not produce goods, rather would result in inflation in the economy.
As the economy of Bangladesh is not having full employment at present, more money supply should energize the production sector to produce more goods for the market. And if more goods are supplied in the market, there would be less inflation in the economy. Our economy is not having full employment situation, we can say the present inflation is caused by supply-push, instead of demand-push. As such, we should take appropriate steps to have more investment, more employment and more supply of goods in the market so that excess money may be matched with the supply of goods.
But the Bangladesh Bank took the opposite steps to fight inflation. They adopted a contraction in monetary policy through which they wish to check the persisting inflation. The contractionary monetary policy advocates withdrawal of money as the money circulation becomes higher in the market. So credit should become costly so that demand of money would be less and, thus, the price levels of the essentials would come down. The way is adopted to reduce the supply of money against the higher demands of the goods, not to increase the supply of real goods in the market. It is the failure of the Bangladesh Bank to understand whether the causes of the present inflation is based either on demand-push or supply push factors. This continues to aggravate the price situation of the essentials severely affecting the economy. It not only reduces the purchasing power of the fixed-income groups but also affects the GDP growth of the economy.
Definitely, the government is taking various steps including tariff reduction on the essential goods to check the inflation but without any result. One of the factors that might thwart the positive steps of the government was a sense of panic persisting among the businessmen, large importers, local wholesalers and others. Thus, fighting inflation turns into a futile job. Even businesses that operate exclusively in domestic market are not immune to the effects of globalization particularly while a country like ours is import-based for its essential goods supply.
Moreover, we are very much concerned with maintaining the comfortable level of foreign currency reserve than addressing the import market price and its effects in the market and the GDP growth rate. Blaming the floating exchange rate regime launched in 2003, the continuous appreciation of US dollar is allowed which turns into a major reason of higher import cost thus affecting the price-hike of the essentials. The supply of essential goods in the market has become instable while eviction of thousands of small traders, hawkers, chasing black money, strident anti-corruption drive etc. came into force together. From the fury of all these simultaneous drives it seems that no corruption drive was made at all for a long time. But what has happened now is that all the anti-corruption drives have been made at a time affecting the dynamics of the economy, generated by both the white money and the black money.
These sorts of simultaneous drives not only made the self-employed unemployed but also destroyed the low cost supply chain of the market. Such type of correction of the economy disrupts the scope of low cost supply chain for the millions and thus retards the growth of the economy. Society observes the destabilization of the market economy along with the above situation. Economic growth under the poor infra-structures, as in Bangladesh, warrants thousands of small shop owners, street hawkers, open markets/huts (daily/weekly village markets occupying the govt. lands) operational -- factors that are all necessary to maintain the supply chain undisrupted leading to competitive prices.
The private investment volume comes under dogmatic pressure as the Bangladesh Bank adopts the contractionary monetary policy. The government credit will be higher to meet up deficit budget, thus raising the cost of credit. This would be definitely retarding the growth of private investments. Such stands that reduce the investments would affect the supply of the real goods in the market.
Retardation in the investments both domestic and FDI might aggravate unemployment and inflation and, thus, curtail the GDP growth. Under the deficit budgeting, government has to acquire Tk 72.53 billion from the banking sector. But if all the above funding would have been made possible by raising the volume of revenues, the market effects would be rather positive. We must take into account that the main driving force of the economy in Bangladesh is the private sector. And we should take every care to ensure that the private sector investments at large are not affected while formulating the budget, monetary policy, policy of trade and commerce etc.
The amount of local investment was at Tk.183.70 billion during 2005-06 which also came down to Tk.150 billion during 2006-07. On the other hand, FDI came down to Tk 93.85 billion from Tk 249.85 billion in the same period. Facing the mounting harassment by the NBR, ACC or the bankers while opening the LCs, the business people preferred inaction while FDI cannot be expected for the reason of continuous political instability. And due to such inactions by both the foreign and local investors, the rate of employment generation is affected, thwarting the poverty reduction strategy. Millions of people are remaining unemployed. During 2005-06, 418,529 persons were employed which came down to 322,479 persons in 2006-07 due to the direct investment drives going down.
So, the government should look at ways to facilitate the low-income people, particularly the thousands of self-employed entrepreneurs to tap the potentials of the market. The people will be more enterprising under such a policy for income generation as well as more enterprising people would contribute to the growth of the economy easing the pressure of unemployment, inflation, distortion etc. So, the elements of markets forces involving the poor enterprising and entrepreneurial people should receive the priority attention of the government and not excluded, not even on the justification of presenting a corruption-free society all at a time.
........................................................
The writer is a Sr. Vice President of Islamic Bank Bangladesh Limited
PEOPLE from all sections of society extended welcome to newly formed caretaker government after the change-over of 1/11 this year due to particularly their drive against corruption. This is the first government which dared to make accountable the big-shots like some businessmen and ex-ruling party members, MPs, and ministers. They have been highly appreciated for it and it has brought mass people supports for them though their main job is to hold a fair and free general election.
Despite the laudable job, the government faces a critical question from the same people due to some unhealthy trends in the economy that are surfacing gradually, particularly like that of price hike of essentials. The continuous price hike of essentials has put an inflationary pressure on the economy. People have become irritated due to the effects of persistent inflation. Sometimes, they feel disappointed that it might lead to inability of the government to govern the country under such an environment.
The Bangladesh Bank, the central bank of the country, has been pursuing a contractionary monetary policy to contain inflation, to acquire sustainable GDP growth and to create more employment since 2005. But it is alleged that the expansion of private sector investment is affected which not only reduces the production of real goods in the market but also the employment generation in the country where about 40 per cent of the active people are unemployed. Against the above backdrop, more conscious and restrained monetary policy is said to be pursued by the Bangladesh Bank without any result.
The Bangladesh Bank failed to take effective steps to contain inflation due to its failure to identify whether the inflation is caused by demand-push or supply push factors. The demand-push inflation works in case of an economy having full employment. In this situation, more money supply in the economy would not produce goods, rather would result in inflation in the economy.
As the economy of Bangladesh is not having full employment at present, more money supply should energize the production sector to produce more goods for the market. And if more goods are supplied in the market, there would be less inflation in the economy. Our economy is not having full employment situation, we can say the present inflation is caused by supply-push, instead of demand-push. As such, we should take appropriate steps to have more investment, more employment and more supply of goods in the market so that excess money may be matched with the supply of goods.
But the Bangladesh Bank took the opposite steps to fight inflation. They adopted a contraction in monetary policy through which they wish to check the persisting inflation. The contractionary monetary policy advocates withdrawal of money as the money circulation becomes higher in the market. So credit should become costly so that demand of money would be less and, thus, the price levels of the essentials would come down. The way is adopted to reduce the supply of money against the higher demands of the goods, not to increase the supply of real goods in the market. It is the failure of the Bangladesh Bank to understand whether the causes of the present inflation is based either on demand-push or supply push factors. This continues to aggravate the price situation of the essentials severely affecting the economy. It not only reduces the purchasing power of the fixed-income groups but also affects the GDP growth of the economy.
Definitely, the government is taking various steps including tariff reduction on the essential goods to check the inflation but without any result. One of the factors that might thwart the positive steps of the government was a sense of panic persisting among the businessmen, large importers, local wholesalers and others. Thus, fighting inflation turns into a futile job. Even businesses that operate exclusively in domestic market are not immune to the effects of globalization particularly while a country like ours is import-based for its essential goods supply.
Moreover, we are very much concerned with maintaining the comfortable level of foreign currency reserve than addressing the import market price and its effects in the market and the GDP growth rate. Blaming the floating exchange rate regime launched in 2003, the continuous appreciation of US dollar is allowed which turns into a major reason of higher import cost thus affecting the price-hike of the essentials. The supply of essential goods in the market has become instable while eviction of thousands of small traders, hawkers, chasing black money, strident anti-corruption drive etc. came into force together. From the fury of all these simultaneous drives it seems that no corruption drive was made at all for a long time. But what has happened now is that all the anti-corruption drives have been made at a time affecting the dynamics of the economy, generated by both the white money and the black money.
These sorts of simultaneous drives not only made the self-employed unemployed but also destroyed the low cost supply chain of the market. Such type of correction of the economy disrupts the scope of low cost supply chain for the millions and thus retards the growth of the economy. Society observes the destabilization of the market economy along with the above situation. Economic growth under the poor infra-structures, as in Bangladesh, warrants thousands of small shop owners, street hawkers, open markets/huts (daily/weekly village markets occupying the govt. lands) operational -- factors that are all necessary to maintain the supply chain undisrupted leading to competitive prices.
The private investment volume comes under dogmatic pressure as the Bangladesh Bank adopts the contractionary monetary policy. The government credit will be higher to meet up deficit budget, thus raising the cost of credit. This would be definitely retarding the growth of private investments. Such stands that reduce the investments would affect the supply of the real goods in the market.
Retardation in the investments both domestic and FDI might aggravate unemployment and inflation and, thus, curtail the GDP growth. Under the deficit budgeting, government has to acquire Tk 72.53 billion from the banking sector. But if all the above funding would have been made possible by raising the volume of revenues, the market effects would be rather positive. We must take into account that the main driving force of the economy in Bangladesh is the private sector. And we should take every care to ensure that the private sector investments at large are not affected while formulating the budget, monetary policy, policy of trade and commerce etc.
The amount of local investment was at Tk.183.70 billion during 2005-06 which also came down to Tk.150 billion during 2006-07. On the other hand, FDI came down to Tk 93.85 billion from Tk 249.85 billion in the same period. Facing the mounting harassment by the NBR, ACC or the bankers while opening the LCs, the business people preferred inaction while FDI cannot be expected for the reason of continuous political instability. And due to such inactions by both the foreign and local investors, the rate of employment generation is affected, thwarting the poverty reduction strategy. Millions of people are remaining unemployed. During 2005-06, 418,529 persons were employed which came down to 322,479 persons in 2006-07 due to the direct investment drives going down.
So, the government should look at ways to facilitate the low-income people, particularly the thousands of self-employed entrepreneurs to tap the potentials of the market. The people will be more enterprising under such a policy for income generation as well as more enterprising people would contribute to the growth of the economy easing the pressure of unemployment, inflation, distortion etc. So, the elements of markets forces involving the poor enterprising and entrepreneurial people should receive the priority attention of the government and not excluded, not even on the justification of presenting a corruption-free society all at a time.
........................................................
The writer is a Sr. Vice President of Islamic Bank Bangladesh Limited