Tracing the reasons for extreme inflationary pressure
Sunday, 24 June 2007
Ahmed Showkat Mosud
GLOBAL economy in the year 2006 has grown at the rate 5.4%. This has reflected an impressive increase of gross output of the world. Increase of gross output means that there has been an increase of the demand for inputs -- raw materials and capital machinery. Demand for labour has also increase throughout the world.
The increased demand for raw materials, capital machinery and requirements differs from country to country, depending on the domestic requirements of each country. But the price-hike of oil in the global market has created pressure on the prices of inputs. That has accentuated the inflationary pressure in the global market. Oil importing countries are the sufferers. The degree of sufferings from inflationary pressures depends on how the related countries are addressing the challenges of macroeconomic stability, keeping the inflationary pressure within tolerable levels while also ensuring that the essential consumer items are available to the mass people and the income equity is maintained.
In our country the government is giving emphasis on maintaining law and order on the right track, curbing corruption, keeping inflation within tolerable level, removing constraints to private sector-led growth, etc. But the hard reality is that while efforts are on to improve law and order and activate the anti-corruption watchdog-ACC (Anti-Corruption Commission), the inflation rate is on an unabated upward course. Since the nation was captive to the corrupt politicians, some equally corrupt big business houses, corrupt government officials and the economy also grew with infusion of corrupt money, the crack down on them has directly hit the country's economy. That is why, the country is witnessing the continuous rise of prices of essential consumer items.
No doubt, the prevailing high inflation rate in the global market has an impact on our domestic economy. But to what extent it has impacted upon the local economy? If the black economy is larger in size than the official one, the incidence of continuous price hike of essentials is not abnormal. If few businessmen control the major portion of the economy of the country with the help of corrupt politicians and bureaucrats, then the present inflationary pressure is normal for a country-like ours.
India and Pakistan are facing more inflationary pressure. But we have to remember that their GDP growth rates are higher than ours. India, Pakistan, Sri Lanka have stronger capital market than that of ours. Their national savings rates are higher than ours. Their inflation may represent an over-heating of their economies
Our GDP growth rate has been estimated at 6.50% for the financial year 2006-2007. For the FY 2007-2008 it has been projected at 7.0%. Higher growth in industrial sector mainly in RMG sector has contributed to the higher growth performance of the national economy. Service sector growth in telecommunications, hospitals, construction, education, etc., have played a vital role. But the over-dependence on the RMG sector is a bad signal for the economy. Pharmaceuticals, cement, ceramics, agro-based products like jelly, juice have potentials. If all these sectors have to flourish, the on-going economic reform programmes must target their growth. Pharmaceuticals, leather, ceramics goods, etc., have already entered the foreign markets. Now we need further diversification of export items.
Our agricultural land has been reducing day by day. Therefore, hybrid varieties of agri-products can meet the demand of the market. In case of rice, our country is less dependent on import. The government has taken initiatives for agricultural research programmes by allocating funds in the proposed budget. It is a good sign for our agricultural sector.
Accelerated economic growth requires increased domestic demand. Investment in infrastructure and power sector requires large investments. If demand for capital machinery and raw materials is met by importing those items, then a huge amount of fund will be needed. This has been the case every year. Therefore, we have to depend on fund of multilateral financing agencies for infrastructural development and improvement of the power sector. Infrastructural investment, along with investment in the power sector, is of long-term nature. Therefore, cost of inputs from the locally produced sector will remain high. On the other hand, dependence on imported consumer items will not give us any solution in case of inflation.
If the restrained/contractionary monetary policy is seen to contain excessive aggregate demand, then the country will witness a reduced credit flow to the private sector. Less credit flow to the small and medium enterprises (SMEs) and self-employed persons would reduce the aggregate demand for capital machinery for SMEs and then demand for raw material will also decline.
(The writer works at One Bank Ltd., Khatunganj Branch, Chittagong. The views expressed here are of his own.)
GLOBAL economy in the year 2006 has grown at the rate 5.4%. This has reflected an impressive increase of gross output of the world. Increase of gross output means that there has been an increase of the demand for inputs -- raw materials and capital machinery. Demand for labour has also increase throughout the world.
The increased demand for raw materials, capital machinery and requirements differs from country to country, depending on the domestic requirements of each country. But the price-hike of oil in the global market has created pressure on the prices of inputs. That has accentuated the inflationary pressure in the global market. Oil importing countries are the sufferers. The degree of sufferings from inflationary pressures depends on how the related countries are addressing the challenges of macroeconomic stability, keeping the inflationary pressure within tolerable levels while also ensuring that the essential consumer items are available to the mass people and the income equity is maintained.
In our country the government is giving emphasis on maintaining law and order on the right track, curbing corruption, keeping inflation within tolerable level, removing constraints to private sector-led growth, etc. But the hard reality is that while efforts are on to improve law and order and activate the anti-corruption watchdog-ACC (Anti-Corruption Commission), the inflation rate is on an unabated upward course. Since the nation was captive to the corrupt politicians, some equally corrupt big business houses, corrupt government officials and the economy also grew with infusion of corrupt money, the crack down on them has directly hit the country's economy. That is why, the country is witnessing the continuous rise of prices of essential consumer items.
No doubt, the prevailing high inflation rate in the global market has an impact on our domestic economy. But to what extent it has impacted upon the local economy? If the black economy is larger in size than the official one, the incidence of continuous price hike of essentials is not abnormal. If few businessmen control the major portion of the economy of the country with the help of corrupt politicians and bureaucrats, then the present inflationary pressure is normal for a country-like ours.
India and Pakistan are facing more inflationary pressure. But we have to remember that their GDP growth rates are higher than ours. India, Pakistan, Sri Lanka have stronger capital market than that of ours. Their national savings rates are higher than ours. Their inflation may represent an over-heating of their economies
Our GDP growth rate has been estimated at 6.50% for the financial year 2006-2007. For the FY 2007-2008 it has been projected at 7.0%. Higher growth in industrial sector mainly in RMG sector has contributed to the higher growth performance of the national economy. Service sector growth in telecommunications, hospitals, construction, education, etc., have played a vital role. But the over-dependence on the RMG sector is a bad signal for the economy. Pharmaceuticals, cement, ceramics, agro-based products like jelly, juice have potentials. If all these sectors have to flourish, the on-going economic reform programmes must target their growth. Pharmaceuticals, leather, ceramics goods, etc., have already entered the foreign markets. Now we need further diversification of export items.
Our agricultural land has been reducing day by day. Therefore, hybrid varieties of agri-products can meet the demand of the market. In case of rice, our country is less dependent on import. The government has taken initiatives for agricultural research programmes by allocating funds in the proposed budget. It is a good sign for our agricultural sector.
Accelerated economic growth requires increased domestic demand. Investment in infrastructure and power sector requires large investments. If demand for capital machinery and raw materials is met by importing those items, then a huge amount of fund will be needed. This has been the case every year. Therefore, we have to depend on fund of multilateral financing agencies for infrastructural development and improvement of the power sector. Infrastructural investment, along with investment in the power sector, is of long-term nature. Therefore, cost of inputs from the locally produced sector will remain high. On the other hand, dependence on imported consumer items will not give us any solution in case of inflation.
If the restrained/contractionary monetary policy is seen to contain excessive aggregate demand, then the country will witness a reduced credit flow to the private sector. Less credit flow to the small and medium enterprises (SMEs) and self-employed persons would reduce the aggregate demand for capital machinery for SMEs and then demand for raw material will also decline.
(The writer works at One Bank Ltd., Khatunganj Branch, Chittagong. The views expressed here are of his own.)