No sooner was the monetary policy for the first half of the current fiscal (2014-15) announced than came the news about inflation raising its head in the economy. The revelation is disconcerting because the monetary policy statement (MPS) pegged containing inflation as one of its foremost objectives. If inflation threatens to break out of control so early in the first half of the current fiscal covered by the present MPS it may be tough going making counter-inflationary measures effective. A wobbly start does not augur well for the future of price stability. The silver lining is that early warning about the gloomy prospects may enable authorities, particularly the central bank, to unleash measures to cope with the unfolding macro-economic scenario.
According to monthly Consumer Private Index (CPI) released by the Bangladesh Bureau of Statistic (BBS), the rate of inflation soared in July this year with the overall inflation rate notching 7.04 percentage point, up from 6.97 percentage point in June last. This indicates 7 basis points (.07 percentage) rise in prices in the course of a month. In urban areas, the general point-to-point inflation has been 7.24 percentage point in July which was 6.93 percentage point in rural areas. The general inflation in urban areas in June this year was 7.42 percentage point while it was 6.73 percentage point in rural areas. The national wage index rate also witnessed a 10.47 per cent growth in July with 8563.49 which was 8501.42 in June this year. The average inflation rate in the last one year (August 2013-July 2014) reached 7.28 percentage point which was 6.99 percentage point during August 2012 to July 2013 period.
The rise in inflation in the first month of the new fiscal year may shake the confidence of the government which has set a 6.0 per cent target for fiscal 2014-2015. Conceding to the rise in prices the government is now hoping to keep inflation contained between 7.0 and 7.50 per cent. According to the planning ministry the seventh Five Year Plan will also aim at keeping the inflation target within 7.50 per cent instead of fixing it at 6.0 per cent. As against this projection the target fixed for inflation in the current budget was 6.0 per cent. The central bank, on the other hand, while releasing the latest monetary policy in the last week of July estimated that inflation would be 6.50 per cent in the current fiscal provided no risks surface during the course of the year. It is thus apparent that both the targets of 6.0 per cent fixed by the government in the budget and 6.50 projected in the MPS have already been exceeded, according to CPI for the month of July. Of the three authorities involved in fixing target of inflation only planning ministry considers inflation between 7.0 and 7.50 percentage as acceptable. The views of the ministry of finance and Bangladesh Bank on this are yet to be made public. Since BBS is the source for calculating monthly consumer price index on which inflation is estimated, the ministry of finance and Bangladesh Bank may accept an inflation rate above 7.0 per cent as reflection of the reality.
Though increase in prices of non-food items have been identified by the planning ministry as the cause of rise in inflation there have been other factors also contributing to it. According to BBS data, food inflation increased in rural areas in July compared to the previous month, It was 7.78 percentage point against 7.64 percentage point in June. It has been found that though prices of food items have declined worldwide this has not been the case in Bangladesh. According to Food and Agricultural Organisation (FAO), food prices came down for six months consecutively up to June this year. But BBS figures indicate 7.0 per cent increase in food prices during last one year. According to FAO the average price of food items will continue to maintain a lower trend for the rest of the year. Given the recent experience world food prices are unlikely to be reflected in the prices of food items in Bangladesh. The operation of syndicates in market has been responsible for the upward rise in food prices according to many. It is not a problem of supply and demand but a political one, observers have pointed out. Only political will and determined steps can reverse this trend, it has been maintained.
According to BBS, the prices of non-food items also rose recently. It was 5.43 percentage point in July compared to 5.12 percentage point this year. The non-food inflation rate in urban areas also rose in July clocking at 6.10 percentage point, up from 5.91 percentage point in June this year. The planning ministry has attributed this rise to the excessive spending by holidaymakers during Eid festival. While that may be partly true, the main reason is that non-food items rose in price in response to food inflation. So the conclusion is unless food inflation is contained, non-food inflation will continue to rise.
The current MPS has taken adequate policy initiatives to contain inflation conducive to economic growth. It has set limits to Broad Money (M2) and reserve money growth to keep inflation controlled around 6.50 per cent. While encouraging private sector investment the Central Bank has limited credit growth to it at 16.50 per cent and advised banks to extend credit for productive purposes. The central bank has also raised Cash Reserve Ratio (CRR) by 50 basis points and revised upward the rate of Repo (bank borrowing from the central bank). These measures are intended to absorb excess liquidity from the market. The central bank has also started buying dollars from the commercial banks as part of its strategy to stem excessive money flow. From the point of view of containing inflation the central bank is very much on track except being liberal about borrowing from external sources by commercial banks. The central bank needs support from the ministry of finance in the implementation of its anti-inflationary measures. Without a coordinated approach the spectre of inflation that has become visible cannot be stopped in its tracks.
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The spectre of inflation: Coping with macro-economic scenario
Hasnat Abdul Hye | Published: August 27, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
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