The trap of low growth and high inflation

Two important reports on the Bangladesh economy hit the headlines both in print and electronic media last week. One is about inflation and the other is about forecast of growth of the GDP (gross domestic product) for FY14. The sources are different but the reports are interlinked. Both of them convey clear messages for our policymakers that should be heard and acted upon.

The Bangladesh Bureau of Statistics (BBS) released the inflation figures for March 2014. Overall inflation has increased from 7.44 per cent in February to 7.48 in March. Food inflation also increased while non-food inflation decreased.

The World Bank Dhaka Office released the revised forecast for growth of GDP for the current fiscal year. The growth of GDP in FY14 is expected to be 5.4 per cent. The forecast for growth of GDP by the same organisation a few months ago was 5.7 per cent. The current forecast is 0.3 percentage point smaller than the previous one and 1.8 percentage point less than the original target set by the government of Bangladesh in its budget announced in last June.

The first forecast was received with some criticism, many experts dubbing 5.7 per cent growth of GDP for the current year as too pessimistic.  However, the author of the present write-up had a different view. He wrote, "Given merciless damages done in the economy in recent months, this forecast is an optimistic one and the country should be happy if the growth rate is accomplished in the end… In fact, such an accomplishment will be a pointer to our growing economic resilience. Not many economies of the world can accomplish a 5.7 per cent growth following what happened in Bangladesh during last couple of months" (The Financial Express, January 19, 2014).

The same article also mentioned, "The main question is, can we really achieve a 5.7 per cent growth this year? There is no 'yes' or 'no' answer to this question, or to any economic question for that matter. We can achieve a 5.7 per cent growth of GDP provided that some measures are taken to control the damage already done to the economy by the violent activities in the recent months."

But the fact is adequate measures were not taken to revamp the economy. The inflation figure for the month of December 2013 revealed the area where the most of the damages have occurred as a result of political turmoil. Although the overall inflation increased in that month compared to the previous month, the non-food inflation had actually declined during the same period. Fall in income does not affect consumption of all items equally. If a household has to reduce the overall consumption as a result of fall in income, consumption of non-food items would be the first one to be compromised. Food items will be the last one to be curtailed as a result of falling income. The observed inflation dynamics of December 2013 was a testimony to the fact that the slowdown of economic activities and fall in household income affected the consumption of non-food items more than the food items.

The issue of fall in or inadequate demand for non-food items has been acknowledged by the Bangladesh Bank (BB) as well in its monetary policy statement announced in January 2014 for the second half of the current fiscal year. According to the monetary policy statement, bank advances to transport and communication sector registered a negative growth of -43.54 per cent (at the end of Q1FY14 compared to Q1FY13. Moreover, there is also evidence that retail and wholesale trade, hotel and restaurant business, transport services and tourism faced sluggish demand due to frequent countrywide shutdowns in H1FY14. Low growth of cement production (3.16 per cent) and negative growth of iron and steel (-8.54 per cent) in the first two months of FY14 indicate slowing growth of construction sub-sector with bank credit to this sector also experiencing a low growth of 8.87 per cent in Q1FY14. A sample of iron, steel and cement manufacturers reported a 50 per cent-60 per cent drop in sales in Q2FY14.

After the release of the inflation figures for December 2013, this writer wrote in an article by highlighting the issue of inadequate demand for non-food items. As remedial measures, the article highlighted the policy options as follows: "Consumer credit is one way to promote private consumption, especially the non-food items and consumer durables. The government has taken a very conservative stance on consumer credits for different reasons. Conditions to get it have been made very stringent. Recent information about the non-food inflation probably indicates that the ground to take a conservative stance about consumer credit does not hold anymore. Therefore, a policy revision with regard to consumer credit is required to vitalise the economy by promoting private consumption at this depressed environment" (The Financial Express, January 14, 2014).

Unfortunately, the monetary policy taken for the second half of the current fiscal year did not pay any attention to consumer credit. Instead, it maintained the same stringent stance about it. In a review article of the monetary policy, the same author mentioned: "The continuance of conservative stance on private sector credit including the consumer credit will neither curb the food inflation nor revive the demand for non-food consumption. Alternatively, accepting the fact inflation is an evil that has to be endured unless food production is enhanced and disruption in supply chain is prevented, the Bangladesh Bank could ease the delivery of private sector credit, especially the consumer credit, to avoid further sluggishness of the demand for non-food consumption. In case of the currently taken monetary position of the Bangladesh Bank, the danger of high inflation with low growth cannot be ruled out, whereas in case of the alternative monetary stance high inflation with reasonably high growth could be expected" (The Financial Express, February 03, 2014).

The latest projection of the World Bank and the inflation figures released by the Bangladesh Bureau of Statistics indicate that the danger of high inflation with low growth is probably becoming a reality that the Bangladesh economy has to endure this year. Unless the demand for non-food consumption is revitalised, the trap of low growth and high inflation will continue.

The writer is a researcher at the Bangladesh Institute of Development Studies (BIDS), former economist, the World Bank, and former faculty, Willamette University, USA [email protected]