Reining in inflation a big challenge for upcoming budget

Pulling the rein of rising inflation emerged as a big challenge for the upcoming budget as the economy continued to take the heat from the recent months’ cost-pull inflation.

Like the outside world, Bangladesh witnessed a steady inflation rate of above 6 per cent throughout the last three months. All essentials, including rice, lentils, flour, and edible oil, now cost much higher than the normal.

When inflation intensifies, a fear looms before the group who are just above the poverty threshold that they might become poor again.

The dollar exchange rate must be kept normal to minimize import costs and control inflation. As there is no mechanism to bring down the prices of essentials in the global market, the government is going to increase duty on luxuries and less-important products, to discourage their imports.

Experts say it is possible to control prices of locally produced commodities through strict monitoring on the market. A proper market strategy is necessary to keep the rice price within the affordable range. Apart from that, the vulnerable group should be protected through cash and food assistance in the annual budget.

Inflation is quite similar to a type of tax. When income does not increase at the pace of commodity price, pressure mounts on the low-income people as they lose their actual purchase power.

The state minister for planning, Shamsul Alam, was asked what method will the upcoming budget incorporate to tackle the prevailing inflation? He told Prothom Alo that the government is putting utmost importance on controlling inflation. The existing social safety programmes and food assistance will be widened to ensure safety of the poor. For the first time in history, the allocation to social safety programmes will be more than 3 per cent of the country’s gross domestic production (GDP).

He also disclosed that there will be a special allocation for creating employment in some specific areas. Besides, the duties will be increased in the upcoming budget to discourage import of less-important commodities.
Combatting dollar crisis

The finance minister is scheduled to announce the budget for the financial year 2022-23 on 9 June. Keeping the dollar exchange rate stable is currently the most crucial weapon to combat the inflation and curtail the import cost. If the authorities fix an uniform dollar exchange rate, it would reinvigorate the hundi business and speed up illegal remittance inflow. The dollar crisis may turn grave if the banks see a decline in greenback income.

On the flip side, the consequence is quite uncertain when the exchange rate is left on the market as there is no upper or lower ceiling. After several phases of experiment, the Bangladesh Bank allowed the market to determine an exchange rate on the basis of supply and demand. However, the market would be under strict surveillance of the central bank.

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said inflation cannot be controlled by fixing an irrational dollar exchange rate. The dollar should be left on the market and its price will be determined as per demand.
Safety for poor, low-income group

It is a big challenge to keep the essentials’ prices within the affordable range. According to a poverty report released by the World Bank two years back, some 54 per cent of the total population in Bangladesh always remains under the risk of being poor again. The report estimated such population at more than 80 million. Basically, when the economy faces a sudden shock, a large number of people lose their income and become poor.
Question on inflation

The inflation rate is relatively lower in Bangladesh than its South Asian peers. The inflation figure stood at 6.29 per cent in April when the figure was 7.78 per cent in India, 13.4 per cent in Pakistan, 29.8 per cent in Sri Lanka, and 7.28 per cent in Nepal.

The United Kingdom witnessed a 40-year-high inflation of 8 per cent in April and the rate is 8 per cent in the United States.

Expressing suspicion on the process of inflation measurement in Bangladesh, economist Ahsan H Mansur said when the neighboring nations record high inflation, the figure in Bangladesh is supposed to be a similar one.

He believes the actual inflation in Bangladesh is higher than 6 per cent. The current figure is an outcome of average calculation from the national level. The prevailing impact on the poor is no less than that of 10 to 15 per cent inflation.

The noted economist feared that people who are just above the poverty line may become poor again. The poor and low-income group already suffered a significant fall in their income due to the Covid-19 pandemic. They are now suffering again due to the inflation.

However, State Minister Shamsul Alam spurned the doubt on the inflation measurement process, saying that the Bangladesh Bureau of Statistics (BBS) calculates inflation properly following the UN standard.
Inflation at 1.5-year high

Bangladesh witnessed a steady uptick in inflation since April. No such upsurge has been recorded in the last six years. The BBS calculated the country’s inflation at 6.29 per cent in April, which is the highest figure in the last 1.5 years. The figure peaked at 6.44 per cent in October, 2020.
Inflationary pressures

Inflation has become diversified nowadays. Earlier, rise in prices of several commodities used to push up inflation. The scenario is a bit different now as all types of commodities are now rising.

The BBS, in April, disclosed the price status of some 47 essential commodities. Of them, 32 items, including rice, lentils, sugar, fish, meat, edible oil, milk, and clothing, saw rise in their prices while only 13 recorded fall. The BBS chart showed egg price to drop in April, but it is now much more costlier in the market. Among the items, prices of only four items remained unchanged.

As a result, the common people are feeling the pressure of inflation at every step of their life.
Rice triggers fresh concern

As a single item, rice contributed the most in the inflation measurement process. Generally, the poor spend 25 to 30 per cent of their whole income to purchase rice. But its price soared by Tk 3 to Tk 6 per kg last week, though it is a peak season. The inflation figure might see a big jump in the next months due to the increased price of rice.
Reasons behind inflation

The wheel of economy started speeding up at mid-2021, after a disruption inflicted by the pandemic. The businesses resumed in full swing and the economy initiated the recovery process.

But the commodity prices and shipping costs went up in the international market during the period, which eventually pushed up the import cost and ate up the forex reserve.

The edible oil recorded a 50 per cent surge in its price in the last one year when the wheat price doubled. The fuel price crossed the $100-mark. The price of industrial raw materials also rose 50 to 100 per cent.

The inflation started to rise in the previous year’s last quarter and it took a turn for the worse in the last week of February when Russia launched an invasion on Ukraine.

A dollar crisis appeared in the scene and it has been ravaging the import-export system for the last two months.

Against such a backdrop, Selim Raihan, executive director of South Asian Network on Economic Modeling (SANEM), placed four suggestions to tackle the rising inflation.

Firstly, the supply of products, especially rice, needs to be kept normal. But the official data on production and storage is quite disappointing and it made policy formulation more difficult. There should be arrangements to import rice if necessary.

Secondly, the authorities should relax duty on imports to keep the market price affordable in the country.

Thirdly, Bangladesh Competition Commission and Directorate of National Consumers’ Right Protection should be empowered to take action against the unscrupulous traders. Besides, measures should be taken so that the traders cannot flee the scene and intensify the crisis. Cooperation of business leaders can be sought in this regard.

Fourthly, the social safety net should be widened for the poor who are hit hard by the inflation.