Exploring the causes of inflation in Bangladesh

ECONOMISTS, policy makers and multilateral capital donors have different explanations about the causes of inflation in countries like Bangladesh. A brief look at a few of such explanations merits attention for shaping and re-shaping of appropriate policies to help curb inflation. Here below is a brief critical overview of such explanations. One of the causes of inflation, explained as such, relates to food prices in the international market. Bangladesh being a food importing country, any rise in food prices in the world market can push up the domestic prices of those commodities. In the not too distant past, the prices of essential commodities, like rice, wheat and edible oil, increased significantly in the international markets. So, domestic prices of those items shot up phenomenally then. Then the link between rising prosperity and inflation is sought to be proved by many. Despite all its problems, Bangladesh has been performing well, in terms of economic growth over the last 10 years. Its gross domestic product (GDP) base is not small, in absolute volume terms. It is the 50th largest economy in a sample of 177 countries. Not many developing countries have grown faster than Bangladesh with bigger GDP volumes since the early 1990s. Those who seek to link inflation and GDP growth performance state that the high growth rate of GDP and the per capita GDP in particular has led to the creation of excess demand in the Bangladesh economy. This has resulted in a demand-pull inflation. Then there is the growth of money supply that is directly related to the price situation. 'Inflation is a monetary phenomenon', so is explained by a good number of economists as well as some of the donor agencies. It is, thus, stated to be caused by the excessive supply of money in the economy. Bangladesh Bank has otherwise been found to be guided by the monetarist approach to inflation -and that is not without some good reason. If has been following a rather "cautious" monetary policy. Many consider it as a pragmatic step. Then the question of relative strength of Bangladesh currency in relation to those of other countries, particularly that of neighbouring India, is considered an issue of consequence for analysing the price situation here. The Bangladeshi taka has depreciated to some extent against its intervention currency, US dollar over the past several years. But the Indian rupee has depreciated higher than that. As a result, the relative position of the Bangladesh currency has suffered, having its impact on the economy because India is Bangladesh's major source of import, through both formal and informal channels. Imports from India in recent years constitute more than 20 per cent of Bangladesh's total imports, comprising many essential food items. If the import cost for Bangladesh is affected by the cross-currency exchange rates, this affects the prices. Any movement of prices in the upward direction indicates depreciation of taka relative to the currency in question after adjusting for inflation. This hypothesis does also provide some reasonably plausible explanation to the movements of prices of essential food items in Bangladesh. However, there are some disagreements among the economists and policymakers with regard to combating this situation. The policy of foreign reserve accumulation by the Bangladesh Bank is considered by some quarters as not being consistent with the exchange rate movements of taka vis-a-vis the Indian rupee in recent years. Fuel prices is yet another factor that is cited to have a major impact on the domestic price situation. If the fuel prices go up, that impacts the prices of commodities through two major channels: the high prices of fuels lead to high cost for irrigation, which raises the cost of agricultural production; and, high fuel prices increase the cost of transportation, which also raises the prices of essential items

transported from remote villages to urban areas. The non-competitive market features -- or what are stated to be "the syndicate" syndrome -- are otherwise widely considered as being one of the strong factors, igniting price pressures. Here, argument is made about many middle-men, wholesalers and importers acting as syndicates and causing large price hikes, by making cartels and hoarding essential goods like rice, wheat and edible oil. Such cartels do reportedly fix the prices of these goods, dictate supply in the market, and earn excess profits. However, there is yet no convincing, concrete evidence of 'syndicates' being in total control of the markets of essential commodities to take advantage of the weak consumer protection laws. However, some short-term alliances among the suppliers of such goods is not to be rule out to have some influence over supply and prices. This may have some impact on the rising prices of essential items. Then the issue of growth of remittances and its links with inflation come. There has been a steady and substantial rise in remittance inflow over the last few years. Such inflow does, no doubt, contribute to demand-pull inflation in Bangladesh. Working as the Rising Prosperity Hypothesis, such demand-pull factors can push up prices. But increased remittance inflow alone is unlikely to be a major cause of inflation. This is so because the rise in demand has been supported by the rise in supply through increased imports. There are many other factors behind the rising trend of inflation in Bangladesh. Such factors contribute, in their own way, to the price-hike of essential items. A detailed analysis of the situation is, thus, called for, in order to help devise a strategy for combating inflation effectively.

Inflation andBangladesh The current up trend of inflation rate is not good for Bangladeshs economy, which is already roaming with luxury double digit. This is no way a good sign or indicator for economic progress, which the Government is aspiring. This must be stopped what is called the crazy horseof inflation, which eating up of peoples savings, home, food and future. We are already in doubt whether the projected Gross Domestic Product will be achieved in the fiscal year 2011-12, subject to the following conditions are met positively If Bangladesh could indeed bring about positive fruits from itsexport of garments to India, which recently agreed upon between the two countries in a signed protocol; If the foreign remittance flow pour in regularly and satisfactorily; If infrastructural development is done as per plan; If utility services, like power, gas and energy could be ensured adequately; If proper investment from abroad, and local entrepreneurs could be achieved. In both the demand and supply are under pressure due to unprecedented rate of inflation in recent year, particularly in the period of this government. On top of this phenomena the fear and speculation of inflationary rise due to wrong government measures or economic mismanagement and indiscipline inflation is inflamed. In this September 2011 inflation rate stood at 12%, which is 9.41% in India. Reasons behind this inflation are as follows: Price hike in international commodity market, which incited the domestic market; Price rise of fuel oil also contributed to the commodity inflation in the domestic market;

 Weak monetary policy also increased money supply in the market; Counterfeit money is also contributing as a dormant factor; Government borrowing from private banks, approximately Tk. 10,00,00,000/- everyday and spending it to non-productive sector, mostly by paying government recurring or revenue expenditure, e.g., salary and maintenance of government offices and institutions; Military expenditure; Private banks losing its fixed deposits as the clients are withdrawing its fixed deposits to support the rising cost, so, liquidity is squeezing; The reason for clients withdrawal is partly related to www.Unipay2you.com and www.speakasiaonlinesurvey.com who cheated people with billions of Taka, for which Government could not deny its responsibility, more pathetic is some corrupt government officials also involved with this scams and got benefited. As people lost their regular hard earned resources, last resource is the future insurance fixed or term deposits which they keep for future. In the last two years public consumption rate increased by 8%, which is 2% higher than the 2006-2007. This indicates the pressure on price levels due to level of demand factors. Importing commodities from abroad, which was 40%, covered the deficiency between theGross Domestic Product and public demands. This contributed much in affecting the noncommodity inflations. To control this high inflation rate the following steps could be followed: Controlling of money supply and printing; In the last two years supply flow was much higher than usual; Private banks must control their loans; Government borrowing from commercial banks; Bangladesh should follow China and India in monetary policy strategy, which revised interest rates 12 times in the last 18 months; Bank of China revised two types of loan interests nine times. So, Bangladesh Government must pursue drastic measures in controlling the inflation rate in order to have its budgetary goals and economic growth rate 8%. If it goes on like what is now, the government would never be able to achieve its goal of binding the inflation rate at 7.5%. If inflation could not been bottled up, the country would be in deep trouble, not the political leaders, as they have dual passports and links abroad to fly leaving the people in distress.