East West University

Term Paper on
Causes of Increase in Price of Essentials in Bangladesh (2007-2010)
Submitted to
Imrana Sharmin Senior Lecturer Department of Economics East West University

Submitted by
Group: 04 Section: 05 Department of Business Administration

Name of The Students

Emranul Islam Emranul Hossain Niloy

Id No.
2010-2-10-064 2010-2-10-252

Introduction to Macroeconomics Course Code: ECO102

Submission Date: 10 April, 2011. Acknowledgements

At first we desire to express our deepest sense of gratitude of almighty Allah. With profound regard we gratefully acknowledge our respected course instructor Imrana Sharmin, Senior Lecturer, Department of Economics, for her generous help and day to day suggestion during preparation of the term paper. We would like to give thanks especially to our friends and group members, for their enthusiastic encouragements and helps during the preparation of this term paper by sharing ideas regarding this subject and for their assistance in typing and proof reading this manuscript.

Table of Contents

Abstract ....................................................................................................... Introduction ................................................................................................ Scope of the study ........................................................................................ Methodology ............................................................................................... Literature Review ....................................................................................... Limitations of the Term Paper ..................................................................... Analysis Technique & Term Paper Writing ................................................ Lower growth in agricultural / production sector ................ Rising food prices in international market .......................... Raising price of fuel ............................................................

4 4 5 5 5 6 6 8 9 9

Causes of Increase in Price of Essentials ..................................................... 7-13

Illegal toll collections............................................................. 10 Exchange rate fluctuations .................................................. 11 Supply shortage ..................................................................... 11 Non-competitive market behavior (Syndicate in market)...... 11 Anti-corruption drive and disruption of supply chain ............. 12 Increasing demand .............................................................. Import dependency .............................................................. Long supply chain .............................................................. Declaration of export restriction ........................................ 12 13 13 13 14 14 3

Overall findings of the study ..................................................................... Conclusion ................................................................................................

Recommendation ...................................................................................... References .................................................................................................

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We choose this topic Causes of Increase in Price of Essentials in Bangladesh because recently the increases in price of essentials problem has become an alarming issue in Bangladesh. There are many reasons behind this problem. International market price, fuel cost, power crisis, natural disaster, transportation problem, illegal toll collection, action against corruption by the caretaker Government, etc. are responsible for increase in price of essentials in Bangladesh. But we think formation of syndication and corruption is the main reason for this. Unfortunately, the then government and the authority could not solve this problem. Though they tried some initiatives, those were not effective. A powerful authority can only keep the prices of daily necessaries under control by using effective law.

Introduction
As we know Bangladesh is a country of middle income. Nearly 65% of total population income is less than $1. Nowadays increase in price of essentials is one of the main concerns of Bangladeshi people in recent years. Though their incomes do not increase as much as they need, their expenses are increasing day by day. As a result, people consume more than their income. And poor people are getting poorer day by day. Government has taken short-term policies but those are not paying off. In this term paper we try to find out why price of essentials increase in Bangladesh, what consequences are faced by the people for this unsustainable price of increase in consumption goods and services, and what are the initiative measures government can take to make the price level sustainable.

Scope of the Study

As because of some constraints some topics remained untouched. Working of economy always changes depending upon conditions prevailing in the economy and also relates to world economy. Therefore, there are always some scopes for further research. Also a research had some limitations because of time, resources, knowledge, etc. that give scope for further research. Here under our studies we had not covered many other factors of price hike except mismatch in Aggregate demand and Aggregate supply and rise in money supply, which gives rooms for further researches.

Methodology
It is difficult to find out the data about this issue. But we tried our best. We will give our full effort to make the term paper on Causes of Increase in Price of Essentials in Bangladesh. For the assessment, both literal and visual data was collected. For this, we searched in the internet as well as existing East West University library magazines, journals, research reports, references etc. regarding causes behind increase in price of essentials. 5

Literature Review
It is not only Bangladesh where price hike has been a problem recently. Whether we are talking about the developed world, major emerging economies, or our neighbors in South and Southeast Asia, the increase price rate picked up considerably in the past few years. Almost 90 per cent of Bangladeshi people are affected by it, 50 per cent of us very severely. However, we found that all the previous researches were based on some specific area. From the previous articles, research, etc. we found the reasons such as global price hike, lower productivity, exchanged rate, festivals, corruption, energy crisis, etc. are the main reasons of increase in price of essentials. As the time has changed from 2007 to 2010, we found some new causes of increase in price of essentials within those years. First of all, syndication in the market became a major factor for price hike. In addition to the millers especially from North Bengal makes a huge stock. Because of this the price of rice also increased too much. Secondly, the corruption in Bangladesh has risen than the past. It also influences the price of daily essentials. In addition to the economists of Bangladesh now blame the Long Supply Chain for price hike of daily essentials.

Limitations of the Term Paper

Since our study is based on both literal and visual data, there is a possibility of getting fake information. Some of the visual data have taken from open sources or different freeware websites which might prove wrong later. If the websites provide us with any fabricated information about causes of increase in price of essentials, then the term paper findings may be erroneous. Above all, this study is weak in some points. The notable ones are as under: 1. The study was made in a very short time so we were not able to collect enough information. 2. Some of the information may not prove to be reliable. 3. Our lack of experience in this field. 4. Lack of proper authority to conduct some interview programs.

Analysis Technique & Term Paper Writing

The data are taken from secondary sources. At first, we decided to collect data on quick time basis from reliable sources. We mainly focused on two parts: How price of essentials grown up day by day, and Causes of increase in price of essentials in Bangladesh from 2007 to 2010.

In preparing this term paper, we approached according to the following procedure: Selecting the topic Finding information Sorting information Analysis and evaluation of the information

Causes of Increase in Price of Essentials

Term paper writing and presentation

Rising rate of price hike has become a serious concern in Bangladesh from past few years. The impact of rising prices of essentials is being felt almost everywhere. The prices of essential commodities have gone up. According to the estimates by the BBS, the inflation rate, on a pointto-point basis, in June, 2007 stood at a 10 year high of 9.20 per cent. The corresponding food inflation rate was 9.82 per cent, and BBS reported that inflation on a point-to-point basis in urban areas was 10.71 percent. Prices of essentials, for example- cereals, pulses, vegetables, spices, fish, meat, eggs, milk, oil, fats, sugar, fruits, etc are always in a hike in the kitchen markets of Bangladesh for the past couple of years. But these prices soar sky-high on and during specific occasions. In the last couple of years, the price of fish has increased by 5.51 per cent, meat (beef, chicken etc.) by 4.38 per cent, eggs by 8.23 per cent, spices (masalas) by 6.22 percent, vegetables by 7.89 percent, sugar by 21.42 percent and fruits by 7.94 percent (Star Weekend Magazine, 2009). Table: 1 Average Price Trends of Rice and Wheat in Bangladesh (2008-2009)

Source: Computed from Bangladesh Bureau of Statistics (BBS), Ministry of Agriculture, Government of Bangladesh Note: Values are in UD dollar (1 USD=70 Taka). Bangladesh has no specific reason of increase in price of essentials. Price of essentials was increasing more and more for several reasons. But all reasons were not equally important. Some reasons influence more and some reasons influence less. We have identified some reasons of increase in price of essentials. All sources said that in the recent period prices of essentials increased in both domestic and international markets. A draft research paper highlighted by a research organization that the major reasons behind escalating prices of basic commodities in the local market. The findings included that supply shortage, syndication, rising global prices and high transportation costs as the major causes behind the hike. Natural calamities, lack of government policy, bribery or extortion and interrupted utilities were also found as factors that led to the surge in commodity prices. Causes of Price Hike: Among all essential necessary things the significance of food items are supreme. Since Bangladeshs staple food is rice, so the country is greatly affected by price hike of food items. Here we provide a brief critical overview of these causes point by point: Lower growth in agricultural / production sector Rising food prices in international market 8

Raising price of fuel Illegal toll collections Exchange rate fluctuations Supply shortage Non-competitive market behavior (Syndicate in market) Anti-corruption drive and disruption of supply chain / fear among businessmen Increasing demand Import cost Long supply chain Declaration of export restriction

Lower growth in agricultural / production sector:

There is a declining trend of growth in agriculture over time, especially of the crop sector in Bangladesh. This has resulted in less domestic production relative to the domestic demand. The low productivity was introduced as one of the main reasons of the price hike by the former Finance Adviser Dr. Mirja Azizul Hoque at the time of caretaker government. Because of low production, foods are required to be procured from the international market by higher prices. Also, year of [2007-2008] and [2009-2010] was full of natural calamity like flood and cyclone, and these hamper the agricultural production very much. About 60 per cent of the green vegetables like spinach and onion came to Dhaka from Narsingdi and the remaining 40 per cent from other places outside Dhaka (Star Weekend Magazine, 2009). Most of these areas have been flooded and plenty of damage has been made on the fields because of the heavy showers of rain. Therefore, it is quite natural for the prices of these vegetables to climb.

Rising food prices in international market:

Bangladesh being a net 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 have increased significantly in the 9

international markets. So, domestic prices of those items shot up phenomenally then (20072010).

Raising price of fuel:

Fuel prices are 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: i. ii. The high prices of fuels lead to high cost for irrigation, which raises the cost of agricultural production; and The high fuel prices increase the cost of transportation, which also raises the prices of essential items transported from remote villages to urban areas. Popular evidence shows that it is the transport owners syndicates arbitrary decision about the rent of transportation that ultimately affects the price of food items carried by those vehicles (Khan, M.A. 2007). Also the skyrocketing price of energy-fuel affected the world goods market. As a consequence, this price hike of energy-fuel also affects Bangladesh.

Illegal toll collections:

Another spiraling effect of the consumer items is the illegal toll collections by the different quarters at the different points of the country during the movements of the goods. A section of law enforcing men and political beneficiaries are reported to have been patronizing the toll collections. Traders, house owners, market owners, owners of transports and traders of small Case-1: Common price hike to extortions on roads shops based in footpaths are subject to extortion bydue unscrupulous people. Police themselves are involved in toll collection atbound many places. A goods-laden truck for Dhaka from Jessore has to pay toll at nearly 20 spots. Police extract toll of Taka (local currency) 200 (=US$3) at Navaron turn of Benapole (prominent land port), TK 100 (=$1.5) each at Chhachra point of Jessore, Arpara of Magura, Ramnagar High Way and Kanapur Highway of Faridpur. Each truck has to pay Tk 1,200 (=$17.5) in place of fixed rate of TK 900 (=$13) Bangladesh Inland Water Transport Corporation (BIWTC) at Goalanda ghat for ferrying. The rate goes up to TK 2,000 (=$29) if there is traffic jam in the ferry. Besides, a goods-loaded truck has to pay TK 140 (=$2.3) to the police outpost at Uthli Highway of Manikganj, TK 300 (=$4.35) to Bathuli weighing centre and Tk 200 (=$3) each at Nabinagar Bus Stand and Amin Bazar. A Dhaka-bound goods truck from Rajshshi has to toll at 15 points ranging from Tk 100 (=$1.5) to TK 200 (=$3) at each place. The total points of toll payment for a truck from 10 jessore to Dhaka stand at 50. [US$ 1= TK 69]

Source: The New Nation (Local Daily English Newspaper), 15th September, 2009. The practice of toll-collection by hooligans at the open markets from wholesalers, 10 percent for the total amount sold, compels the small traders to increase the prices (Star Weekend Magazine, 2009).

Exchange rate fluctuations:

There is a close association between exchange rate fluctuations and inflation or level of price of essentials. Historically, exchange rate in Bangladesh exhibited steady increase over time. The period average BDT-USD exchange rate was recorded at 69.39 during FY09 in comparison to 67.29 in 2008. The comparable FY07 figure rose to 67.08. Exchange rate generally increases the import cost and that causes increase of price.

Supply Shortage:
Poultry farmers claim that frequent interruption in electricity supply in poultry farms has affected chickens, which fall sick because of the heat, and eggs too get rotten creating shortage of supply in the market making them pricier eventually (Star Weekend Magazine, 2009). All kinds of fish along with meat (chicken, beef, and mutton) are going out of reach of the ordinary people (Khan, M.A. 2007).

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Taking for granted that the natural calamities might have played havoc with the crops, the weather or rains are the reasons for the shortfall of supplies. So, production in agriculture and fisheries sectors in Bangladesh is still subject to the whims of nature to a notable extent.

Non-competitive market behavior (Syndicate in market):

The syndicate hypothesis argues that many middle-men, wholesalers and importers are acting as syndicates and are causing huge price hikes, by making cartels and hoarding essential goods like rice, wheat and edible oil. These cartels fix the prices of these goods, dictate supply in the market, and earn excess profits. This hypothesis has become one of the dominant hypotheses in increasing of price in Bangladesh. For example, the top five importers of eight essential commodities have almost monopolized the import of these commodities and can make undue profits because the demand for such commodities is relatively inelastic. Moreover, in the supply chain of rice, millers alone are usurping more than 23 percent of the retail price (CPD, 2007). As like this kind of factor price spiral almost every year, the advent of the holy month of Ramadan. Undeniably true, in Bangladesh consumption of certain food items goes up during the month of Ramadan.

Case-2: Abrupt sugar price hike during the month of Ramadan Sugar appeared to have gone beyond control of all market mechanisms and is being sold at three different rates in the country. The per kg price of sugar at mill gate was sold at TK 39(=$0.6) while it was TK 42 (=$0.62) at Open Market Sales (OMS) operation. The retailers are selling sugar at TK 70 (=$1.02) per kg which is an all time high in the country though in view of the international price hike, the government earlier withdrew import duty on unrefined sugar and reduced duty on purified sugar to TK 3,000 (=$43.45) from 7,000 (=$101.45) per tome but New the price rebounded. Source : The Nation (Local Daily English Newspaper), 15th September, 2009. The above mentioned phenomenon is a clear evidence indicating hoarding of products by syndicated businessmen with a view to making excess profits afterwards by selling when the market price is higher. 12

Anti-corruption drive and disruption of supply chain:

It is thought that due to the anti-corruption drive many businessmen have contracted their usual business activities with the fear of legal actions. Furthermore, many informal marketplaces, both in rural and urban areas, have been wiped out by law forcing agencies on legal grounds, so most of them take away themselves from normal business flow or import and this occur shortage in goods and causing high price rise.

Increasing demand:
Due to increasing demand, the food stock is becoming less. According to the statement of International Food Policy Research Institution (IFPRI), there is no possibility of reducing food price in the upcoming years. As a consequence, like other importing countries Bangladesh is also affected by this adverse situation.

Import cost:
Bangladesh is one of the prime rice importing countries. Since crops were destroyed due to floods and cyclone Sidr, the expenditure of importing has been raised dramatically. For instance, 29.91 lack metric tons rice and wheat were imported during July 2008 to February 2009. On the contrary, 16.87 lack metric tons rice and wheat were imported during the same period of the previous financial year.

Long supply chain:

It is unfortunate that in Bangladesh most of the farmers do not have the access to market. The traditional distribution chain, from farm to fork, is too long and cumbersome. It involves too many middlemen, forcing consumers to pay as much as four times what the farmer gets paid for his products. The following table shows the trade volumes and monthly trader incomes in 2007.

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6. Sells to the consumers from a fixed outlet (usually leasesd) in a market-place/informal outlet/ internal vendor. 7. Collects from growers. 8. Collects from both faria and growers and distributes to retailers. 9. Maintains physical space(arat) for storage and distribution of products.

Declaration of export restriction:

Since the demand of rice has been raised, rice exporting states is taking various strategies in terms of exporting rice to ensure their own food security. They have imposed some terms and conditions or stopped exporting rice. For instance, India has raised the price of rice per ton $1000. As a result, Bangladesh is passing ominous Situation.

Overall Findings of the Study

The prices of commodities are almost uniform across the capital, which only implies that a group of people are fixing the prices and that they have enough clout in the market to be able to decide what the prices should be. Corruption of so called political leaders, corruption of different government officials and law enforcing agency is the main reason behind this problem. The skyrocketing price of energy-fuel affected the goods market as well as food market. Insufficient supply of power and fertilizer are responsible for lower production that creates shortage of goods, as it increases price of essentials. When the international market is in rising position then it affects the local market and creates price rise. Transportation cost also affects the level of price of essentials. 14

Conclusion
The concept of protecting consumer rights is not a new one. Since the dawn of human civilization, the ordinary members of every society have been consciously trying to protect their rights as consumers. But its scope might have been limited to prevent unusual price hikes of essential items of daily life. After all of this analysis we conclude that our hypothesis is correct. We think that most of the general people will agree with our hypothesis. Like ours most of the people will agree with us that formation of syndicate groups and corruption is the main reasons behind this problem. Other all causes like rising food price internationally, illegal toll collections, supply shortage, long supply chain, shortage of power and fertilizer are also related to price rise of daily essentials. Above all, Bangladesh is passing now an ominous situation. What is very important now, Government has to take proper initiatives along with the policymakers, think tanks, and political parties to overcome the current situation, because in future the situation will be worse globally and no doubt Bangladesh will be affected gravely.

Recommendation
Bangladesh can overcome this kind of situation if proper measures are implemented. Like, The first and foremost measure is to increase domestic food production at any cost. Yearly rice production should be 7 lack metric tons more and we have to be less dependent on world market. For increasing food production what is mostly important is to ensure proper supply of power and energy in time so that farmers can easily cultivate their lands.

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At least 20-22 lack metric tons food stocks should be maintained by the government so that the domestic market remains stable during food crisis.

Increasing subsidy is another significant measure that should be increased in agriculture sector.

The agro-based agencies like BADC, BARI should be strengthened as well as government should give more emphasize in agro-based research and scientific cultivation. Proper coordination should be established between Bureau of Statistics and Agriculture Extension Department for reliable statistics.

Government can imply the flexible tariff and quota system to control the import price and make it stable in the domestic market.

A strong co-ordination efforts and monitoring cells should be formed to observe price level of essential commodities in different trade center of the country.

and check

Government can establish new agencies like Trading Corporation of Bangladesh (TCB) or make sure their continuous efficient operation.

Last of all people of Bangladesh have to change their food habit; they should reduce absolute dependency on rice. For instance, potato and cassava can be alternative food of rice.

References
Ahmed, Nasiruddin and Nikhil Kumar Das (September, 2007), An Investigation into the Recent Inflationary Trends in Bangladesh Dhaka: Finance Division, Ministry of Finance. Bangladesh Bank (19 August, 2007), Inflation in Bangladesh: The Evidence and the Policy Alternatives Paper presented at a Seminar on Inflation in Bangladesh held at CIRDAP Auditorium, Dhaka.

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Bangladesh Bank (August, 2007), Economic Trends. Centre for Policy Dialogue (May, 2007), Price of Daily Essentials: A Diagnostic Study of Recent Trends Report Prepared for the Ministry of Commerce, Government of Bangladesh.

Khan, F. R. (March 17, 2007), Need to enact Consumer Protection Act, Law & Our Rights, The Daily Star, Bangladesh.

Mustafizur Rahman, Debapriya Bhattacharya, Wasel Bin Shadat and Uttam Deb, (July, 2008), Recent Inflation in Bangladesh: Trends, Determinants and Impact on Poverty Centre for Policy Dialogue (CPD), Dhaka.

Rashid, M. (July 21, 2007). Price hike, inflation, and price control, Retrieved July 21, 2007 from http://www.bdeconassoc.org/publication.php?cat=21, (last viewed on March 29)

Star Weekend Magazine (July 24, 2009), Markets Getting Hotter, The Daily Star, Bangladesh.

http://www.cpd.org.bd/html/publications.asp , (last viewed on March 31, 2011). http://www.geocities.com/sarkermm/Articles3.doc, (last viewed on March 28, 2011).

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