M A Faisal Mahmud faisal.mahmud@live.

com

Taming Inflation: High time to chalk out a long term strategy

The inflation we are facing, if attributed, much of it due to global reasons. The prices of petroleum products, food grains and edible oil have risen steeply in international markets in recent times. Thereby the inflation we are facing is a pass-through of rising global commodity prices in international markets. Indeed, a similar pattern was witnessed during the oil price boom of 2007-2008. However, this time our populaces are much more stressed mainly because of non-linear increase of compensations/prices of different sectors. Consumers have borne the brunt of this price surge as the increased costs are passed on directly through higher fuel prices and indirectly though increased commodity and transport costs.

Inflation (Point to Point) in recent months

Inflation (General) 15 13 11 9 7 5 3 January February March April May June July August 9.04 12.77 11.91 9.79 10.49 10.67 10.2 13.87 14.36 13.16 13.4 12.51 10.96 10.17 11.29 12.7 Food Price Inflation

FY10-11

FY11-12

The middle income/low income households have been suffering most since food accounts for a large share of their overall consumption and their incomes have lagged rising prices. Furthermore, the pinch of inflation is eating up middle class income groups savings. Thus national savings would be affected in medium term if this situation continues. With even high propensity to save and higher deposit rate, these groups cant afford savings as they will find lower or no disposable income left in their pocket. Controlling rising prices is a primary responsibility of any government and monetary authority of a country. The growth of broad money (M2) had been far ahead of growth in Nominal GDP for long. And after miles of accelerated pace Bangladesh Bank is now forced to make a hard break. Bangladesh Bank has already taken a tightened monetary policy to safeguard economy from excess money supply related inflation. It has increased its key policy interest rate last week for the fourth time (175 bps cumulative rate increase since March) to tame surging inflation. There is neither a clear sign of moderation in the momentum of the rate increase nor any bending of inflation trajectory. Time will say if this tightening exercise truly worked on demand supply imbalance. The term structure of interest rate has already shifted and the cost of financing is getting higher. Its obvious that when inflation is persistently high then interest rates will increase in nominal terms. However, we must not forget its cyclic/lagged effect. Those entrepreneurs are borrowing at a higher rate will eventually transfer the extra cost to the end consumers as they think their cost of production is higher. If so, even international market goes on moderate; our domestic economy wont allow us to take the fruit at maximum. Sustained inflation can be damaging to macroeconomic and social stability in top line. The increases in prices that outstrip income gains will be reducing purchasing power, particularly for the poor and most vulnerable in society. High inflation will be redistributing income in ways that may not be equitable or efficient - for instance from pensioners, savers and creditors toward borrowers whose debt falls in value. Furthermore, it will reduce the incentives to invest and employ workers by creating uncertainty about the value of future returns. Finally, persistent inflation can devastate livelihoods of Bangladeshis as still at least one third of the population is literally poor.

On the other front, the challenge can be multifaceted. Persistent high cost of living yield will not be allowing enjoying low cost of labor which has long been treated as our competitive advantage in exporting commodities. However also noting that as Bangladesh has a surplus of workers, with significant underemployment in some sectors. Wage increase in export sectors wont run too far ahead of productivity gains in coming future and exporters profit margins will remain somewhat intact. But its detrimental effect can come up with labor motivation and productivity. Our entrepreneurs should come up with social packages for their labors gradually (say schooling of employees child and thus) so that labors gets assured that even though their days are tough their child is getting right future at least. Imported inflation should be brawled through productive capacity. Its clear that further increases in food and fuel prices cannot be ruled out mainly because of oil market disruption as a result of worsening of conditions in the Middle- East and North Africa. Even a few months earlier OXFAM warned food price to double in next twenty years. This is quite logical as the demand outpaces food production every day. The price crunch has been worsened by a spate of recent climate-related crop failures worldwide, but the underlying causes are more long-term. In addition, speculation by investors/traders has artificially inflated food prices even beyond their already alarming highs, and is likely to continue doing so. Nervous governments are now starting to stockpile massive food stocks to offset what they believe is a coming wave of civil unrest over the continued rising costs of basic essentials. Looking at local, the loss of arable land to urbanization is being accelerated highly in Bangladesh. If our crops disappoints (due to flood or any natural disaster) in local or oil prices (an important cost-side determinant of food prices) rise, feeding more than 140mn people will be solely a great challenge for the government. Bangladesh has got no options rather to be self-sufficient in food grains. We are fortunate enough that we have not faced any major calamity in recent past. Given the condition of our water channels, no one can argue against that we are at great risk. In organized economies costs are volatile and susceptible to supply shocks and acts of nature and price would settle after the forces that instigated the increase were resolved. That is not the case in Bangladesh where prices keep rising without much viable reasons. The present scenario of the markets is a result of years of neglect in general management of the economy. Market structures have been very poor, so is the supply chain. To ensure a decline in Bangladeshs inflation and prevent a dangerous wage-price spiral, it is essential that people's expectations about future prices remain under control in the coming months. Implementing the tighter monetary policy planned for this year will be key and is currently being achieved predominantly through a slower credit supply. However, there should have a regular monitoring that productive sectors are getting timely credit at affordable rates. Moreover our capacity to measure inflation should be increased for effective solution. Wholesale Price Index (WPI) or Producer Price Index (PPI) should be introduced along with Consumer Price Index (CPI) to effectively measure to what extent inflation is attributable to what. By then we can observe if there is any pipeline cost pressures generating in the economy. Once measured, we must seek long term avenues to combat inflationary pressures. Again, we dont have many avenues than to keep our propensity of consumption at a reasonable level. If fuel price in the international market keeps increasing, GoB wont be able to subsidize more than USD 3.0bn each year for the accelerated demand of the domestic economy. So, the much needed adjustment in the fuel prices will be keeping pressure in the Non Food Price Inflation. We are fortunately privileged by our history and endowments. We can work and work effectively on Food Price Inflation. We must seek a long term solution by Massive Agricultural Revolution. We need to strengthen our all out effort to make our farming system a modern one. Concentration must be given to high-yielding seeds, irrigation, sufficient fertilized supply and financial facilities/credits to the farmers and providing risk mitigants (i.e. Crop insurance). We must think ways to transform our agricultural farming into farming industry where large scale farming will eventually take shape of Agri-business. Sufficient cold storage will ensure good price for the farmers and at the same time safeguard our distressed future. Market structures should be improved thoroughly and supply chain should be monitored effectively so that each participant is paid fairly for their value addition. If we can grow our own food and live off by utilizing our own land as much as possible, we will not be affected by volatile supply and demand issues that affect the global food market. Self-sufficiency in food is the key to long-term survival.