Since FY09, average inflation (Base: 2005-06=100)
remains high, at least above the 6.0%. In fact, since July 2008, monthly average
inflation never came down to less than 6.0%. During this period, the highest monthly
average inflation was 11.8%, observed in November 2011. Within a period of 6
consecutive FY, ranging inflation between 6.0% - 11.8% reflects significant
volatility. At the same time, this also reveals, based on Bangladesh’s
historical inflation record, a moderately high level of inflation period. In
other words, since FY09, inflation remains unstable and high.
Two obvious questions arise when there is a
consistently high inflation. One, why has the country been experiencing a high
level of inflation for a longer period? Second, what are the costs of
experiencing such high level of inflation?
Reasons: Data reveals that until early 2012, it was
basically high food prices, which dominated the overall inflation, and started
to decline in the latter period. However, prices of non-food commodities
started striking when the pressures from food prices eased, which kept the
average general inflation well above of 6.0%.
After first global food price shock in 2007-2008,
there was second shock in 2011. As Bangladesh is not immune from global food
price shock, it had to absorb its share from both shocks by experiencing higher
inflation during those periods. Since FY09, the government, on couple of times,
increased energy and electricity prices which had a direct and permanent effect
on the general price level and consequential indirect effect on the prices of
other commodities. Also, the government had to raise the wages of government
employees, and set higher minimum wages for industrial workers. Wage adjustment
in large sectors like government and industry have direct and upward effect on
prices of commodities and wages of other sectors, basically due to speculation
factors. Right after the stock market crash in late 2010, there was period when
Taka depreciated sharply against the US$, although in the latter period, Taka
appreciated again.
For strange reasons, policymakers used monetary
policy instruments to control inflation in Bangladesh. Despite having a pile of
excess liquidity in the banking system, policymakers thought that inflation was
driven by demand side factors, and still they are thinking in the same line. So
they kept interest rate high for long period. Keeping interest rate high had
twice effects: one, it helped raise the excess liquidity even more and second,
the central bank had to allow domestic investors to take cheap credit from foreign
sources. But inflation scenario wasn’t changed much; basically, average
inflation has been roaming within a range between 6.0% - 11.8%. Then what’s the
success of policies?
Judging policies is largely dependent on the
expectation from policy adoption. Do you remember the last time you heard that the
current inflation rate is less than 5.0%? One might ask that why an inflation
of less than 5.0% is required for Bangladesh. Well, in a country where food
commodities still dominate in the total food basket and even major non-food
commodities are the basic consumer products, it’s the poor and middle-class who
suffer the most from a higher level of inflation. Even when the inflation has
been consistently high for a longer period, it is expected that the sufferings
have been also lingering. Now if a policy/a set of policies can’t resist the
sufferings of the mass, then should we call that as policy failure?
It seems that policymakers are not concerned enough
to bring down the level of inflation rate, rather are quite happy for whatever
their achievements are. Their recent concerns are to hold future inflation, without
thinking to bring down the level of inflation even less. And again they feel to
use monetary instruments. But as previously, they will be able to hold inflation
volatility only, but not the inflation level. It seems they forgot one simple
alternative. When demand management policies are not strong enough to bring
down the inflation for easing the sufferings of the mass, then why not the
authorities (same or other) try for supply management policies. Probably,
policymakers forgot the fact that demand management policy is a short-term
instrument to control inflation, but when inflation phenomenon is already a
long-term one, they should think for long-term solution.
It’s not easy to formulate supply management
policies. Improved governance is the most important factor for a
successful supply management policy. A success in supply management policy
requires strong commitment, good policy formulation and implementation skills.
Above all, it needs committed governance, which is probably the missing area for
which authorities had to use demand management policies.
What policymakers should do? First, policymakers
should consider the current period of high inflation as a long-run economic
disruption. Second, policymakers should focus more on supply side of the
economy to keep inflation at tolerable level in the long-run. They should recall
the fact that demand management is effective in the short run, and they can’t
use the same instrument for a longer period. Third, it seems that policymakers are not
interested to bring down the inflation at lower levels, say, below 5.0%. They
seem more interested to keep the inflation around 7.0% along with a focus on
controlling inflation volatility. But somehow they miss a point: it’s not easy
to control inflation volatility without controlling the level of inflation. So,
policymakers should focus on controlling high inflation, rather inflation
volatility.
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