Inflation Shows No Sign Of Abating

Inflation shows no sign of abating Consumers' trust is fast receding.

Bangladesh Bureau of Statistics has revealed that inflation in February increased slightly, reaching 8.78%¹. In general, inflation is hovering around 9%. In August,it reached 9.52%,a record in the last 11 years. However, unofficially inflation long ago crossed the double digit. There is no improvement in inflationary situation, this is the general mood at the ground. Meat prices give a great deal of trouble to the Middle and lower middle class. Quarter of a whole chicken is being sold in some neighborhoods, capturing the awful compromise ordinary people make everyday.

Nominal wage has registered 7.11% growth in February. But real wage lowers in the wake of double digit inflation. People’s ability to spend is significantly curtailed. This negative mood is writ large on the markets. Shops and markets earn two-third of their annual revenues during the Ramzan, fasting month ensued by the biggest festival of the Muslims.Many markets run special promotion. Many brands run special campaign ahead of Eid.The Middle class prefer to complete their Eid shopping before the start of Ramzan as prices are a bit lower than the days approaching the Eid. But this time of the year a dead atmosphere prevails before the markets. Last February ,the biggest book fair of the country registered lowest sales in recent years. Less enthusiasm from the side of the consumers. A clear sign that the consumers anticipate worse days are lying ahead. So they tight their wallets.

As sources of tax revenue are limited and VAT and income tax could not be raised to an extraordinary level, other sources bear the full brunt of govt's new tax policy. Exporters sensed the danger. Head of the platform of garments exporters urged govt not to raise the export source tax,which is 0.5% now.

Not only consumers, businessmen are not optimistic about the situation. This high inflation makes investment costly and makes them reluctant to undertake new project.In addition, govt is implementing IMF conditions; one of which is to raise the Tax-GDP ratio. As sources of tax revenue are limited and VAT and income tax could not be raised to an extraordinary level, other sources bear the full brunt of govt's new tax policy. Exporters sensed the danger. Head of the platform of garments exporters urged govt not to raise the export source tax,which is 0.5% now.

Govt keeps arguing that high fuel price and the Ukraine war provoked the current situation. That is not the whole truth. Many amassed huge fortune over the years and much of it lies outside the banking system.Govt itself printed money and injected to problem-ridden banks instead of letting them die. In addition, during the post Corona period govt provided Tk5000 crores incentives to the businesses.In addition, Bangladesh Bank itself observed a great part of the credit distributed this time did not go to productive use. Multiple exchange rates played a conducive role to clandestine capital flight and to curb remittance flows from traditional sources. Had there been a unitary exchange rate,we would save a lot of foreign currency. Incentive to remittances rendered ineffective. Market determined exchange rate would bring lot more forex and discourage forex flight.

Despite eye-dazzling investment summit, high average inflation is a signal to investors that govt is not functioning well. And a willful reluctance to a smooth political dialogue further erodes their confidence. It has to keep in mind that political stalemate is also a cause of budget deficit. To bring confidence among investors and consumers, reconciliation is as important as a well-devised inflation targeting policy.

Notes And References

1. "Satchollish Ponneyr Modhyey Chhabbishtir Dam Barlo,Mullosphiteyo Barti(26 products among 47 registered increase in prices,inflation also soars)",Daily Prothom Alo,p-1,March 13,2023.