Check Food Inflation

Strong dollar and high oil price
Hint there will be hungry cries.
Stock release,langar,less ethanol production
Could comfort the people in desperation.

International Monetary Fund(IMF) in its latest “World Economic Outlook” depicted a grim future about growth and inflation in the coming months. Inflation may cause further damage to food security, pushing millions of people to starvation like situation. Earlier, World Bank downgraded Bangladesh’s growth forecast from 7.0% to 6.2% for the year 2022-23.

Bangladesh government in its latest draft BBS report officially acknowledged that inflation touched the double digit figure (10). But actually food inflation is much higher than the double digit figure. Both the coarse rice price and flour price rose to Tk 55/kg; a year ago the two items were sold at Tk 40/kg. Eggs are sold at Tk 156/dozen; a year ago a dozen cost Tk 108/102. Milk is sold at Tk 90/liter; a year ago it was sold at Tk 80/liter. A laundry soap,which is used for both washing body & clothes,costs Tk 23; a year ago it cost Tk 18. So coarse rice and flour registered a 37.5% increase. Egg recorded a 44.44% rise while Milk witnessed a 12.5% rise. Meanwhile laundry soap registered a 27.77% increase. Even Nilotica Tilapia registered a 33.33% increase in the span of one year.Even the pangash catfish,which many despise for being cultivated in swear water,registered an increase in price.

This clearly demonstrates how high inflation is pinching people from all walks of life. What is worrying is that high oil price and inflation complicate the ongoing situation. As the anticipation of further Taka depreciation gets stronger, price level may further rise. Government’s focus is on food production, so subsidies for fertilizer production and irrigation during the winter get top priority at the cost of city dwellers who spend more time in the dark.

So far central bank adopted a gradualist monetary policy by raising the policy rate by 50 point basis. It reflects government’s determination to not affect the employment ahead of election year. Another small increase in policy rate is expected.Lending rate,which has not been raised yet,may also rise,making investment more costly.

The prime concern for the ordinary citizens is the food inflation. Checking food inflation should be the top priority. Though govt has taken programs to feed the vulnerable people,such programs are politically biased and not free from corruption. It is not just to keep blaming the war in Ukraine for the hike in food grain price.As the aggregate demand may fall in future due to high interest rate and inflation, ethanol production may also fall. Food grain used in ethanol production could easily be diverted to poorer countries. Many countries could also relax their food grain stock to help friendly countries.

Bangladesh dealt with this kind of situation in the past. When we were kids, we witnessed how school grew vegetables and garrison produced food like the communist countries. Government could instruct army to produce rice, vegetables and fish inside the cantonment where land is aplenty and labor is cheap.

Government in association with businessmen could set up langar(public eatery) at selected urban pockets where 5 million people could take at least one meal daily.

It is important to maintain one cheapest source of protein,one cheapest source of vegetables and one cheapest source of carbohydrate for cash-strapped lower income group. There should be no compromise with protein and calorie intake of individuals.

IMF Assistance & Gradualism

Central Bank picks gradualist policy, To fight inflation and stabilize the currency. Past management and sources of tax Expose economy’s hidden cracks.

Last week, International Monetary Fund formally disclosed that Bangladesh sought assistance from it. $4.5 billion worth assistance package may come from several fund facilities offered by the IMF. This is for the first time Bangladesh sought assistance from Sustainability and Resilience trust fund ,reserved for mitigating adverse challenges posed by climate-change,apart from Balance of Paymey support fund¹.Earlier Finance minister had stressed that Bangladesh would not take loan from IMF if the conditions were not favorable.

Unprecedented inflationary pressure with rising import bills worsened by Ukraine war and record current account deficit prompted the government to seek such assistance. Though government projected the inflation rate below 7.5%,NGOs apprehend the inflation may cross the double digit figure, incapacitating further the cash-strapped government’s ability to spend.

Prior to IMF announcement, govt raised the policy rate by 50 points basis, raising the interest rate to 5.5 %. This will eventually curb the money flow,easing the inflation. The latest MPS also envisages to encourage import substitution industry through incentives.

As the policy rate is increased, lending rate of commercial banks should be raised accordingly. But govt is reluctant to raise the lending rate and willing to maintain the ongoing 3% spread between deposit rate and lending rate. Even a 1% increase in deposit rate will not offset the inflationary pressure. Moreover, ahead of election year when the government is poised to carry through projects that will create jobs,any increase in lending rate will be greeted with bitter reactions.

In key export markets of Bangladesh(USA,Canada,EU), central banks raised policy rates. This insinuates consumption in these countries may shrink in future, resulting in fewer orders. In addition, rising defense spending in these countries cuts spending on other sectors. That poses serious doubts about further obtaining assistance and funds for humanitarian grounds. Not only that domestic companies' borrowing from overseas also gets costlier.So it could be another stumbling block for the local industries that eye for foreign credit.

Falling demand in Occidental countries and rising interest rate is expected to improve current account deficit by reducing the import bill. But to stop Taka's depreciation, govt needs to do more. Bangladesh inked several strategic agreements with Middle Eastern countries. Why does Bangladesh not approach these countries to do some favors in this critical time? Bangladesh could propose them to accept Taka in exchange of oil or to defer the oil payments by half a year or a year at a discounted exchange rate. Similarly, Bangladesh could make request to other friendly countries to trade with Bangladesh in Taka. This growing demand for Taka could at least peg the Taka at some fixed value against major currencies.

Govt's past record in utilizing climate fund is not good. Anti corruption bodies published detail accounts about this. Luckily ,central bank is responsible for using the credit this time. But government is implementing the budget, so mismanagement of budget support fund still looms large.

Bangladesh’s internal revenue generation still hinges on indirect taxes. Tobacco and telecommunications are the key sources of indirect tax revenue². Without increasing the tax revenue, this IMF support may come less handy at the end of the day. Public credit growth outweighs the private sector credit growth. Private sector is struggling to get credit. In this backdrop,how the government could attain MPS goal of employment generation through import substitution industry is indeed a puzzling one.

Notes And References:

1. “IMF says It Is Ready To Support Bangladesh After Loan Request”, Business Standard, July 27,2022. For more read at https://www.tbsnews.net/bangladesh/imf-says-it-ready-support-bangladesh-after-loan-request-466422
2. “Dosh Company Dilo Chollish Percent VAT(10 Companies Account For 40% VAT Payments)”,Jahangir Shah,Prothom Alo(P-13),July 27,2022