High inflation shows cost of living crisis

With inflation hovering around 10 per cent and food price inflation at around 10.5 per cent annually, Bangladesh is now in the grip of a cost-of-living crisis. Official inflation figures published by the Bangladesh Bureau of Statistics (BBS) show Bangladesh's inflation rate at 9.72 per cent in June this year compared to 9.90 per cent in May indicating a slight decline. But many consider that the figure is an underestimate, the real figure is much higher because prices of daily necessities do not show any decline in the market.

While inflation has put a squeeze on private consumption, public consumption continues to expand, now accounting for 13.02 per cent of GDP. Rising inflation is also contributing to the higher cost of production which is further fuelling inflation. The inflationary surge was largely driven by rising food and fuel prices and the depreciation of the taka. Generally, when inflation is rising, it generates conditions suitable for further price rises, thus increasing inflation risk.

Now the rising cost of living combined with the ongoing political crisis in the country with curfews and internet shutdown are disrupting the supply of food and other essential commodities which will further add to the inflationary surge. The Financial Express in an editorial on July 28 said, "The shock of unrest centring quota movement and curfew has been taking its toll on prices of daily essentials."

Inflationary pressures are likely to continue to rise in 2024 in Bangladesh. This is because of supply disruptions, high exchange rate of the US dollar, falling foreign exchange reserves, balance of payment deficits and delayed pass through of higher food and energy (of which Bangladesh is a net importer) prices to the rising price pressures. According to the IMF, global food crisis may persist with prices still elevated.

The current spate of Inflation in Bangladesh has largely been attributed to costs transmitted by disrupted supply chains enabling large importers and domestic businesses to jack up prices far more than the transmitted increased costs notwithstanding hoarding by domestic business syndicates adding to further supply disruptions.

The existence of business syndicates (cartels) in Bangladesh clearly points to the lack of competition enabling large firms to exercise their market power to increase prices. Bangladesh responded by culling imports of non-essentials and through fiscal austerity. The former would only further add to the inflation problem by further restricting supply given that essentials and non-essential consumer goods are a matter of value judgement, and the latter has always proved to be a hard nut to crack, whoever tried it.

This clearly shows Bangladesh's vulnerability to external market shocks and now domestic shocks resulting from the current political crisis have created an environment to accelerate price rises. Cartelised businesses in Bangladesh are taking advantage of these shocks to excessively jack up prices enabling them to significantly increased profit margins, thus fuelling further inflation. In fact, a very large portion of increased profits earned by Bangladeshi firms is economic rent. This is symptomatic of the economy where competition is arguably not as strong as it should be.

While cost of living crisis is an ongoing reality for the poor and low-income earners in Bangladesh, that may not be the case for the rich.  In fact, there are now growing numbers of US dollar-equivalent millionaires and billionaires in the country for whom inflation is of no consequence.

According to the Household Income and Expenditure Survey (HIES) report 2022, average food consumption expenditure was 45.8 per cent in 2022 but that figure would be much higher for the poor and low-income earners. The report also said that using the upper poverty line, 18.7 per cent of the population lived below the poverty line nationally and 20.5 per cent in rural areas and 14.7 per cent in urban areas in 2022. Using the lower poverty line, figures are 5.6 per cent, 6.5 per cent and 3.8 per cent respectively.

The Bangladesh Labour Force (BLF) Survey 2022 finds that close to 60 million people, accounting for 84.9 per cent of total working population in Bangladesh are employed in the informal sector. It is also noteworthy that the report also points out that out of the total employed women in Bangladesh, 96.6 per cent are in informal employment.

Informal sectors in all countries are typically characterised by a high incidence of poverty and severe decent work deficits. It thrives mostly in a context of high unemployment, underemployment, poverty, gender inequality and precarious work. Informal employment arrangements are in practice or by law not subject to national labour legislation or entitlement to social protection or other employment guarantees.Therefore, the informal sector is marked by very lowly paid and precarious jobs.

Because the poor and low-income earners spend a much greater share of their income on food, the current high inflation has a greater negative impact on them. In fact, empirical studies have clearly demonstrated that the rising inflation rate experienced by the poor and low-income groups is much higher than that of non-poor groups.

It is estimated that about 80 per cent of the people in Bangladesh in the above two groups are vulnerable to even slight increases in food prices.

Rise of income inequality as reflected in the estimated Gini coefficient which rose to 0.499 in 2022 from 0.482 in 2016 and 0.458 in 2010 (HIES 2022) further adds to the vulnerability of the poor and low-income earners to rising food prices.

Bangladesh Bank adopted a contractionary monetary policy to contain the rising inflationary pressure. However, monetary policy transmission mechanism is impaired by regulations on lending interest rates by commercial banks. Also, private sector credit growth remains sluggish making the policy rate less effective. Supply side bottlenecks, further manipulated by cartelised businesses, are also at play against the effectiveness of the policy rate. As balance of payments difficulties intensify, the scope for monetary policy actions become increasingly constrained by the need to protect foreign currency reserves in countries with managed float like in Bangladesh.

Very early last month Bangladesh Bank detected "accounting anomalies" in exports data for the first ten months of fiscal year 2023-24 which resulted in US$13.8 billion reduction in export revenue. According to the Financial Express (July 12), about US$20 billion shortfall in export revenue has been detected by the Export Promotion Bureau for the last two fiscal years.

This further highlights the long-standing concerns about the reliability of published data by various government institutions including the Bangladesh Bureau of Statistics (BBS). Reliance on unreliable data can lead to worrying distortions in the government's policy moves including those relating to combating inflation.

Consumer price inflation in Bangladesh averaged 6.2 per cent in the ten years to 2022, above the Asia-Pacific regional average of 2.1 per cent. In 2023-24, the inflation rate reached 9.72. Such price increases are symptomatic of long-standing structural problems in the economy and now that will be further exacerbated by the current political turmoil in the country. More worryingly such inflationary surge will have negative impact on economic growth because inflation will decrease the real rate of return on investment, leading to decrease in investment.

[email protected]