High prices: the cause of sorrow and suffering

The rising prices of essential goods have become a prominent concern in Bangladesh, attracting considerable attention from policymakers and the public. The primary problem faced by Bangladesh’s economy in recent times is the discernible upward trajectory of prices for essential goods. Bangladesh is undergoing a period of heightened inflationary pressure, a phenomenon that commenced before the onset of the Ukraine crisis. In recent times, Bangladesh has experienced significant movements in energy prices, thereby intensifying the existing predicament. The ongoing price increase has been influenced by domestic factors, including market distortion caused by a small number of dominant businesses and inadequate monitoring mechanisms. It has been observed that several essential commodities, whether domestically produced or imported from more economically advanced nations, tend to have higher prices in Bangladesh compared to other countries in the developing or developed category. As the cost of goods and services rises, lower-income households face significant challenges in effectively managing their financial obligations. Numerous households, encompassing individuals employed across various industries and earning minimum wages, encounter substantial challenges in achieving financial stability.

Inflationary pressure is associated with adverse outcomes for various stakeholder groups. The escalation of prices of essential commodities in Bangladesh has elicited considerable concern among the general populace, who experience the impact of these fluctuations in their dual roles as consumers and producers. The persistent upward trajectory of prices has been observed to have a noticeable effect on the actual purchasing power of consumers, specifically those who fall within the low-income segment of the population. It has been observed that households characterised by low-income levels tend to allocate a significant proportion of their overall income towards purchasing food items. Consequently, these households often encounter a more pronounced impact of inflation than households from higher-income brackets. Bangladesh’s ongoing cost of living crisis has had detrimental effects on individuals with fixed and flexible incomes. Due to the upward trajectory of the cost associated with the consumption basket, producers have been confronted with pressure from their workers for increased remuneration in the form of higher wages and salaries.

The impact of high energy prices on inflation in Bangladesh is a significant area of concern that warrants further investigation. The magnitude of capacity payments disbursed to independent power producers (IPPs), encompassing rental and quick rental power plants, has experienced a significant escalation. The government’s apparent objective has been to generate revenue by increasing energy prices for consumers and producers. The pressure by the International Monetary Fund (IMF) to eliminate subsidies is concurrently compelling the government to increase energy prices during a period characterised by an already high cost of living. Energy price escalation has been observed multiple times after 2021, exerting a notable influence on the overall inflationary tendencies. The current state of natural gas availability, which serves as a crucial energy source for power generation, has been characterised by a notable scarcity. This scarcity can be attributed to the gradual reduction in domestic supply levels. The existing deficit has been mitigated through increased importation of liquefied natural gas (LNG) to meet the unfulfilled demand. The power and energy sectors in the country have experienced a notable lack of public investment despite the presence of geological surveys that have indicated the potential for gas discoveries.

Policymakers persist in attributing the rise in prices to external factors, specifically the high import prices of essential commodities. The current trajectory of global prices has consistently declined over the past few months. Therefore, it can be concluded that the inflation in Bangladesh is no longer solely attributable to high import costs. There has been a persistent escalation of prices for domestically manufactured goods despite abundant local production. The actions of market manipulators, who have deliberately induced a supply crisis and the apparent lack of efficacy in policy interventions, have resulted in adverse consequences for the general public. This is particularly evident in the stagnation of wages, which have failed to keep pace with the rising inflationary pressures. This section presents an overview of the recent trends in inflation in the country and proposes a few policy recommendations to rectify the situation.

New CPI base does not adequately reflect the rapidly rising prices: In the new base index, where the consumer price index (CPI) in 2021-22 is assumed to be 100, there is currently data available for point-to-point inflation rates for the general inflation rate, food inflation rate, and non-food inflation rate over seven months from April 2023 to October 2023 (Figure 3.1).

In April 2023, the general inflation rate was 9.24 per cent, with food inflation slightly lower at 8.84 per cent and non-food inflation at 9.72 per cent. Moving to May 2023, there was a noticeable increase in the general inflation rate, reaching 9.94 per cent, with both food and non-food inflation also experiencing upward trends at 9.24 per cent and 9.96 per cent, respectively.

June 2023 witnessed a slight dip in the general inflation rate to 9.74 per cent, while food and non-food inflation rates remained relatively stable at 9.73 per cent and 9.6 per cent, respectively. In July 2023, the general inflation rate further decreased to 9.69 per cent, with food and non-food inflation rates showing similar trends at 9.76 per cent and 9.47 per cent, respectively.

However, August 2023 saw a significant spike in the general inflation rate, reaching 9.92 per cent, primarily driven by a substantial increase in the food inflation rate, which soared to 12.54 per cent. Non-food inflation, on the other hand, decreased to 7.95 per cent. This trend persisted into September 2023, with the general inflation rate at 9.63 per cent, food inflation at 12.37 per cent, and non-food inflation at 7.82 per cent.

In October 2023, the general inflation rate again increased to 9.93 per cent, with both food and non-food inflation rates showing upward movements at 12.56 per cent and 8.3 per cent, respectively.

The data indicates fluctuations in inflation rates over the specified period, with notable increases in the general and food inflation rates during certain months, while the non-food inflation rate exhibited more moderate variations. High inflation rates hovering around the 10 per cent mark have significantly increased the cost of living and decreased consumer purchasing power. Nevertheless, an analysis of the prices of several items shows that the new CPI base tends to hide the actual extent of inflation prevailing in the market.

Apprehensions about cartels and collusion: In economics, essential commodities are usually considered as same or similar items. In this case, the producers of these goods have little control over the price and cannot significantly influence the product’s market price. Nevertheless, Bangladesh’s marketing and distribution system for essential goods is complex and diverse. The lack of competition in the market for essential goods enables the practice of collusion. There is a scarcity of wholesalers for many items manufactured inside the country, yet many retailers exist because of various intermediaries. Given this backdrop, concerns of cartels, acts of sabotage, and hoarding were sometimes voiced, although verifying such allegations is typically tricky. There are concerns about possible barriers to entry for some participants in the value chain.

Within the essential goods market, there is a significant market power concentration, which a small group of firms mostly holds. This situation may potentially result in anti-competitive behaviour, such as price manipulation, control over market supply, and purposeful creation of scarcity by hoarding products to make excessive profits. This might be accomplished by using highly structured cartels or, at the very least, some unspoken agreement.

The market is characterised by a diversified distribution of market power, resulting in a complex interaction and interdependence among the participants. For example, when there are just a few importers of specific commodities, there is potential for oligopolistic behaviour among those importers. Comprehending the economic factors that drive the activities of market intermediaries in the value chain of essential goods is crucial since these intermediaries substantially influence the final retail price. An immediate need exists to thoroughly examine the process of monitoring and analysing price fluctuations for a specific group of goods throughout the entire product life cycle. This examination should involve identifying the factors contributing to price increases, scrutinising the behaviour of the various actors involved in the product value chain, and formulating policy interventions to address the associated issues through remedial actions. Regrettably, neither the Bangladesh Bureau of Statistics (BBS) nor the Competition Commission has undertaken recent research on the persistent escalation of prices of goods.

For ordinary people, such sharp rises in the prices of all essential food items mean that their nutrition is being compromised, their food security is being threatened, and their lives are being filled with misery and suffering. Table 3.1 summarises the price rise of 34 essential food items, showing the absolute change and percentage between 1 January 2019 and 20 December 2023.

Ineffectiveness of government measures to tackle inflation: Bangladesh has been grappling with the persistent challenge of containing elevated inflation levels, which has proven to be a formidable task thus far.

In contrast to numerous other nations that have effectively mitigated inflationary pressures by implementing monetary policy instruments, Bangladesh’s policymakers have shown reluctance to pursue a similar course of action. The primary focus during periods of significant inflationary pressure should revolve around managing and regulating the money supply. By implementing a policy of increasing interest rates, the central bank effectively employs a mechanism to dissuade individuals from seeking loans, thereby mitigating the potential for excessive money circulation within the economy. This policy is classified as a contractionary measure primarily aimed at regulating and moderating individuals’ expenditure patterns.

Indeed, it is evident that high lending rates present several challenges. An elevated borrowing cost can escalate production expenses and diminish profitability, potentially dampening private investment. It is worth noting that ordinary citizens seeking to obtain loans may encounter specific difficulties. Moreover, it is plausible that the magnitude of their loan repayment instalments could be higher than that of other groups. In the given scenario, it is anticipated that the economy will attain a state of stability at a diminished level, consequently impacting the overall growth trajectory. However, it should be noted that the current situation can be considered a transient challenge. During periods of high inflation, policymakers must reassess their objectives, as economic growth may no longer be viable. The central bank can gradually decrease interest rates once inflation has been effectively managed and controlled.

In April 2020, Bangladesh Bank implemented regulatory measures by imposing specific limits on lending and deposit rates. These prescribed rates were set at nine per cent for lending and six per cent for deposits. Economists supported removing interest rate caps, allowing market forces to determine interest rates. However, a persistent challenge emerged in opposition from influential business entities, who vehemently expressed their disapproval of high lending rates. Their argument centred around the notion that such high interest rates would inevitably curtail private investment and impede economic growth. However, it is intriguing that despite implementing a nine per cent interest rate cap, there was no observable surge in private investment. This is because interest rates do not solely determine private investment, which is also influenced by many additional factors. These factors encompass, inter alia, robust infrastructure, advanced technology, skilled human resources, the absence of bureaucratic complexities, consistent policy implementation, political stability, and effective governance. In Bangladesh, the availability of cheap capital did not significantly increase private investment. On the contrary, implementing this policy resulted in a notable expansion of the monetary base within the economy.

Another significant contributor to Bangladesh’s money supply was the government’s substantial borrowing from the central bank. This phenomenon undoubtedly contributed to the escalation of inflationary pressures. The government also resorted to borrowing from commercial banks as a source of borrowing, and its actions have decreased excess liquidity. Consequently, this has raised concerns regarding potential constraints on private sector borrowing. Despite stellar economic growth, private sector credit growth targets have not been met since FY2019 (Bangladesh Bank, 2021a). In response to low private sector credit growth, the central bank had to reduce its monetary policy targets for several years. Weak private sector credit growth in an economy indicates low private sector investment.

The government’s reliance on borrowing from the central bank has become necessary due to the challenges of effectively mobilising higher tax revenues through expanding the tax net and reducing tax avoidance. The tax structure exhibits a greater dependence on indirect taxation, a regressive form of taxation that disproportionately impacts individuals with lower incomes relative to those with higher earnings.

In addition, it is worth noting that a significant amount of currency is currently in circulation, facilitating the acquisition of funds with relative ease. The accumulation of substantial financial resources by brokers, intermediaries, and rent seekers across diverse sectors of the economy, in the absence of direct engagement in productive endeavours, is detrimental to the economy. Corruption and deliberate loan default may contribute to the escalation of living expenses. It has been observed that individuals who default on their loans tend to exhibit a lack of interest in investing in industries or engaging in any productive ventures that have the potential to generate employment opportunities. A portion of the funds defaulted is illicitly transferred to other countries for money laundering. The remaining part is allocated towards personal indulgences within Bangladesh, exacerbating inflationary pressures.

The Bangladesh Bank, in its Monetary Policy Statement for the period of July-December 2023, has announced its intention to shift from a monetary-targeting framework to an interest ratetargeting framework. The central bank has implemented a significant policy change by removing the lending rate cap and transitioning towards a market-driven lending rate. An expansionary fiscal policy may compromise the efficacy of monetary policies. Despite high inflation and limited fiscal space, there is a notable absence of discernible implementation of austerity measures. During the period leading up to a national election, it is plausible that there may be a potential rise in public expenditure. Therefore, the efficacy of the monetary policy remains uncertain. Establishing effective coordination between monetary and fiscal policies is essential for an economy’s optimal functioning. To address the issue of inflationary pressure on poor and low-income households, it is suggested that the government prioritise allocating resources towards enhancing support for these vulnerable groups. The government can effectively alleviate inflation’s burden on the most financially disadvantaged by redirecting funds from non-essential expenditures towards social protection programmes. This approach aims to ensure that the impact of rising prices is mitigated for individuals and families who are already struggling to make ends meet. If a prolonged period of high inflation ensues, it is anticipated that the existing level of inequality in Bangladesh may rise.

Recommendations: The price of essential food items in Bangladesh has increased exponentially over the past few years. The general people of Bangladesh are going through a severe struggle and compromise due to the high food prices.

• The role of the Bangladesh Competition Commission needs to be strengthened, particularly in the case of the essential consumer goods market. The Commission should develop a database, regularly monitor the dominant market players’ operations, examine the market control and manipulation (if any), and take proper measures.
• The Bangladesh Competition Commission should adopt a strong stance against cartels and a zero-tolerance policy towards collusive practices.
• The Competition Act 2012 should be revised to address monopolies and include specific anti-trust clauses and concrete penalties for violators.
• The Minimum Wage Board should consider increasing the minimum wages in all industries so that workers earning minimum wages may at least afford basic food.
• Distribution of essential commodities sold through the open market system (OMS) must be managed effectively and without corruption so eligible people can access these items at low prices.
• The government should provide direct cash support to people experiencing poverty, enhance social protection for low-income families, and extend stimulus to small businesses for survival during challenging times.

Dr Fahmida Khatun, Executive Director, Centre of Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Towfiqul Islam Khan, Senior Research Fellow, CPD;

Mr Muntaseer Kamal, Research Fellow, CPD; and Mr Syed Yusuf Saadat, Research Fellow, CPD. [email protected]; [email protected].

[Research support is given by

Mr Tamim Ahmed, Senior Research Associate; Ms Marium Binte Islam,

Research Associate; Mr Mahrab Al Rahman, Programme Associate;

Ms Anika Ferdous Richi, Programme Associate; Ms Zazeeba Waziha Saleh, Programme Associate; Mr Rushabun Nazrul Yaanamu, Research Intern; and Mr M M Fardeen Kabir, Surveyor, CPD.]