Home ›› 21 Mar 2022 ›› Front
Prices of a number of essential commodities have skyrocketed in Bangladesh, but this increase has no connection with the global market. When compared to countries that have significantly more per capita income, prices of rice, eggs, milk and beef in local markets are much higher.
Making the observation on Sunday at a discussion on Bangladesh’s economy under the changing global context, the Centre for Policy Dialogue (CPD) added that the government’s inflation data does not reflect reality, and it should fight inflation with utmost importance.
Speakers pointed out that the inflationary pressure will hamper a sustainable and inclusive pandemic recovery, since the real purchasing power of many people will decline in the coming days, widening inequality.
On this issue, CPD Distinguished Fellow Prof Mustafizur Rahman said, “The growing income inequality has gone up further amid the Covid-19 pandemic. If purchasing power does not increase at a proportional rate, then this inequality will worsen.”
Towfiqul Islam Khan, senior research fellow of CPD, said, “The government’s main task at the moment should be to alleviate the suffering of the poor by bringing down inflation.”
At the discussion, held at the CPD office in the capital’s Dhanmondi area, the speakers presented their views on key issues such as inflation, external sector, power and energy prices, banking industry and budget management.
Egg, milk cheaper in USA, Spain
The CPD compared prices of essential commodities in Bangladesh with global prices and also the prices in different countries. It found that though the country’s per capita income is far below the USA and Spain, Bangladeshi consumers are spending more on essentials.
According to the think tank data, the price of liquid milk in Dhaka is around Tk 80 per litre in March, but Tk 63 per litre in Spain, and Tk 62 in the Czech Republic. The price of eggs in Dhaka is higher than that in America. The price of a dozen eggs is more than Tk110 in Dhaka, but it is Tk 103 in America and Tk 86 in Malaysia.
The price of beef in Dhaka exceeded Tk 650 per kg, but in the international market, it is within Tk 500. Apart from this, the prices of rice, oil, onion, sugar and flour are also much higher in the domestic market compared to the international market rates, the CPD said.
“Undoubtedly, the Ukraine-Russia war situation is the reason behind commodity price hikes. However, we have tried to show that the same product is being sold in other countries at lower prices. There must be a problem somewhere,” said Towfiqul Islam Khan.
CPD recommended a number of steps to tackle the inflation, such as an effective management of the commodity distribution process free of any corruption, so that people eligible to have access to essentials at low prices can do so.
The need for strong market intelligence is critical. Unscrupulous market players have always been active to take advantage of difficult periods by stockpiling and creating artificial crises in the market. CPD’s Executive director Fahmida Khatun said, “The consumption basket used for calculating overall general inflation was created in 2005 and does not reflect the current consumption pattern of consumers or the actual prices in the market in 2022.”
A CPD keynote said in the country, there is a tendency to blame external factors for high prices even if certain commodities do not have any connections with the global demand.
“As the country imports a few important commodities, higher prices of those will be passed onto the consumers. Unfortunately, such pass-through is reflected in the case of price hike,” it reads.
Trade deficit may reach $30 billion
As commodity and energy prices rise amid the Russia-Ukraine war, Bangladesh has to shoulder additional import costs, resulting in increased trade deficit as well as pressure on foreign exchange reserves.
The balance of payments (BoP) deficit was over $2 billion in January, 2022. At the same period of last financial year, it was $6 billion positive. In other words, now it has a deficit of $8 billion dollars. Besides, the trade deficit increased by $18 billion in January, 2022, Prof Mustafizur said.
According to the CPD, at the rate the exports and imports are growing, if exports increase to $50 billion and imports to $85 billion, the trade deficit could reach $30 billion – $35 billion.
Prof Mustafizur added, “If the trade deficit widens further, it will put a lot of pressure on our economy. Remittances cannot be used to cover this deficit, because it is now also in decline.
“Since the cost of imports is high, we have to try to maintain the current exchange rate of taka against USD. It is necessary to strengthen the initiative for bringing remittance through formal channels and prevent capital flight through exports and imports.”
He added that Bangladesh must focus on boosting exports.
Pressure on banking sector to increase
As inflation is currently on the rise, deposit rates should also increase, the CPD recommended, adding that if the current lending rate cap of 9 per cent cap is not increased, it could lead to a shortfall in banks’ profits.
However, if the loan interest rate is increased, then the cost for new investments will also go up.
Moreover, the amount of non-performing loans (NPL) in the banking sector has been steadily increasing. Even after providing the moratorium facility, the volume of defaulted loans have not stopped rising in the last two years.
On the issue, Bangladesh Institute of Bank Management’s (BIBM) Director Shah Md Ahsan Habib said, “We halted calculations of NPLs amid the pandemic. Once calculation resumes, the NPLs will naturally rise further in the days ahead.”
Soaring energy prices to shrink fiscal space
The current energy situation is quite unusual as a result of the Ukraine-Russia war. As the government has to readjust to the shift in energy prices, it also has to ensure that inflation does not increase due to the price hikes. The CPD in its keynote stated that the prices of Brent crude oils have increased by 83.9% over the last 12 months. The Bangladesh government will have to prepare to face such price hikes strategically.
“Bangladesh should make advance purchases to reduce the pressure of high prices,” reads the keynote, warning that high payment for expensive fuel will be a stress on the country, given the shrinking fiscal space.
Power Development Board’s (PDB) proposal to increase electricity prices by 117 per cent at bulk level is unreasonable, said M Tamim, a professor of Petroleum and Mineral Resources Engineering at Bangladesh University of Engineering and Technology.
The price should not be increased by more than 20 per cent, considering the current production cost of power generation companies, Tamim added. He however agreed on raising gas prices at a reasonable level.
‘Budget management possible without hiking oil, gas prices’
Bangladesh can give its people relief from another fuel cost hike by paying a Tk 36,000 crore subsidy on oil and gas soaring on the Russia-Ukraine war, a former World Bank official said Sunday.
Not raising fuel and gas prices that the budget will have to provide Tk 14,400 crore subsidy on diesel, Tk 3,915 crore on electricity, Tk 17,200 crore on LNG and Tk 430 crore on food for family cards, said Zahid Hussain, former lead economist of World Bank, Dhaka.
Apart from this, if all types of VAT on edible oil are withdrawn, the amount of revenue that the government will lose will also have to be added to the grand total of Tk 35,945 crore, he said at “Which way is Bangladesh’s economy in the changed global context?” programme organised by CPD.
As a mechanism to cope with this pressure in the budget, he said, the government has doubled the budget deficit for the current financial year to almost Tk 2 lakh crore. Despite the increase in the deficit, the government could not increase expenditure in the first quarter of the current financial year. As a result, there is a surplus of Tk 1,100 crore.
Besides, the government is withdrawing money from savings certificates, there is no shortage of foreign aid and the government has a deposit of Tk 22,000 crore in the central bank. That means the government does not have liquidity pressure.
Zahid said the government’s budget deficit widened in the last six months of the last fiscal year. He estimated that it has a maximum fiscal space of Tk 94,900 crore and a minimum of Tk 28,500 crore.
“These calculations say that price increase is not acceptable due to financial pressure. If the budget goes beyond the target, there will be financial pressure on the government. It will not be relevant. If the government wants to increase, it may increase with other arguments,”said Zahid.
Instead, we have to wait and see if the prices fall on the international market. If not, it will be difficult to cope with the pressure. In this case, the government can adjust the price in the budget of the next FY, but it must also be through transparency and logical formula.
However, the entire price cannot be imposed on the people. The government has to move towards a clever subsidy, meaning only those who need subsidies should be covered.
In addition, the government will have to adjust the price of fuel oil automatically. In other words, if it increases on the international market, it will also increase on the domestic market. If it decreases, it will also fall on the domestic market.
“If we continue to increase prices through bureaucratic decisions without reforming energy pricing policy, then the political issue of it cannot be ignored,” he said.
Regarding ways to reduce the government’s revenue deficit if fuel and oil prices do not rise, Towfiqul Islam Khan, senior research fellow of CPD said the government should take big steps to stop tax evasion. It must stop the wastage of money in budget implementation. Unnecessary allocations must be stopped and good governance must be ensured.
