The common people face a triple whammy. With a slump in business, opportunities for employment and income have dropped. With a decrease in interest on savings, people are having to dip into their funds. And inflation is forcing people to compromise on nutrition -- fish, meat and eggs are no longer on the daily menu of the common people.
According to a study done by the government-funded research institute BIDS, though the income of all -- rich and poor -- has increased over the past four years, the lowest increase in income is among the lower middle class. But expenditure has shot up for people of all classes and income disparity has widened. BIDS recently published the findings of this study, based on a survey carried out on 2,046 households in various areas of Dhaka. The middle classes, dependent on a fixed income, are under tremendous pressure due to inflation. The price of everything has shot up, but their income has not increased in that proportion. In the capital city Dhaka alone, 11.34 per cent of the people are the new poor.
According to the narrative put forward by government policymakers, this inflation is imported. They place the blame on Covid and the Russia-Ukraine war. The Bangladesh Bank governor echoes them. He says this inflation had not been sparked off locally. This former finance secretary of the government perhaps is speaking from his position, not as the governor of the central bank. Two examples are enough to prove the emptiness of their words. The indicator of foreign dependence of any country's economy is the trade openness ratio. This is easy to calculate. If you divide the sum of the import and export costs by the Gross Domestic Product, you get the trade openness ratio. In Bangladesh, this ratio in 2021 was 27.72 per cent. Comparatively, in the same time period, the global average (160 countries) of this ratio was 89.24 per cent. In neighbouring India, Myanmar, Nepal and Sri Lanka, the trade openness ratio was 45, 53, 44 and 41 per cent respectively. In other words, Bangladesh's economy is the least open. Therefore, the impact of foreign trade should be relatively less in Bangladesh.
In investigating the reasons behind the inflation, a comparison can be drawn up between the prices of certain essential items in Dhaka and neighbouring Kolkata: soybean oil per litre Tk 200 (Rs 115), sugar per kg Tk 135 (Rs 50), eggs per dozen Tk 140 (Rs 100), potatoes per kg Tk 40 (Rs 20), onions per kg Tk 80 (Rs 20), green papaya Tk 80 (Rs20), string beans Tk 80 (Rs 25). Prices of the items in Dhaka are all higher. This may be due to shortage in production, but this does not seem so from the ample supply of the products in the market.
The prices of two sorts of commodities have been given above -- imported and local. In the case of imported items, even if the taka-rupee exchange rate and the import duty is taken into consideration, the prices of these commodities are still higher in Dhaka. The reason behind this is that only four or five business houses import soybean oil and sugar. They have a syndicate through which they set high prices, and the commerce ministry backs them. While these items imported from various countries and sources are marketed under different brand names, the prices are all the same. This is clear indication of a syndicate.
Now we come to the price of items produced locally. I have a longstanding habit of visiting the kuccha bazaars (vegetable, fruit, fish, etc markets) wherever I go. Just the other day when I went to visit Shailan Prabin Nibash (the old people's home), I bought vegetables for the Nibash and my own home too. Green papaya was Tk 30 per kg, string beans Tk 20 per kg, squash Tk 10 each, bottle gourd Tk 30 each. The price of each and every vegetable was one third or half that of Dhaka. Transportation costs cannot account for this difference. The main reason for the high price of vegetables is 'toll' collected by the cadre of the ruling party, the law enforcement agencies and the transport workers along the way, along with the high price of fuel for transportation.
Failure in macroeconomic management
No matter which government has been in power, Bangladesh has previously always displayed success in macroeconomic management. This continuity faltered during the tenure of the former finance minister Abul Maal Abdul Muhith. There was mismanagement in the financial sector, an increase in default loans, money laundering, deficit in revenue collection and an increase in high-interest foreign loans. This increased further in the tenure of the incumbent 'absentee' finance minister.
In consequence, in Moody's rating, Bangladesh was downgraded from Ba3 to B1. As a result, 1. The cost of future loans will increase; 2. Entry into the international share market will be constricted; 3. Confidence of investors will drop; 4. Pressure will mount on foreign currency exchange rates; and 5. There will be an adverse impact on foreign trade.
Inflation takes place primarily for three reasons. These are, demand pull, cost pull, and price hike fixed by the government. All three of these factors are behind the inflation in Bangladesh -- as revenue income is low, the government borrows hugely from the central bank (demand pull), the taka value has fallen against the dollar (cost pull) and the price of transport fuel has been hiked (price hike fixed by the government).
It is because of the economic misdemeanours of the past few years that we have now fallen into this all-encompassing crisis. We must take immediate measures to recover from this. We have very little time
How to rein in inflation
1. Discipline must be restored in the macro economy. In order to address the fall in credit rating, Bangladesh must pay attention to implementing structural reforms to ensure good governance, systematic financial management and transparency -- determining currency rates and interest rates must gradually be left to the market.
2. The policymakers must shrug off the misconception that inflation is imported, and admit that the major reason of inflation is local. Revenue income must be increased and government borrowing decreased. In the case of increasing revenue, dependence must be placed in income tax than taxes that increase inflation like VAT. Caution must be practiced in the case of withdrawing agricultural subsidies. The lure of mega projects and high cost foreign loans must be resisted.
3. The syndicate of imported goods must be smashed. Rather than being reactive, the commerce ministry must be pro-active. They must take action before the crisis enters the commodity market.
4. Toll collection or extortion must be halted along the highways, riverway and at the marketplaces. Exemplary punishment must be given to businessmen involved in money laundering as well as tax and duty evasion, and also to the government officials and employees in collusion with them.
It is because of the economic misdemeanours of the past few years that we have now fallen into this all-encompassing crisis. We must take immediate measures to recover from this. We have very little time.
* Muhammad Fouzul Kabir Khan is an economist and former secretary
* This column appeared in the print an online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir