Before Russia's invasion of Ukraine drew all the media attention, all major news outlets were dominated by the skyrocketing prices of essentials and stories of even middle-income families losing the ground under their feet.
The soaring prices of almost every commodity means that most people are struggling to make ends meet, many even curtailing their food budget or sending their families to village homes to cut expenditure. Even the state-run Trading Corporation of Bangladesh (TCB) last November increased the price of essentials sold through their trucks.
The market situation remains volatile to date.
The Business Standard spoke with Dr M M Akash, a professor of economics at the University of Dhaka, attempting to understand what went wrong, and what could have been done differently.
The queue behind the TCB's trucks is getting longer and longer. Reports are saying even middle-income families are struggling to cope with the price hike. What economic processes led to this situation?
After the onset of the Covid-19 pandemic, the government followed expansionary economic policy. The credit the government distributed, the extra expenditure that the government undertook, not all of it were effective.
So aggregate demand increased, but aggregate supply did not. Therefore, it resulted in demand-pull inflation.
The more recent inflation that we are witnessing has emanated from the price hike of fuel etc, as the price of energy has gone up internationally. This, in turn, translated into an increase in production and transport costs.
So, the ongoing inflation is more of a cost-push inflation by nature. We have been attacked from two fronts.
What could have been done to avoid this? What can the government still do to tackle this inflation?
The government announced a Tk30,000 crore package (credit at a lower interest rate) for large industries, a lower amount for the medium industry, but gave the lowest stimulus package to the small industry.
This distribution of the Covid-19 stimulus package was very unequal. The same was the case in disbursement.
If you look at the percentage of funds going to the percentage of clients, it is highest for the large industry, and lowest for the small industry. This means, in the case of the former, the largest amount went to the smallest number of people, while the smaller amount went to a relatively higher number of people. So, there is a clear bias towards large owners.
Now, small and medium entrepreneurs supply most products for the domestic market. 87% of employment is in the informal sector. So, 87% of production is dependent on proper funding in this sector. There the adequacy of funding may have had an effect on today's market.
It is true that the recovery of growth in Bangladesh was much quicker than in other countries. However, this growth has not been equal. Another factor for this is inadequate cash transfer.
In order to control demand-pull inflation, the government at some point, not exactly now, will have to take contractionary policy. The economy is still not growing on full scale, so the government has to continue injecting funds for now, but it has to do it very cautiously.
At the same time, to control cost-push inflation, the government needs to continue subsidising both agriculture and non-agriculture sectors such as energy. Or else, cost-push inflation will go out of control.
GDP growth is maintained at a satisfactory level because people from small and medium industries are not afraid of coronavirus. The credit of the growth goes to them. In spite of little to no support, they kept the economy's wheel turning.
If low- and middle-income people lose their savings due to inflation, will it impact the small and medium enterprises, as this will strip them of their ability to invest and reinvest?
Actually, they have lost their savings already, during the pandemic. If low- and middle-income people do not get a chance to replenish it, the whole economic system will suffer. This is why I think they should have been provided with more support with easier conditions, but the money has gone to the hands of big capitalists who are on good terms with the government.
The price of rice has remained stable in the international market, and domestic production has also not been hampered in recent times; still, people are having to buy rice at a higher price. What might be the reason? And what is the way out?
It seems to be a result of manipulation by the syndicates that control the market.
The government recently issued a stern warning against stocking rice, but it will not be able to control the market this way. The government should have purchased rice during the harvest and stocked it on its own for open market sale (OMS) at a later time to prevent a price hike.
We have been saying that the government should have one-third of the supply in its own stock to ensure food security.
A food rationing system can ease the situation. RMG owners in the past were asked to start food rationing for 4 million workers. It would be easy for them to execute. But they didn't do it.
Speaking of rationing, should the government now start such a programme for the common people outside of the RMG sector?
The problem with food rationing for the wider population is that the lack of institutional capacity opens the door for corruption, and the rationed food ends up in the market. If it is the case, then OMS is a better choice. But yes, food prices can be controlled in both ways: rationing and OMS.