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This year's inflation situation is quite different from that of other years for two reasons. Strong economic recovery from Covid-induced fallout creates demand-pull inflation while Russia-Ukraine war causes somewhat cost-push inflation due to supply chain disruptions. Both cause inflation to spiral at a level that is difficult to control.

There is no immediate sign of inflation coming down in the near future, which might lead to stagflation globally. So, it is time to take all-out measures to control inflation and provide necessary assistance to the hardest-hit people, particularly the poor, to manage the inflationary pressure.

In this context, both monetary and fiscal policies should work in a coordinated manner to handle the current episodes of inflation.

Traditionally, inflation in Bangladesh has largely depended on food prices and the supply chain has a big role to play in determining food prices, which are regulated through fiscal policy.

The government is regularly subsidising agriculture to reduce the cost of food production and keep prices affordable. In order to control the market, import duties as well as other regulatory duties are being reduced and increased, while essential commodities including food are sold at low prices in the open market to protect the poor people from the heat of inflation.

Considering all these issues, fiscal policy has a big role to play in controlling inflation in Bangladesh.

The last year's budget set a target of bringing down the inflation rate below 5.4%, but the rate reached 5.64%. Over the past several years, Bangladesh has continued to see real inflation surpassing that estimated in budget.

The reality is that even if the inflation target is announced in the budget, the issue of controlling inflation within the specific framework of fiscal policy is not discussed. The government's initiatives to reduce inflation and its effects are not properly presented in the budget speech.

In this context, the reasons for the ongoing high inflation in the economy; who are affected by it; what kind of measures are being taken by the government; and what actions should be taken in the future - all these issues need to be discussed in the budget.

In the current fiscal year, the overall inflation target has been reduced to 5.3%, but in each month of the year, the point-to-point inflation has been even higher. Point-to-point inflation stood at 6.29% in April.

The trend shows that inflation has been increasing every month since July last year, exceeding 6% in December. When the global economy started to recover from the effects of the coronavirus pandemic, prices of all the products were rising due to the simultaneous increase in demand.

In the run-up to any crisis, rising demand for commodities is not really ideal, but is expected nonetheless.

Such inflation decreases as production increases through increased investment with increasing consumer demand. Again, even if the demand decreased due to higher prices, at one stage the price would come down.

However, due to the war between Ukraine and Russia since February, prices of oil, gas, fertilizer, and food items have increased all over the world. Like in other countries, inflation has exceeded the tolerable level in Bangladesh as well. The cost-push of production has made it difficult for people with limited incomes to make ends meet.

A joint study I conducted with former BIDS director general Mustafa K Mujeri has found that fixed-income workers and day labourers are the most affected by inflation (the details of the study can be found in the book "Bangladesh's Macroeconomic Policy", Palgrave Macmillan).

And food inflation hurts the poor and lower-middle income people the most. A large part of the income of this class of people is spent on food. As a result, they suffer from at least 2-3 percentage point higher inflation rate than the rate announced by the Bangladesh Bureau of Statistics (BBS).

The BBS reported 6.29% inflation at the national level in April. In this case, the poor are actually suffering from inflation of 8% or more.

Our research also finds that day labourers can adjust a large portion of inflation within three months with increased wages, but they cannot adjust the rest in a year. In this case, low-income workers are the most affected. They can adjust only 30% of inflation in a year. As a result, they have to deal with a large part of inflation.

Since the impact of inflation is felt more by the poor, special assistance should be provided for them in the budget.

In order to make life easier for the poor day labourers and salaried individuals, arrangements can be made to provide cash allowance, low-cost food, and daily necessities under social safety programmes.

Among the poorest families, women-headed households have the most disadvantages. According to the 2011 census, 15% families in the country are led by women. Therefore, the government may consider providing more benefits to these households.

Poor women and low-income people should get priority for old-age allowances, VGF, VGD, etc.

The old age and widow allowance is currently fixed at Tk500 per month, which is very inadequate in view of the inflation. Considering the limited resources of the government, this allowance should be increased step by step.

For example, the allowance can be fixed at Tk1,000 per month for women-headed households and Tk800 for the poorest families, who have no means of earning quality income. If this can be done, poor families will be able to cope with the effects of inflation to some extent.

I believe if the problems in determining old age and widow allowances can be identified and resolved, an increase in per capita allocation will not have much effect on the budget expenditure.

The government needs to announce specific measures in the budget to ensure fair prices of paddy and rice. We need to make sure our market is in line with the international market, especially the Indian market. If this is not done, farmers will suffer as they will have to sell paddy at low prices, while consumers will suffer as the will have to buy rice at higher prices. In the middle, only traders will benefit through increased profits.

Although our neighbouring market is able to reduce rice prices through subsidies, the same is not happening in our country. The only reason for this may be that farmers are not getting the benefits of subsidies properly. As a result, more transparency and accountability need to be ensured in subsidy management.

There is need for an integrated system for monitoring the rice market. First of all, the actual demand has to be determined by collecting data on the actual population of the country and using the data of per capita rice consumption.

An effective mechanism has to be adopted for timely decision-making on market control, imposition of tariffs by the government, procurement of rice from the market under government management, import of quality rice, etc. This is also true for other essential food items.

In order to control inflation, the amount of money supply needs to be controlled at a reasonable rate in the coming days. In addition to maintaining foreign exchange reserves, steps should be taken to keep the exchange rate stable.

The Bangladesh Bank has already raised the repo rate to control the money supply. This rate may need to be increased further in the future. However, since the interest rate is fixed at 6-9%, such an initiative will not have much effect on the demand for loans in the private sector. In this case, the lending rate cap needs to be revised upward.

But, monetary policy alone cannot control inflation. In this case, it is necessary to ensure good coordination of monetary and fiscal policy.

Apart from that, it is to be noted that controlling money supply might reduce investment and production in the private sector to some extent. This can have a detrimental effect on employment and income too.

In this situation, temporary employment opportunities need to be created through infrastructure development in rural areas, and the scope of employment programmes for the extremely poor needs to be widened.

I think it is necessary to increase the salary allowance in both the public and private sectors to cope with the rising pressure of inflation.

Above all, in the budget, all kinds of social security measures of the government can be delineated within the framework of containing inflation and poverty alleviation. On the other hand, the central bank needs to do an assessment showing the extent to which inflation is being reduced by controlling the money supply and consequently to what extent the growth of the economy is sacrificed.

Monzur Hossain, Ph.D, Research Director at Bangladesh Institute of Development Studies. 

This article was originally published on The Business Standard.
Views in this article are author’s own and do not necessarily reflect CGS policy.