Consequences and Causes of Inflation in Bangladesh: A Descriptive Analysis

Bikash Chandra Ghosh1

Md. Elias Hossain2

Abstract
In Asia, Bangladesh is one of the hardest hit by the current wave of inflation and oil price hike.
The economy has been observing high inflation growth on point-to-point basis since July 2007.
This article attempts to investigate causes and consequences of inflation in the economy of
Bangladesh. This paper also reviews the past record of the inflation and makes a forecast on the
possible movement of inflation. Researchers have found that recent global food price, oil price
due to unrest in middle east as well as high bargaining power of political middle man in our
Bangladesh are mainly responsible for food inflation. At the end of the paper the researchers
forward some strategic points (like strengthen of trading corporation, strict control of
Bangladesh bank during import, breaking down of syndicate etc) that might be useful to reduce
inflation.

Keywords: Inflation, Trend Analysis, Bangladesh

1. Introduction

Rising rate of inflation has become a serious concern in Bangladesh in recent years. The prices
of essential commodities have gone up, and so is the cost of living. The country’s vast
multitude of poor and unemployed people is having a difficult time surviving. According to the
estimates by the BBS, the inflation rate, on a point-to-point basis, in June stood at a 10 year high
of 9.20 percent. The corresponding food inflation rate was 9.82 percent, and BBS reported that
inflation on a point-to-point basis in urban areas was 10.71 percent (Bangladesh Economic
Update, 2011). The inflation rate in Bangladesh was last reported at 11.3 percent in August 2011.
From the beginning of the year 2011, inflation has continued rising and has crossed the double-
digit mark. Inflation continues its upward trend even after crossing the mark. The rate of
inflation is higher in the food sector than in the non-food sector. Despite that, the non-food sector
is not lagging behind in the rate of increase. Side by side with the prices of food items, house
rent, transport cost, and expenditure on clothing and shoes have also increased (Matin, 2011).
As a result, the people are passing their days amid hardship, spending additional money on a
static income.

1
Researcher, Department of Economics, University of Rajshahi, Rajshahi-6205, Email: [email protected]
2
Associate Professor, Department of Economics, University of Rajshahi, Rajshahi-6205, Email: [email protected]
The objective of this paper is to generate analysis and discussion on some key issues of the
Bangladesh inflation, identify major challenges and suggest policy recommendations. In doing
so, selected macroeconomic indicators such as GDP growth, external trade, money, food
situation, foreign aid, exchange rate, and remittance and foreign exchange reserve have been
critically reviewed. Objectives of the study are listed below:

I. Summarize the inflation scenario in Bangladesh.

II. Understand the causes of inflation in the Bangladesh economy.
III. Understand the consequences of inflation in the Bangladesh economy.
IV. To find applicable strategies to cope with inflation in Bangladesh.

To conduct this study the researchers have not followed any mathematical model to check
relation between inflation and long run economic indicators. The rationale behind this study is to
focus on recent causes of inflation in light of the global crises and try to find out the
consequences and applicable strategies to overcome it. Previous findings in developing countries
tried to find out the relationship between inflation and other macroeconomic factors with the
basis of complex mathematical models. Our paper tries to focus on some basic causes and
consequences related to inflation that might help government find out possible strategies
encounter that. We focus on role of importing by government, recent food production scenario,
oil prices and crisis in Middle East due to Arab spring as well as role of syndication. Even
though it is simple rather than emphasizing on complex model, we hope it will draw a holistic
picture of inflation in Bangladesh.

Section 2 of this paper summarized the previous studies and it provides a hypothesis. Section 3
provides an idea about methodology of the study, section 4.1 provides a brief idea about inflation
scenario in Bangladesh, 4.2 explores the causes of inflation and 4.3 explain the consequences
on the economy, lastly section 5 explains possible recommendation with strategies as well as
conclusion.

2. Literature Review

The relationship between inflation and growth remains a controversial one in both theory and
empirical findings. Originating in the Latin American context in the 1950s, the issue has
generated an enduring debate between structuralists and monetarists. The structuralists believe
that inflation is essential for economic growth, whereas the monetarists see inflation as
detrimental to economic progress. There are two aspects to this debate: (a) the nature of the
relationship if one exists and (b) the direction of causality. Friedman (1973) succinctly
summarized the inconclusive nature of the relationship between inflation and economic growth
as follows:

“Historically, all possible combinations have occurred: inflation with and without development,
no inflation with and without development”.

Tun Wai (1959) failed to establish any meaningful relationship between inflation and economic
growth. Paul, Kearney and Chowdhury (1997) involving 70 countries (of which 48 are
developing economies) for the period 1960-1989 found no causal relationship between inflation
and economic growth in 40 percent of the countries; they reported bidirectional causality in
about 20 percent of countries and a unidirectional (either inflation to growth or vice versa)
relationship in the rest. More interestingly, the relationship was found to be positive in some
cases, but negative in others. Recent cross-country studies of Fischer (1993), Barro (1996) and
Bruno and Easterly (1998) show that inflation affecting economic growth negatively include.
Fischer (1993) and Barro (1996) found a very small negative impact of inflation on growth. Yet
Fischer (1993) concluded “however weak the evidence, one strong conclusion can be drawn:
inflation is not good for longer-term growth”. Barro (1996) also preferred price stability because
he believed it to be good for economic growth.

Although the relationships among inflation, output growth, inflation uncertainty and
output uncertainty have been investigated extensively in the empirical literature for developed
countries (e.g., Grier and Perry 1998; Davis and Kanago, 2000; Fountas et al. 2006; Fountas
and Karanasos 2007), a lesser work is done for economies in transition. Few exceptions are
Gillman and Nakov (2004), Dibooglu and Kutan (2005), Gillman and Harris (2008), Mladenovic
(2007), Thornton (2007), Erkam and Cavusoglu (2008), and Susjan and Redek (2008). Gillman
and Nakov (2004) examined the relationship between inflation and output growth in Hungary
and Poland, and found that inflation affects growth negatively in both countries. Gillman and
Harris (2008) also found a robust negative effect of inflation on growth in a panel of 13
transition countries. Dibooglu and Kutan (2005) studied the sources of inflation and output
movements in Poland and Hungary, and found that monetary shocks affect output in Hungary,
while supply shocks dominate output movements in Poland.

Mladenovic (2007) examined the relationship between inflation and inflation uncertainty in
Serbia, and concluded that high inflation invokes high uncertainty, while high uncertainty
negatively affects average level of inflation in the long run. Thornton (2007) studied the inflation
and inflation uncertainty relationship for 12 emerging economies including Hungary, and found
that there is positive bidirectional causality between inflation and inflation uncertainty in the case
of Hungary. Erkam and Cavusoglu (2008) investigated the linkage between inflation and
inflation uncertainty in seven former Soviet Union countries. They found that inflation rate
increases uncertainty in three countries (Azerbaijan, Russia, and Ukraine) while uncertainty
increases average inflation in Kyrgyzstan and Russia, but reduces it in Azerbaijan. Finally,
Susjan and Redek (2008) provide strong evidence on negative effect of transition specific
uncertainties on economic growth for a panel of 22 transition countries. We will focus on
macroeconomic factors (transportation cost, oil price, food production, political stability etc) that
might cause inflation.

Although many cross-sectional studies have been carried out to establish the exact relationship
between growth and inflation, very few studies have been conducted for Bangladesh. Malik and
Chowdhury (2001) examined the inflation-growth relationship for four South Asian countries
(Bangladesh, India, Pakistan and Sri Lanka) for the period 1974–97. They found a positive
relation between inflation and growth rates with no structural break for the four countries. On the
other hand, Burdekin et al. (2000), and Judson and Orphanides (1999) have estimated a non-
linear relationship and discovered structural breaks for many developing countries including
Bangladesh. These varied findings, therefore, deserve further investigation for policy
implications.

3. Methodology and Data

The research used secondary data to analyze inflation pattern of Bangladesh. Secondary data
have been collected mainly from journals, books and previous studies. Suitable data have been
extracted, organized, analyzed, illustrated and interpreted in the article with proper reasoning,
analytical judgment, clarification and explanation. We have considered 2000-2011 inflation data
in the context of Bangladesh. The reasons to choose data for this time frame is to
analyze inflation in recent context especially in the light of global scenario after 9/11
attack. After 2001, world politics and food production scenario are moving in new dimension.
Recent Arab spring is also contributing reshaping the world scenario and politics. These issues of
the world economy are taken into consideration in the analysis of inflation in Bangladesh. This
study has mainly followed qualitative analytical based on reasoning and arguments. Data in this
article have been analyzed through tabular and graphical methods.

4.1 Inflation Scenario in Bangladesh

Experience of high inflation is not new in Bangladesh. The country experienced a significant
rise in the inflation rate in the recent past. The table 1 and accompanying graph (figure 1) in
summarize the inflation scenario of Bangladesh for the last decade.

Table 1: General, Food & Non-food Inflation Rate in Bangladesh during FY 2001 to FY2011

Year General (%) Food (%) Non-food (%)

Point-to-point Monthly Moving Monthly Moving Monthly Moving
Average Average Average
2000 - 1.94 1.39 3.04
2001 - 2.79 1.63 4.61
2002 3.58 2.79 1.63 4.61
2003 5.03 4.38 3.46 5.66
2004 5.64 5.83 6.92 4.37
2005 7.35 6.48 7.91 4.33
2006 7.54 7.16 7.76 6.40
2007 9.20 7.20 8.11 5.90
2008 10.16 10.06 11.43 7.35
2009 4.60 5.51 7.9 4.2
2010 7.61 7.52 9.9 3.9
2011 11.91 9.76 13.90 4.32
Source: Bangladesh Bureau of Statistics

In Bangladesh, the average inflation in FY 2000 was 1.94% while it is found 9.76% in FY 2011.
But during these years changes in inflation did not follow any monotonic pattern. Bangladesh
faces a tougher challenge in bringing down this burgeoning inflation. The latest Bangladesh
Bureau of Statistics (BBS) data shows that inflation had increased to 11.97 % (on point-to-point
or monthly count) in September, 2012, the highest in 10 years. Food inflation, which was 12.7
per cent in August, had increased to 13.90 % in September while food inflation in urban areas
had increased to 14.69 % in the same month from 12.94 % in August.
 Figure 1: Trend of Inflation (general, food, non-food) in
Bangladesh
35
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

General Food Non-Food

The rate of inflation is higher in the food sector than in the non-food sector. Despite that, the
non-food sector is not lagging behind in the rate of increase. From the above figure, it is visible
that within the span of one year, inflation in the sector increased by seven times.
Side by side with the prices of food items, house rent, transport cost, and expenditure on
clothing and shoes have also increased. As a result, the people are passing their days amid
hardship. Additional money is going out of their pockets on a static income. The government in
the budget for the current financial year had a plan to keep inflation at 7.5 per cent but it has
cross the limit. Usually a rise in the food price always increases the prices of other goods. When
expenditure increases on purchasing food items, the prices of other goods are also raised in a
race with that. When the price of food increases, it also pushes up the house rent. Side by side
with that, the prices of shoes and other goods will also be increased. As a result, the prices of
non-food items will rise at an abnormal rate.

4.2 Causes of Inflation in Recent Context in Bangladesh

Both internal and external factors have contributed to the current inflation in Bangladesh. As
Bangladesh is not self-sufficient in terms of production of all food items, the country depends on
external markets for cereals (particularly wheat and rice), pulse, edible oil, milk-products and
other essentials. In 2005-06, the country produced 31.45 million metric ton (MMT) food grain
whereas it imported 2.56 MMT cereals (Matin, 2011). Apart from these food items, Bangladesh
sources petroleum products and metals from international markets (Shahiduzzaman, 2006).
Though Bangladesh has a sizeable amount of natural gas, the country produces only 10 percent
of its oil consumption. It depends on international markets for oil and other petroleum products
(Matin, 2011).

Internally, despite the fact that food production in Bangladesh has increased substantially over
the years, it hardly matches the demand, which remains steady largely owing to the country’s
growing population. In recent years, rice production in the country remains stagnant except for
the Boro high yielding variety rice (Matin, 2011). The production of wheat in Bangladesh has
declined drastically over the years. Further, except for the Boro, the areas of rice cultivation
have declined in recent years. The production of pulses and oilseeds has also declined
significantly; however, vegetable production has shown an increasing trend. Crop failures due to
erratic weather often create food shortages in Bangladesh. As the net domestic production of
food is not sufficient to meet demand, the demand-supply gap of cereals, edible oil and other
food items are imported from external markets (Bangladesh Economic Update, 2011).

In Bangladesh, market mechanism is highly distorted. Matin (2011) argued that the gap between
retail and wholesale market prices is substantial and it is widely believed that a group of traders
control the markets through syndication (oligopoly-type market). In order to break the
monopoly of the commodity traders and unscrupulous businessmen who are engaged in hoarding
activities, the current government has taken some stern actions. However, some of its measures
have proven to be countervailing and indeed instigated the price hike. The drive against the so-
called unscrupulous business people has greatly handicapped the commodity imports.
Consequently, there has been a supply side constraint in the food grain market. Moreover, a
sharp depreciation of the BDT vis-à-vis the USD in recent years and the excess supply of money
in the market are also believed to heighten the inflationary pressures (Matin, 2011). A few
factors have instigated the global commodity boom.

Firstly, the demand for primary commodities has increased tremendously from major emerging
economies, notably from China (Unnayan Onneshan, 2011). Historically, no country has
played bigger role than China in increasing the prices of primary commodities.

Secondly, petrol tanks are competing with human stomachs, as more and more staple foods and
oil seeds are being channeled toward bio-fuel and bio-diesel production. The development of
bio-fuel is not only increasing the prices of the agriculture inputs that are used for ethanol and
bio-diesel, it also keeping pressures on other agriculture produces due to the substitution
effects. Consequently, such developments have been costing higher food bill to net commodity
importing countries (Unnayan Onneshan, 2011).

Thirdly, crop failures due to bad weather in some parts of the world have also caused the increase
in cereals prices. Scientists believe that global warming is also playing a part in changing the
global weather patterns and the agricultural sector is closely linked to climate change.

Fourthly, oil price hike in recent years is widely blamed for supply disruptions in the Middle
East and the Gulf of Mexico, geo-politics, rise in demand (notably from emerging markets), and
slides in the USD, inter alia.

Fifthly, increasing transportation cost (due to oil price hike) is also playing a part in raising the
prices of essential goods. The ban on exports of some essentials such as rice, wheat, lentil and
onion by neighboring India has forced Bangladesh to procure these products from other parts of
the world. The ocean freight rates for grains has increased more than hundred percent since
2005-06 (Unnayan Onneshan, 2011). The higher energy cost also increased the domestic
distribution cost of commodities.

Apart from all these reasons, labor cost, information asymmetry, political unrest, dislocation in
market structure due to anti corruption drives are responsible from recent price hike. High
interest rate is also responsible for price hike as production is increasing. Bangladesh
government is borrowing from commercial banks excessively. Bangladesh’s government
borrowed about $700 million from commercial banks in July and August, the first two months of
the new fiscal year, the central bank said on October 1 st. It will put private sector in open
competition with government. It will raise the interest rate as well as price level. Moreover
government is heavily borrowing from central and central bank is forced to print money, which
will also create inflation. Specially, Excess subsidy in quick rental power plant (energy sector)
forces government toward budget deficit and mismanagement in overall economic coordination.

4.3 Macro Economic Effect in Bangladesh

The inflationary situation in Bangladesh is on the rising trend, especially since August 2009,
primarily owing to the soaring increase in food prices. The food price hike has accelerated the
general inflation rate in the country. If the food price level rises at an existing rate of 1.31 percent
per month and if adequate anti inflationary measures are not taken, the overall general inflation
might touch a “double digit figure’’. The current rate of rise in inflationary pressure suggests that
the rate of general inflation might reach 10.71 percent by the end of this fiscal year and the food
inflation may reach to 12.84 percent in June 2011 (Unnayan Onneshan, 2011).

Should there be double digit inflation, this would pose a severe threat to the macro-economic
stability in the country. Bangladesh has already experienced a double-digit food inflation rate on
point-to-point basis since July 2007. The soaring prices of essential commodities, especially,
food prices could hurt the poor and worsen equity. Persistent high inflation may unleash forces
that jeopardize macroeconomic stability and economic growth. Last year, the International
Monetary Fund (IMF) also warned Bangladesh that excess liquidity and resurgent international
commodity and food prices might push inflation to double-digit levels by year-end (The Daily
Star, 30 October. 2009).

5. Consequences of Inflation in Bangladesh

Food inflation has a profound nexus with poverty and inequality. Food inflation hits the poor
hardest since their purchasing power decreases due to the erosion in real income. From the
economics theory, when the real wage decreases demand for labor increases. Therefore, the
employment should rise since there is a tradeoff between inflation and unemployment. The
result depends on whether the employment effect of inflation outweighs the real wage effect on
poverty. But in Bangladesh empirical data indicates that the real wage effect on poverty
outweighs the employment effect of inflation (Matin, 2011).

There exists a positive relationship between food inflation and poverty. As the food inflation
increases, the additional number of people goes under the poverty line. The rising trend of food
prices and unemployment make the problem even more complex. As the food prices are in the
rising trend it may pave the way for more people to go under the poverty line while they were
above the poverty line before the food price rises. In Bangladesh 40 percent of 160 million
people live on less than one dollar a day. A rapid population growth, rising food prices and
unemployment as well as the threat of climate change turns Bangladesh into a more food
insecure state (Matin, 2011).
Excess inflation has its negative impact on savings and investment. Impact on savings has its
direct reflection in the area of investment. Investment, both domestic and foreign, is essential for
Bangladesh and it is important for growth and economic development.

An unfavorable and unpredictable movement of inflation often creates lack of confidence among
the investors. Many potential investments face bleak prospect and avoid the game of facing risk
and uncertainty. This has been hindering potential private investments on different sectors in
Bangladesh.

Inflation has its implications for the banking sector as well. Both for the banks and their
customers inflation causes a reshuffle in the flow of activities. Rates of interest offered by the
banks seem less attractive to the depositors. Bank lending has also a great role in the economy.
In recent years there is an increasing trend of providing consumer credit by the banks. It will add
to the demand side. But if its contribution to the supply side remains weak there will be a lack
of balance and the banking industry will face challenge. Other saving lending channels also face
the same consequences from supply side to handle their investment demand. The challenge of
central bank is to balance between growth and inflation. High inflation always put central bank
under pressure to take contractionary monetary policy that might reduce growth.

6. Applicable Strategies to Cope with Inflation

The empirical results obtained in this paper provide important policy implications for
Bangladesh. Given the institutional arrangement, it appears that the monetary authority in
Bangladesh is not independent of the fiscal authority and that it merely implements the decisions
regarding credit expansion and monetization of budget deficit taken by the executive branch of
the government. An implication of this is that the ultimate responsibility for the expansionary
monetary policy in Bangladesh lies with the government (Bangladesh Economic Update, 2011).

It appears that the monetary system in Bangladesh has a built in bias towards expansion of
money supply. It is commonly acknowledged that inflation is hard to prevent in a country in
which the government has direct and indirect authority to print money to finance a fiscal deficit.
Inflation is harder to prevent if the government creates money not only to finance fiscal deficit
but also to provide subsidized credit to both the private and public sectors. Here we explain some
strategic point that might be useful to reduce inflation.
 I. The policy makers have to keep a sharp eye on cost behavior in the relevant
periods.
II. Cutting down indirect tax on commodities may help to reduce inflation
pressures temporarily.
III. Bangladesh Bank can take over some responsibilities such as monitoring
modalities of L/C (Letter of Credit) operation so that market forces determine
the exchange rate in a process that remains free from speculative transactions.
IV. Government can effectively use its legal power to break up the market
syndication and thus improve competitiveness of the distribution network.
V. Bangladesh Bank can reduce the duration of loan given against L/C opened
for importing essential consumer goods.
VI. Government should pass “Consumer Rights Protection” than consumers will
be able to seek legal protection against charging of irrational price of
essentials by the sellers.
VII. Commodity price also rice by creating artificial crisis, hoarding, obstructing
goods transportation, taking money by cheating in the name of providing
services. These illegal activities should be stopped as early as possible.
Government should introduce commodity exchange market that can forecast
future demand.
VIII. Increases supply of essential commodities (rice, wheat, and lentil) with no or
least tariff and efficient intermediation.
IX. Political parties should come out of the practice of mudslinging and blame
shifting.
X. Information system should be improved in a way that reduced the information
gap among different stakeholders of the country.
XI. To strengthen local currency government has to increase remittance inflow,
export production.
XII. To strengthen the Trading Corporation of Bangladesh to control import prices
of essential commodities.
6. Conclusion

The current inflation in Bangladesh could not be explained solely on the economic numbers and
graphs as some non-economic factors (drive against corruption, market distortions, low business
confidence, political uncertainties, etc.) have also contributed to the price hike. So, the concerned
authorities should take into account all these factors when they formulate policies to check
inflation. To maintain price stability, the government must work on both economic and non-
economic factors that have instigated the ongoing inflation.

Going forward, we cannot say anything about where food inflation will stand. Supply
shocks may be mitigated abroad; there may be good yields locally and abroad or bad weather
may take its toll in areas not yet affected – as with food inflation in general, predictions are close
to impossible. The researchers focus on the idea that, food security should be a major concern for
the Bangladesh Government, and some efforts by the Central Bank and the Government in
taking policy actions in agriculture, aimed at attaining food sufficiency.

The same, however, is not true for non-food inflation. First of all, we are to see power tariff hikes
proposed by the Government starting from 2011. As per the plan, electricity prices will go up by
25% per year. Secondly, the crisis in the middle-east has made the world shaky about crude oil
prices which are rising rapidly. Hence, non-food inflation, which has been slow, is likely to start
creeping up soon. The BDT-US$ exchange rate has been depreciating steadily for some time
now, reaching a record high of BDT 72.70 per USD in January 2011. This is also concerning for
the nature of the food inflation that Bangladesh are currently experiencing. As a case study, the
researchers can refer to Pakistan, where in early 2008 high global food and energy prices were
worsened by large depreciation in the Pakistani rupee, thus increasing import bills. At that time,
many Asian economies succeeded in mitigating such imported inflation through appreciating
their currencies. The point here is that a further depreciation of the BDT could lead to additional
cost push inflation for Bangladesh, as it had for Pakistan earlier. Finally the researchers conclude
that in all probabilities inflation seems to be rising. It will depend on global food production and
unrest in the Middle East.
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