Food inflation in Bangladesh: causes and consequences

Abstract

In Asia, Bangladesh is one of the hardest hit by the current wave of food inflation. The economy has been observing double digit inflation growth on point-to-point basis since July 2007. In Bangladesh, the correlation between per capita income and food weight in total Consumer Price Index (CPI) is one of the highest in the world and the economy is vulnerable to sharp hikes in fuel and non-fuel commodity prices. The highest inflation rate in Bangladesh was last reported at 11.98 percent in November 2011 and the highest food inflation was 15.05% in January 2012. The rate of inflation is higher in the food sector than in the non-food sector. The BDT-US$ exchange rate has been depreciating steadily for some time. Which has direct impact on food inflation that Bangladesh is currently experiencing. An International Monetary Fund (IMF) study shows food prices on headline inflation has been a staggering 55.9 percent in Asia in 2007, whereas the figure was 34.1 percent in the 2000-06 period. The researchers highlight that a further depreciation of the BDT could lead to additional cost push inflation for Bangladesh. This article attempts to investigate causes and consequences of food inflation on the economy of Bangladesh. This paper also reviews the past record of the inflation and makes a forecast on the possible movement of inflation. The paper investigates the main factors that were the driving forces of food inflation in Bangladesh over the years and the Consequences of food inflation are most severe on poor and middle class people. At the end on the paper the researchers forward some strategic points that might be useful to reduce food inflation.

1. Introduction:

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Rising rate of food inflation has become a serious concern in Bangladesh in recent years. The Food and Agriculture Organization (FAO) considered Bangladesh as one of the thirty–seven countries in ‘crises’ due to the rise in food prices. 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, Inflation Rate in Bangladesh averaged 6.63 percent from 1994 until 2015, reaching an all time high of 12.71 percent in December of 1998 and a record low of -0.02 percent in December of 1996. On a point-to-point basis, The highest inflation rate in Bangladesh was last reported at 11.98 percent in November 2011 and the highest food inflation was 15.05% in January 2012. 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. From the below figure it is clear 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 (Matin, 2011). As a result, the people are passing their days amid hardship, spending additional money on a static income.

19871988

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19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

0

2

4

6

8

10

12

9.87

7.41

6.05

6.136.36

3.633.01

5.31

10.3

2.38

5.31

8.4

6.11

2.212.01

3.33

5.67

7.597.05

6.77

9.11 8.9

5.42

8.13

10.7

6.22

7.536.99

Inflation Rate of Bangladesh Inflation Rate of Bangladesh

Source: The World Bank

2. Literature Review :

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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”. Earlier work (Tun Wai, 1959) failed to establish any meaningful relationship between inflation and economic growth. A more recent work by 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 per cent of the countries; they reported bidirectional causality in about 20 per cent 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.

Bruno and Easterly‟s (1998) work is interesting for noting that the ratio of people who believe inflation is harmful to economic growth to tangible evidence is unusually high. Their investigation confirms the observation of Dornbusch (1993), Dornbusch and Reynoso (1989), Levine and Renelt (1992) and Levine and Zervos (1993) that the inflation-economic growth relationship is influenced by countries with extreme values (either very high or very low inflation). Thus, Bruno and Easterly (1998) examined only cases of discrete high-inflation (40 per cent and above) crises and found a robust empirical result that growth falls sharply during high-inflation crises, then recovers rapidly and strongly after inflation falls.

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. Besides, it is argued that an individual country study should provide more reliable estimates than cross-country studies as country-specific relevant variables can be controlled properly and homogeneity can also be maintained. Different

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demand and supply responses for policy changes in different countries might result in different economic outcomes and provide misleading results under cross-sectional data. Temple (2000) pointed out that in cross-country studies comprising relatively dissimilar developing countries, inflationary impacts might differ and therefore, extrapolation requires more caution. He further argued, citing findings of several studies that the detection and significance of some relationships change when cross-section instead of annual panel data is used or if the time-horizon is altered. Bangladesh is under pressure from the international lending agencies (IMF, the World Bank and ADB) to reduce its inflation rates in order to boost economic growth.

Two recent works (Bruno and Easterly, 1998 and Paul, Kearney and Chowdhury, 1997) do not shed much light on what is the right approach. Their findings appear counter-intuitive as the four South Asian countries share a very similar economic structure and until very recently have followed (and are still following) roughly similar economic policies (e.g., a relatively large public sector, a nationalized financial sector and five-year plans though with varying emphasis). It is possible that the counter-intuitive results of Paul, Kearney and Chowdhury (1997) are due to methodological deficiencies. For example, Paul, Kearney and Chowdhury (1997) used the Dickey-Fuller (DF) and augmented Dickey-Fuller (ADF) tests. The ADF tests are unable to differentiate well between non-stationary and stationary series with a high degree of autocorrelation (West, 1988) and are sensitive to structural breaks (Culver and Papell, 1997). Paul, Kearney and Chowdhury (1997) also did not include any error correction model to check the existence of any long-run relationship. The Error Correction Model (ECM) test is essential to see whether an economy is converging towards equilibrium in the long run or not. The ECM also shows short-run dynamics. 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 crisis and try to find out the consequences and applicable strategies to overcome it.

3. Objectives:

The objective of this paper is to generate analysis and discussion on some key issues of the Bangladesh food 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:

1. Summarize the food inflation scenario in Bangladesh.

2. Understand the causes of food inflation in the Bangladesh Economy.

3. Understand the consequences of food inflation in the Bangladesh Economy.

4. To find applicable strategies to cope with Inflation in Bangladesh.

4. Study Methods :

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This article is mainly based on secondary information. Hakim (2000) suggested combining secondary data from various sources to increase the validity of the information. The research design has been conducted by secondary data method 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 report with proper reasoning, analytical judgment, clarification and explanation. The research has been presented in written form in this article to interpret the information gathered and convey the research findings. The article has been made by popular reporting in order to facilitate the readers in better understanding of the report. No technical terms have been used in the study. To represent the data graphic and moving average method are used.

5. Results and Discussions :

5.1. Findings of Objective I

Food 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. A widely discussed plausible cause of high inflation in Bangladesh is the impact of global price hike. As a food and petroleum importing country, Bangladesh has to bear the brunt of global price hike of these items. Since the beginning of the current decade and up to 2008 global prices of fuel and food followed an increasing trend which got transmitted into the country’s domestic economy. There has been some respite from high inflationary pressure towards the end of 2008 and 2009 due to the global meltdown and the resultant price fall of major commodities in the global market. With the turn round of the global economy from the recession towards the end of 2009 and beginning of 2010, inflation started to shoot up. This trend was also observed in Bangladesh. The following table and accompanying graph summarize the inflation scenario of Bangladesh for the last decade.

TABLE 1: FOOD AND NON FOOD INFLATION, (2000-01=100)

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YEARGENERAL INFLATION

FOOD INFLATION

NON FOOD INFLATION

FY 2000-01 1.94 1.38 3.04FY 2001-02 2.79 1.63 4.61FY 2002-03 4.38 3.46 5.66FY 2003-04 5.83 6.93 4.37FY 2004-05 6.49 7.9 4.33FY 2005-06 7.16 7.76 6.4FY 2006-07 7.2 8.11 5.9FY 2007-08 9.94 12.28 6.32FY 2008-09 6.66 7.19 5.91FY 2009-10 7.31 8.53 5.45FY 2010-11 8.79 11.33 4.15FY 2011-12 11.41 13.28 8FY 2012-13 6.78 5.22 9.17FY 2013-14 7.35 8.58 5.55FY 2014-15 6.2 6.48 6.01

Source: Based on Bangladesh Bank Data

Fig 1: Food and Non-Food inflation

FY 2000-01

FY 2001-02

FY 2002-03

FY 2003-04

FY 2004-05

FY 2005-06

FY 2006-07

FY 2007-08

FY 2008-09

FY 2009-10

FY 2010-11

FY 2011-12

FY 2012-13

FY 2013-14

FY 2014-15

0

2

4

6

8

10

12

14

General inflation

Food inflation

Non Food Inflation

Source: Based on Bangladesh Bank Data

The major source of high inflation in Bangladesh is high food inflation. The reason behind this assumption is that food carries a large weight in the CPI of Bangladesh. The weight of

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food items in the CPI commodity basket of Bangladesh is as high as 58.8 per cent, of which the share of rice is 20.1 per cent. Hence the rise in food inflation affects the overall inflation significantly. Based on BBS data, it has been estimated that the contribution of rice inflation to the overall inflation was 23.41 per cent in FY 2011-12.

Table 2: Contribution of Food and Non-food items to General CPI Inflation, (2000-01=100)

Year Food Contribution in InflationNon Food Contribution in

InflationFY 2000-01 41.86 58.14FY 2001-02 34.38 65.62FY 2002-03 46.48 53.52FY 2003-04 69.94 30.06FY 2004-05 71.62 28.38FY 2005-06 63.77 36.23FY 2006-07 66.28 33.72FY 2007-08 72.69 27.31FY 2008-09 63.52 36.48FY 2009-10 68.66 31.36FY 2010-11 75.85 24.15FY 2011-12 68.52 31.48

Source: Bangladesh Bank Data

Fig 2: Contribution of Food and Non-food items to General CPI Inflation

FY 2000-

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Inflation appears to have emerged as a permanent phenomenon in the economic landscape of Bangladesh over the recent past. It has started to increase since the second quarter of

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FY2009-10 and continued to rise throughout FY2009-10 and FY2010-11. During the first three months of FY2011-12 there has not been any change in the direction of inflationary movements. The 12-month point to point consumer price index (CPI) inflation has reached as high as 11.98 per cent in September 2011 compared to 7.61 per cent in September 2010. This is the highest inflation in last one decade. As in most years, food inflation was higher than general inflation. Food inflation reached to 13.75 per cent in September 2011 as opposed to 9.72 per cent in September 2010. High food inflation had a knock on effect on non-food inflation as well, pushing it upward to settle at 8.77 per cent in September 2011 from as low as 3.69 per cent in September 2010.

Table 3: Annual Average CPI Inflation; (2000 = 100).

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 6.2 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.

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Another feature of recent inflation in Bangladesh is that rural food inflation has been closer to urban food inflation which was not the case in Bangladesh till August 2010. The likely causes for high rural inflation could be increasing demand due to higher purchasing power of the rural population through rising agricultural production, higher labor wages, expanded social safety net programme and inflow of remittances. In rural area food inflation was dropped then non food inflation after july 11 but then rises up after jan 12. But in urban areas it always greater than non food inflation.

Fig 3: Rural (CPI) Inflation, (On Monthly Basis), (2000-01=100)

Source: Bangladesh Bureau of Statistics

Fig 5: Urban (CPI) Inflation, (On Monthly Basis), (2000-01=100)

Source: Bangladesh Bureau of Statistics

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In Bangladesh the average inflation (general) 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. World Food Program (WFP) titled the 2011/2012 food price hikes as the ‘silent tsunami’, which was caused by a number of interlinked and mutually related factors. Bangladesh faces a tougher challenge in bringing down 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 2011, the highest in 10 years.

When we will look for vary recent situation of the inflation. After the financial year 2011-12 the inflation rate is dropped. Now the inflation rate is bringing down to 6.2%.

Table 4. Consumer Price Index (CPI) and Inflation Rate (Point to Point) (2005-06=100)

CPI Classification 2011-12

2012-13 2013-14 2013-2014 2014-2015Nov'13 Dec'13 Jan'14 Nov'14 Dec'14 Jan'15

NATIONALGeneral index 170.19 181.73 195.08 194.76 195.82 198.1

5206.86 207.78 210.1

2Inflation 8.69 6.78 7.35 7.15 7.35 7.50 6.21 6.11 6.04

Food index 183.65 193.24 209.79 210.27 211.87 213.65

223.81 224.29 226.61

Inflation 7.72 5.22 8.56 8.55 9.00 8.81 6.44 5.86 6.07Non-food index 152.94 166.97 176.23 174.92 175.26 178.2

6185.14 186.62 188.9

8Inflation 10.21 9.17 5.55 5.08 4.88 5.53 5.84 6.48 6.01

RURALGeneral index 173.26 183.90 196.90 196.43 197.55 199.9

3208.32 209.19 211.5

5Inflation 8.69 6.14 7.07 6.92 7.22 7.24 6.05 5.89 5.81

Food index 183.62 192.14 207.72 207.74 209.37 211.48

221.00 221.47 223.73

Inflation 7.50 4.64 8.11 8.06 8.63 8.39 6.38 5.78 5.79Non-food index 156.77 170.79 179.69 178.43 178.72 181.5

7188.15 189.66 192.1

8Inflation 10.96 8.94 5.21 4.88 4.69 5.17 5.45 6.12 5.84

URBANGeneral index 164.52 177.71 191.73 191.69 192.64 194.8

4204.16 205.17 207.4

7Inflation 8.70 8.02 7.89 7.58 7.58 7.97 6.51 6.50 6.48

Food index 183.71 195.91 214.85 216.34 217.94 218.97

230.65 231.16 233.62

Inflation 8.27 6.64 9.67 9.67 9.89 9.80 6.61 6.07 6.69Non-food index 147.84 161.88 171.61 170.24 170.64 173.8

5181.12 182.57 184.7

2Inflation 9.16 9.50 6.01 5.35 5.13 6.04 6.39 6.99 6.25

Source:http://www.bbs.gov.bd/WebTestApplication/userfiles/Image/National%20Account%20Wing/CPI/CPI_January-15.pdf

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Rural Inflation Urban Inflation Rate

2011-12

2012-13

2013-14

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Food inflationNon-food in-flationGeneral

2011-12

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2013-14

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Food inflationNon-food in-flationGeneral

Inflation rate was again increasing after FY 2012-13 and food inflation was also rising in both rural and urban areas. Urban food inflation was more than rural.

The rising inflation has become a major threat to people from all segments of the society. Rapidly higher food inflation has made it difficult for the low income households to carry on with their daily basic expenditures. According to the World Bank, four million people have been pushed below the poverty line due to abnormal rise in food price. Another statistics of the World Bank shows that between January 2007 and March 2008, the gross income of the poor decreased by 36.7 per cent mainly due to surge of food items, pushing 2.5 million households below the poverty line. Even the bumper boro harvest could not save the people from the grip of high inflation. On the other hand, the adverse impact of inflation has created a stumbling block to macroeconomic stability and curtailed the pace of economic growth, which is necessary to poverty reduction and meeting other development challenges and goals.

Climate change, natural calamity along with increasing demand of biofuels contribute to this shortfall of food grain. Since Bangladesh is net importer of food grains, they have to face a negative impact of this consequence.

5.2. Findings of Objective 2

5.2.1. Causes of food inflation in Recent Context in Bangladesh:

Both internal and external factors have contributed to the current food inflation in Bangladesh. As Bangladesh is not self-sufficient in terms of food production, 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

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for oil and other petroleum products (Matin, 2011). Food inflation in Bangladesh is triggered by both domestic and international reasons. Without solving those reasons Bangladesh cannot control food inflation.

International reasons:

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.

Sixthly, Droughts in major wheat-producing countries in 2005-06 while floods and cyclones in rice producing countries.

Apart from all these reasons, Low grain reserves, 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

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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. 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.

Domestic reasons:

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 (abrupt behavior of South Asian monsoon, wrath of El Niño and La Niña, damages caused by cyclones, etc.,) 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).

The 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).

There are some Domestic long term reasons of food inflation:

Controlling Supply Chain through Syndication:

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Syndication probably the most destructive reason for food inflation over the last few years. This is the man made obstacles to control the normal of supply of goods in the market. Unfortunately, there are no data to identify such cases. However, according to information of some traders suggests that the presence of market power either through collusion between two or more traders or because of the existence of large individual traders may be a problem at the import stage. There are roughly 10 to 20 trading houses in Bangladesh who have the capability to import in bulk (edible oil, sugar, wheat, pulses) and the financial capacity to hold on to the stocks in order to influence prices. In the supply chain of good produced domestically, there are just too many traders at the levels of middlemen (traders collecting from producers), Aratdars (link between beparis and wholesalers essentially performing a storage and matching functions), wholesalers and retailers for syndication to be possible. Specially during the time of some religious festival like Eid-ul-fitr syndicate holders supply their products at very high price. As a result, a real shortage can emerge and domestic prices increase even in the absence of collusion. People are now confined to them and due to their political connection no government take any actions against them.

Negligence of agriculture sector:

Bangladesh has an agrarian economy. Agriculture contributes about 16% of the GDP. But allocation of public expenditure in this sector reduced drastically in the last few years. Shrinking government support to agriculture has made the production hardly viable over the years. Drastic reduction in public expenditure in agriculture increased the input costs and shrinking price incentives in an imperfect unregulated market structure ultimately swept the farmers out of their business. Just after the liberation in 1971, share of ministry of agriculture in total annual development programme was 30.97 per cent while it came down to only 2.59 per cent in 2001 (MoA 2001). In terms of share of GDP, real public investment in agriculture did not grow over the years. In fact between 2001 and 2005 real public investment in agriculture marked a negative growth sliding to 0.16 per cent in fiscal 2005 before raising it to 0.48 per cent in 2007. Poor performance of agriculture sector is the result of low budget allocation in agriculture sector. For instance growth rate of agriculture sector was 6.92% in 2000while in 2002 it was -0.62% which created many adverse effects in the subsequent period. To keep this sector alive and make the farmer affordable to buy the agricultural inputs, government is giving subsidy. In 2008-09 government allocated BDT 1650 crore as subsidy. But this allocation is not enough especially when cost of agricultural inputs as well as fuel price are rising rapidly and farmers don’t get fair price of their product. Besides this benefit of this subsidy has not reached to the marginal farmers. Subsidy is alsonot enough compare to other neighboring countries. Subsidy in Bangladesh amounts to 1% of GDP while in India agricultural subsidy accounts for 9% of GDP.

Trade liberalization and increasing trade deficit:

1990s is the decade of trade liberalization in Bangladesh. Due to various commitment of bilateral and multilateral trade agreement, Bangladesh made continuous effort to reduce tariff to facilitate global trade. Over the last decade the (weighted) average tariff reduced to 6.98per

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cent in February 2007 from 23.6per cent in June 1993; un-weighted average tariff reduced from about 49per cent to about 13per cent. Number of restricted items which were 193 in the import policy of 1991-93 was reduced to 63 in the import policy of 2003-06. This has intensified the dependency of import. As a result trade deficit has increased by 85percent to US$ 3458 million in 2007 from US $ 1865 million in 2000. High trade deficit also leads currency to depreciate thus has an impact on inflation.

Increasing Dependency on Import:

As a result of trade liberalisation, dependency of import increased significantly, especially, from India and China.These two countries are the main sources of Bangladesh's import, especially, of food and other essentialcommodities. Bangladesh accounted for, on an average, around 28-30 per cent of her total import from these two countries in the last four years or so. At the same time, in the last few years, Indian Rupee and Chinese Yuan has appreciated by 15-17 per cent and 4-6 per cent, respectively, against dollar while between 2003 and June,2007 taka depreciated by about 19 per cent, meaning that cost of import from these countries increased substantially, which has an impact on inflation

Fluctuations of Food Grain Prices in Domestic Market:

As the price of rice and wheat becomes double in the international market, it has affected in the domestic market. It is largely due to the fact that Bangladesh is a net food importing country. According to government statistics, the nominal rice and wheat prices increased by 66 per cent and 69 per cent respectively between March 2007 and March 2008. The corresponding real price rises were 51 per cent and 53 per cent. The rate of increase of wheat price was slightly higher compared with rice price.

Currency Depreciation:

Depreciation has three broad implications: first, depreciation further stimulates inflationary pressure; second, depreciation means that country's terms of trade eventually deteriorate, implying that cost of import is higher than the cost of import, which in turn causes a negative impact on trade balance. Thus further lead currency to depreciate; third, since price is sticky in the short run, it gradually adjusts in line with the rate of currency depreciation. This means that export lose competitiveness after a certain period of time, stimulating currency to depreciate further to maintain the export competitiveness, thus, puts further pressure on inflation.

5.3 Findings of Objective 3

Consequences of food inflation in Bangladesh:

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The rise in food prices is having serious impacts on food consumption and nutrition. Poor and limited income earners hit hard by the food inflation.

Impact on farmers:

Since rice is the staple food in Bangladesh, most of the farmers are rice producers and most of them belong to the small and marginal category. But the farmers are not benefited by the increase in price of rice. A study conducted by Unnayan Onneshan in 2005 shows that there exists a huge gap between the farmers' selling price of paddy and market price of rice both in the advanced and backward areas. The empirical findings show that farmers' net loss of income from the market is Tk 8.7 billion. The middleman and brokers grab most of the income. Any price increase of domestically produced rice could bring benefit to the majority of the rice growers through providing a share of higher prices to them, only when reasonable and competitive rice prices are maintained after harvest. The gain resulting from any subsequent rise in rice prices in the retail market largely accrues to the millers, stock holders, other dealers, and probably a few large rice producers without much benefit to the majority of the small rice producers who form the overwhelming majority. In the case of imported rice, the margin from higher retail prices is shared between the importers and the wholesalers and retailers. On the other hand, since the vast majority of the population in both rural and urban areas are net purchasers of rice, this large group especially the poor faces significant disadvantages and real income erosion when rice price increases.

Impact on poor and middle class people:

The major consequence of food inflation is the erosion of real income of the people resulting from the general increase in prices. The burden of income loss differs across different income groups. Undoubtedly the household groups who are employed in the formal sector and whose salaries/wages are fixed in nominal terms and are refixed periodically are the worst sufferers. The same is true for those employees in the informal sector who have income fixed in nominal terms. In Bangladesh, a major concern, however, is the inflation-induced loss of real income of the poor. Rise in inflation need to be compensated by the increase in wage. The Bangladesh Bank analysis shows that the daily agricultural wage rate in real terms over the period from January 2005 to September 2007 has not declined; rather it has shown a slightly increasing trend. This shows that agricultural laborers, who constitute the largest poor group in the country, usually turn out successful in maintaining the level of their daily real wage at a certain level.

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.

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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. We are now trying focus on issues for the consequences of inflation.

Food Inflation Raises Poverty and Inequality

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 the 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).

Affect on saving & Investment: 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.

Affect on invertors: 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.

Affect on bank & other financial intermediary: 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.

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Affect on money supply: 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.

5.4. Findings of Objective 4

Applicable strategies to cope with Inflation:

Bangladesh is an agricultural economy. So most of the poor people and their livelihood is directly linked with this a sector. Bangladesh is also a net food importing country. The rapid population growth and the growing food requirements pose a difficult challenge given the limited availability of cultivable land in Bangladesh. The reoccurring disasters further complicate the stability of food production, endangering the food security. Given the current context, the food insecurity is not only a national concern but also a global concern. Therefore, it is important to pursue specific direct measures nationally, regionally and globally to dampen inflationary pressures especially that of containing food prices resulting from supply shocks and other events. Domestic production and supply chain needs to be strengthened to prevent artificial food crisis prompted by the market syndication. This requires an effective regulatory body that could closely monitor the market with effective intervention. It is proved that an ad hoc mechanism like allowing armed forces to control the market can never be effective.

Develop food grain production and productivity of land and laborers through technological advancement and infrastructure development.

To protect food crisis in future, large food reservation needed which could be useful to address the immediate supply shocks at the country level. Regional food bank should be made among member countries of SAARC countries. SAARC remains ineffective even after more than 25 years of its formation.

In this regard, it could be suggested that the regional countries can create South Asian Agriculture Fund (SAAF) under the SAFTA to develop the regional agriculture. The same kind of fund could be created under bilateral arrangement. Besides tariff reduction period should be longer for LDCs under any kind of free trade agreement. Also a compensatory fund for tariff reduction should be established for the resource poor countries.

Inserted efforts are needed to be taken both from government and non government perspective to create awareness among people. There are many foods which are comparatively cheaper but rich in nutritional substance. Include those food items in their daily menu can save their money and at the same time provide the necessary nutrition.

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Efforts need to be made to create proper substitute of rice like potato so that impacts of reduction of rice production will be less severe. Attention should also give to increase non-cereal production.

Fair price of the crops of the farmers should be ensured. The prevalence of middlemen should be reduced. Crops insurance need to be introduced to protect farmers from crop damage.

Cutting down indirect tax on commodities may help to reduce inflation pressures temporarily.

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.

Government can effectively use its legal power to break up the market syndication and thus improve competitiveness of the distribution network.

Bangladesh Bank can reduce the duration of loan given against L/C opened for importing essential consumer gods.

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.

Increases supply of essential commodities (rice, wheat, and lentil) with no or least tariff and efficient intermediation.

Political parties should come out of the practice of mudslinging and blame shifting.

Information system should be improved in a way that reduced the information gap among different stakeholders of the country.

To strengthen the Trading Corporation of Bangladesh to control import prices of essential commodities.

Prudent monetary policy needed to be implemented to control this inflation. An effective government procurement policy is needed to reduce the seasonal volatility of rising prices of domestically produced rice and other agricultural products as well as to protect the interest of farmers. It is important to adopt effective policies that reduce seasonal variability in the prices of different commodities especially rice, and provide a remunerative and fair price of rice to the growers after harvest. For

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vegetables and other non-rice food crops, the priority would be to strengthen the marketing links, both horizontally and vertically by promote market integration and supporting processing and high value activities.

6. Conclusion

The current food 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.

Bangladesh is not capable enough to support its agriculture given the resource constraints. In fact, the government support in agriculture is not sufficient and declined over the period, which is well below the WTO's allowable limit for the last ten years. The right choice for Bangladesh and other LDCs to bargain for the creation of funding mechanism is to protect the consumers in general from abnormal food price hike and to make sure that the poor farmers can get support at least from the level of those in the developing countries.

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