Inflation is 9.67%, officially. Why does it feel higher?

Infographic: TBS

The day's temperature is 36 degrees Celsius, but the real feel is like 40. This is what you may see on Google weather alert quite often in the summer and its humid days. The additional heat is created by human activities such as razing of the greenery, grabbing and filling up of water bodies and the skyward rise of a concrete jungle in the name of building and construction which turn the city we live in into a heat island.

Our official inflation is 9.67%. Does it reflect real life? Economists, though they do not calculate what it should be, often contest the inflation data routinely released by the Bangladesh Bureau of Statistics. But you feel the real heat yourself every time you go to buy the basic necessities. Except for rice, everything else you buy gives you a sticker shock. It seems, the prices have climbed more than the official inflation rate. Why? What has caused the additional heat in the market?

A stubborn inflation

Inflation crossed 8% in May 2022 for the first time in years and remained well over 9% since March 2023. Why is the inflation in Bangladesh so stubborn while it has been tamed worldwide? Even Sri Lanka, which suffered the worst financial crisis triggered by a plunge in foreign exchange reserves, could bring its inflation below 6% from its historic peak of 70% in 2022. The South Asian country has also cleared its $200 million loan it borrowed from Bangladesh two years ago under a currency swap agreement. Sri Lankan central bank governor P Nandalal Weerasinghe, who scored A- grade in Global Finance magazine's Central Banker Report Cards 2023 for leading his country out of hyperinflation and near bankruptcy, told an event in Dhaka last year about how Bangladesh's financial assistance helped his country in tough times. Except Turkey, Pakistan and Argentina, most of the world got relief from the persistent high inflation.

But Bangladesh, considered a few years ago an emerging Asian Tiger, is now struggling with shortage of dollars and roaring inflation. Global analysts and institutions, even central banks, sounded warning that the inflation would turn worse in years after the Great Inflation of 2021-22. The forecasts proved wrong for major economies including the USA and most of Europe and Asia thanks to effective prudent fiscal and policy measures by the governments and the central banks. Two former Citigroup economists, in a Project Syndicate article, explained what factors prompted the forecasters at US Federal Reserves and other major institutions to revise down their inflation forecasts "almost as fast as they had revised up during the two preceding years".

Financial authorities in most economies proved how global forecasters underestimated the demand impacts of massive monetary and fiscal easing, a surge in spending influenced by pandemic-time transfers to households.

Bangladesh also spent thousands of crores of taka in stimulus in wage support for industries and income support for marginal households during the Covid pandemic with some of the schemes still continuing. The Central bank, through restricted imports to save dollars, continued monetary easing to keep money cheaper for industries hit hard by the pandemic and war-induced supply chain disruption and input cost hikes.

Owing to various restrictions imposed by the central bank, the country's total import declined by 24.32% to $65.39 billion by the end of 2023 from $86.40 billion in the previous year, according to Bangladesh Bank data. Yet it did neither ease the dollar crisis, nor cool the exchange rate. It only reduced essential imports for consumers and industries, further contributing to inflation.

Why have those policy measures not brought about the intended results? Why is the dollar still in short supply and inflation staying high?

The dollar crisis is the culprit

Simply put, the dollar crisis is the main culprit behind Bangladesh's persisting inflation. It was the shortage of dollars that forced the central bank to restrict opening of letters of credit for imports of essentials and industrial raw materials, leading to supply shortage of commodities and lower factory outputs.

Bangladesh largely depends on imports in the months ahead of Ramadan, a time when demand for consumer goods surges. Traders struggled to open LCs for essential imports to feed consumer markets as banks cited dollar shortage and charged higher rates.

Most banks say they collect remittances at higher rates and so they cannot offer lower rates for importers. Dollar is traded at multiple rates and repeated calls for enforcing an uniform rate have been ignored. Rates vary widely between banks and the kerb market.

The dollar shortage is not only affecting commodity markets, the energy ministry is also failing to pay energy import bills to international suppliers. It has sought $1 billion from the finance ministry to make urgent international payments.

Energy prices have been revised upward for industries, adding to cost of production and fuelling inflation further.

All that sent commodity prices soaring. Once prices go up, they rarely come down because of lax market monitoring which remains a major structural flaw in this market economy. Cuts in import duty and occasional price caps do not benefit consumers. In February, the government slashed import tax and value-added tax (VAT) on rice, edible oil, sugar, and dates in view of Ramadan but it had almost no impact on consumer prices.

Retail price fixing failed

In March, the agricultural marketing department fixed the retail prices of 29 essential agricultural products to give consumers some respite from the Ramadan price shocks. But traders ignored the price caps for most of the products. Sporadic market drives by government agencies kept prices within range as long as the raids continued.

Prices of some products came down slightly only after initial buying pressures eased and supply increased, either from local sources or from imports.

When released, the March data will tell how much impact the Ramadan market interventions have had.

The point-to-point inflation fell slightly in February compared to January owing to the drop in prices of food and non-food items. Though the food index fell from its October peak of 12.56%, it still remained well over 9% along with non-food indexes, keeping general inflation at 9.67% in February.

Do the February numbers dare us to expect better months ahead?

Take with a grain of salt

The inflation data released by BBS is contested by economists and business people, many of whom prepare their budgets assuming that the inflation rate is double than what BBS says. The BBS data on poverty reduction are also questionable.

As the budget for the next fiscal nears, inflation has become the most prominent consideration. Budget documents being finalised by the finance ministry give a hint that inflation worries will keep the government's spending in check in the next fiscal year. The overall outlay may settle at less than Tk8 lakh crore, lower than what was outlined earlier, according to a document seen by The Business Standard.

Persistently high inflation has also made businesses, often criticised for commodity market volatility, worried about potential decline in consumption. Their apex body, FBCCI, feels the tax-free income limit for individuals should be Tk4.5 lakh in the next budget, up by Tk1 lakh from present, considering the inflationary pressures on taxpayers for the last couple of years.

World Bank sees rising poverty

The concern of businesses has been reflected in the World Bank's latest development update for Bangladesh. It estimates nearly five lakh Bangladeshis might slip into extreme poverty between FY23 and FY24, surviving on less than $2.15 per day. The report also forecasts a marginal increase in moderate poverty defined as living on less than $3.15 per day, from 29.3% in FY23 to 29.4% in FY24, marking an increase of around 8.4 lakh individuals.

The report overshadows the BBS data that Bangladesh's poverty rate dropped to 18.7%, with the extreme poverty rate at 5.6%.

The lender links the concerning trend to weak private consumption growth and high inflation.

"Weak private consumption growth and high inflation have halted poverty reduction. Higher food prices particularly impacted poor households, which allocate over half of their budget towards food expenditures," says the report released on 2 April.

This is why queues grow longer behind Trading Corporation of Bangladesh trucks selling food items at subsidised rates.

The state-owned trading agency TCB keeps track of market prices of daily essentials. It shows potato is now 80% costlier than a year before, onion by 42%, sugar by 21% and lentil by 10%. Prices of chickpea and date – two items most consumed in Ramadan – rose 23% and 11% in a year respectively.

Though not as severe, rice prices have also marked some rise. Broiler chicken is slightly higher than the year-ago level, but egg price is lower – which may be linked to interventions in the poultry market late last year.

Global price fall and duty cuts might have resulted in some declines in prices of coarse flour and edible oils. TCB data shows Ruhi fish declined, while mutton and beef remained close to last year's level, leaving a question open for market researchers how much of the decline is for market drives and how much for a slump in consumption of high-cost protein.

A public university post-graduate student, Aryan (not his real name), who supports his five-member family with earnings from his mid-level job in a private firm, shared how he dropped his little "luxury" to keep his family's food menu — beef once and chicken twice a week — intact.

"Before covid, I used to buy a branded shirt almost every two to three months. My favourite perfume cost me Tk2,600. I can not afford those now," said the youth, who also switched over to a lower-priced cigarette brand to cope with the surging cost of living.

He cannot understand why inflation remains so stubbornly high in Bangladesh and how tough his struggle would be in future to have both ends met.

He is one among numerous. The South Asian Network on Economic Modelling (Sanem) a few days ago in a study revealed appalling data: as many as 70% of the households in Bangladesh changed their food habits involuntarily to cope with the high prices.

"Such a large cut down on food consumption habits puts households at risk of food insecurity," said the think tank.

Their food habits changed not over going to the gym, but it exhibits their struggle to stay fed. Not everyone succeeds though. Many of them are facing the risk of falling below the poverty line.

Businesses see dark days ahead

Businessmen also raised red flags. On Thursday last at a consultation meeting with the finance minister and the NBR they have sought "exit policy" in case industries are forced to shut down due to increases in bank interest rates and volatile exchange rate.

"Lights are dimming for industries due to the dollar and power crisis. Give us an exit policy if we are forced to shut down our industries," said Mohammad Ali Khokon, president of the Bangladesh Textile Mills Association (BTMA), while speaking at the meeting.

The economy, once considered as a "development paradox" due to its remarkable growth for a decade until it was first hit by the pandemic and then forex reserve shortage, is struggling to bounce back to have above 7% GDP growth. The World Bank however pointed out that Bangladesh's economy is expected to decelerate to 5.6% in FY24 from 5.8% in FY23 before returning gradually to its long-term trend above 6%, as elevated inflation will weigh on consumption.

State Minister for Planning Shahiduzzaman Sarker said at an event on 2 April that the increase in interest rates (which rose close to 14%) is part of the process to reduce inflation and the next budget would reflect more on the ruling Awami League's election pledges, checking the price spiral being a prominent one.

Until then, keep the monthly inflation data in sight and compare it with the kitchen market prices to gauge the "feels like" heat.