Higher investments in social protection a must to withstand inflation shocks

Bangladesh walked a tightrope in 2022 with global impacts of the Ukraine-Russia crisis building on the prolonged consequences of the Covid-19 pandemic. Rising dollar prices together with stressed dollar supplies, a surge in import-induced cost-push inflation, declining foreign exchange reserves, and an ongoing energy crisis — these realities have placed our economy's resilience in question. These have aggravated already high budgetary pressures from responding to the pandemic's impacts for two years and made the path to Covid-19 recovery highly challenging. 

Bangladesh's inflationary pressures and their impacts on low and lower-middle-income households stand out. According to the Bangladesh Bureau of Statistics (BBS), general inflation peaked at 9.52% in August 2022, the highest in over 11 years, compared to 5.54% a year back. 

Food inflation drove the trend: it stood at 9.94% in August before marginally declining in the following months. Now non-food inflation has picked up pace and stood at 9.96% in December compared to 7% a year back. A breakdown of inflation trends in rural and urban areas also reveals that inflation is running much higher in rural areas than urban areas. 

(All graphs are based on BBS data)

Even while inflation figures are coming down, BBS data highlights that wage growth of low and unskilled workers has not kept pace with inflation since April-May 2022. This indicates that real wages are eroding with inflation, leaving low-income groups vulnerable to poverty. 

This also ties in with food security concerns emerging in the country. According to a December 2022 survey by the World Food Programme (WFP) in Bangladesh, 72% of 1,200 surveyed households cited rising food prices as their biggest concerns followed by income loss and increasing health expenses. Low-income groups are the most vulnerable. Within this group, households with disability and female-headed households are worse off. Many are selling off assets, going into debt, or spending from savings to keep food on the table. 

Keeping inflation in check will continue to be a priority in 2023 amid global uncertainties. On the global front, there is no end in sight to the Ukraine war. But on a good note, the European Union is working to ease the transit of Russia's fertiliser exports through EU ports despite a fresh round of sanctions against Russia. 

While food and fertilisers were exempted from sanctions, Russian shipments were stuck because of legal uncertainty around handling such cargoes. This pushed up food and fertiliser prices in a context where global fertiliser prices had already doubled since May 2020. The move may relieve the fertiliser crisis that heightened food security challenges in developing and poor countries worldwide. Bangladesh may also benefit as it relies heavily on imports to meet its fertiliser demand. 

Trends in global gas and oil prices will continue to matter. While global oil prices are down from their June highs, they will still be volatile as per World Bank's forecast. The volatility is likely to be driven by demand concerns riding on global recession fears as well as China's prospective reopening even as it battles Covid-19 fresh waves. 

Expectations of a tightening global oil market with a potential fall in Russian oil supply given new sanctions and prospective OPEC+ supply cuts in 2023 will also weigh on price trends. Moreover, while crude oil prices typically dominate headlines, the global oil refining sector has also been volatile with its own set of capacity constraints and has affected global refined oil product prices. 

Second, global liquefied natural gas (LNG) prices are likely to remain high. Europe has been racing to substitute its heavy dependence on Russian gas with LNG among other sources in 2022. In the process, it has been outbidding Asian buyers of LNG to build up stocks. This competition is likely to intensify in 2023 especially if China fully reopens. 

What do these mean for Bangladesh? In 2022, we already saw how high imported energy costs aggravated Bangladesh's domestic natural gas crisis and highlighted the ramifications of lack of a diversified energy supply chain. LNG imports were suspended in July due to steep global prices. The gas-dependent power sector suffered as it had to rely heavily on costly imported oil-based electricity generation. 

But managing high import costs while addressing an uncertain electricity crisis became a tough balancing act for Bangladesh especially during the summer months. Together with deep-rooted subsidy management and governance concerns in the energy and power sectors, subsequent policy measures and flip-flops including the fuel price hike in August worsened challenges. Power generation costs went up and deepened shocks for sectors already hurt by the gas crisis and frequent power cuts. 

The agriculture sector was doubly hit. Farmers were pushed towards supplementary irrigation when they faced a water crisis (record low rainfall) during the key rice plantation season. With over 80% of Bangladesh's irrigation system depending on diesel-run shallow tube wells, irrigation costs surged with the diesel price hike. Overall, farming costs substantially rose as spikes in fertiliser prices despite subsidies also aggravated the situation. These developments contributed to inflation peaking in August and its impacts as discussed earlier. 

Outlook for poverty situation

Bangladesh needs to remain alert as inflationary risks remain together with energy-related challenges. On a good note, other major macroeconomic indicators such as exports earnings and remittance growth have picked up despite bumps. 

Nonetheless, inflationary pressure and its impacts continue to overshadow these positive developments chiefly due to prevailing high income inequality in the country. Tied together with falling real wages and continued uncertainties, 2023 calls for greater efforts for targeted strategies especially for the poor and vulnerable. 

Expanding and deepening social protection efforts especially for low-income groups are a must. Recent studies highlight that those on low fixed incomes and who are outside social protection coverage are depleting savings or lowering livelihood conditions. Bangladesh has already been working to extend support through market interventions like Open Market Sales as well as its food-friendly Vulnerable Group Development and Vulnerable Group Feeding programmes. Considering inflation, resuming the "mid-day meal" programme for primary students can also support children at risk of food security and malnutrition. 

With climbing prices of non-food essentials, Bangladesh also needs to better monitor trading syndicates attempting to profit off the ongoing cost-of-living crisis. Temporary job creation schemes for those seasonally unemployed should also be extended for a longer period. 

At the same time, inflation control measures should be taken with caution so that employment generation is not hampered. On a positive note, monetary policy is playing a balancing role to control inflation while supporting job growth.  

While 2023 will possibly continue to test Bangladesh's economic resilience to shocks, we remain hopeful that it will overcome challenges with continued efforts for addressing poverty and vulnerability. Once again, investments in social protection will be a critical pillar for doing so. But the changing nature of cascading polycrisis that Bangladesh is experiencing means that the objectives of social protection must be ambitiously set and help bolster people's capability to manage risks. 

In other words, access to essential social services like education and health as well as economic empowerment opportunities must also be part of policy responses. Here, for example, the United Nations Development Programme (UNDP) has been supporting Bangladesh to develop a shock-responsive, inclusive social protection system through implementation of the latter's long-term National Social Security Strategy (NSSS). 

This can offer an opportunity for coordinated policy responses that help mitigate the poverty impacts of inflation and build people's ability to withstand continued shocks. Most importantly, by keeping the most vulnerable in focus, it can contribute to efforts to leave no one behind in an uncertain 2023.

Nazneen Ahmed is the Country Economist at UNDP, Bangladesh. Sarah Amena Khan is the Team Lead of the Research Facility at UNDP, Bangladesh