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Urgent measures needed to reduce inflation

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Dr. SM Jahangir Alam :

While inflation is a normal feature of the economy, hyperinflation is seen as a shock to the economy.

Inflation refers to the rise in prices of goods and services. A country’s market must be in balance between the stock of goods and the quantity of money.

Inflation occurs when the supply of money is greater than that of goods, i.e. the country’s central bank prints excessive amounts of money.

As a result, you have to spend more currency than before to buy the same amount of goods. This means the price of goods will increase.

All in all, the value or purchasing power of that currency will decrease. Suppose, last year, you used to spend 1000 taka to buy 20 kg of rice.

But this year your cost to buy the same amount of rice is Rs. 1050. That is, 50 taka or 5% more money is being spent in a year.

This 5% is the inflation amount. This means that the value of money has also decreased by 5%.

Thus, inflation is measured by calculating the change in prices of various goods and services over a period of time.

If the inflation is less than the GDP growth of that country then it does not have much negative effect.

Generally, 2 to 5 percent inflation is considered tolerable. If it is 7 to 10 percent, the suffering of middle and low income people will increase. And higher inflation can spell disaster for the entire country.

But it depends on the economic capacity of that country. However, if the price of a few goods and services increases, it cannot be called inflation.

If the overall price of goods and services increases, then it must be understood that it is due to inflation. This is the cause of inflation.

The best economists in the world have said, “If the inflation rate in a country is less than 5.5 percent, then it must be understood that there is no economy in that country”. But in our country Inflation has already reached double digits.

Inflation rose to 9.94 percent last May. Now it may reach double digits. According to the latest inflation data of Bangladesh Bureau of Statistics (BBS), this rate of inflation stood in the last month of May.

This rate is the highest in almost a century. Last April inflation was 9.24 percent.

Earlier in March 2012, inflation was 10.10 percent. Since then, inflation has never gone into double digits.

Inflation fell to 9.93 percent in the following month. According to BBS sources, food price inflation was 9.24 percent last May. And non-food inflation has been 9.96 percent.

Overall inflation in rural and urban areas is almost equal. Inflation is now 9.85 percent in villages and 9.97 percent in cities.

Inflation of 9.94 percent last May means that a person who used to buy a product for 100 taka in May 2022, has spent 109 taka 94 paisa to buy the same product in May this year.

That is, the cost has increased by 9 taka 94 paisa within a year. Inflation is like a tax that burdens everyone, rich and poor alike.

The World Bank has identified four reasons for the increase in inflation in Bangladesh.

The agency says imports are falling due to rising domestic fuel prices, weak monetary policy, and devaluation of the currency and depreciation of foreign exchange. The inflation of Bangladesh is increasing due to these four reasons.

The World Bank has published a report titled ‘Bangladesh Development Update’ at the organization’s Dhaka office on October 3.

World Bank Country Director in Bangladesh and Bhutan Abdoulaye Sek presented the detailed information of the report.

According to the report, the growth in the gross domestic product (GDP) of Bangladesh may decrease in the current financial year 2023-24. The GDP growth in this financial year may decrease to 5.6 percent.

It has been said that there may be 5.8 percent growth in 2025. The agency had predicted a growth of 7.1 percent in 2021-22 and 6 percent in 2022-23.

Apart from this, in South Asia, India will grow by 6.3 percent and Maldives by 5.2 percent. Sri Lanka’s growth in 2023 was negative and was minus 3.8 percent.

The country will turn around in 2024, growth will be 1.7 percent. The World Bank report also said that poverty in Bangladesh has decreased to 5 percent, which was 9 percent in 2016.

The World Bank believes that controlling high inflation is one of the biggest challenges of the economy.

High inflation may continue in the coming days. Inflation situation will depend on the prices of goods in the domestic and international markets.

The World Bank also says that if the pressure of inflation can be reduced and trade with the outside world can be normalized, the GDP growth in the fiscal year 2024-25 may increase slightly to 5.8 percent.

World Bank Country Director Abdullahi Sek said inflationary pressures are increasing due to rising oil prices and devaluation of the currency. People’s consumption is also under pressure.

Apart from this, the price of food has increased compared to the increase in wages. Emphasis should be placed on the effective use of monetary policy to reduce inflationary pressures.

The interest rate cap should be phased out to reduce inflationary pressures. Apart from this, initiatives should be taken to reduce the risk of the financial sector through effective supervision of the banking sector.

The US Federal Reserve has raised policy interest rates three times in the past few months. The Reserve Bank of India hiked the policy rate three times between May and August last year.

As prices continue to rise, the policy interest rate should continue to rise and commercial banks should also be monitored to increase lending rates.

The central bank often tries to reduce the amount by selling government bonds in the open market and withdrawing money from the market. As a result, the lending capacity of commercial banks decreases.

Thus the central bank tries to control inflation by selling bonds in the open market.

In addition, the central bank often tries to eliminate inflation by controlling the amount of bank loans with the help of changing the reserve ratio of commercial banks, applying moral pressure, controlling direct loans, etc.

If inflation is not brought under control immediately, it will lead to unemployment and stagflation conditions, which can be more dangerous for the economy. Therefore, it is necessary to take timely and urgent measures now.

The writer, a Bir Muktijoddha, is former Tax Commissioner and Director, Bangladesh Satellite Co. Ltd.

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