Inflation up, government down

The survival of Bangladesh’s unelected interim government will be based largely on its stewardship of the country’s economy.

Amer Ahmed

Published in Himal SouthAsian (June 2007)

When Bangladesh’s current caretaker government was sworn in on 11 January, the country was on the brink of economic disaster. The economy was still licking its wounds from last year’s crippling labour riots, when the all-important garment industry had suddenly exploded over wage concerns. The political violence that followed, pitting Awami League forces against Bangladesh Nationalist Party (BNP) forces, brought life to a halt in the capital and other major cities in January and February. Industry – with the garments sector being among the most visible and hard hit – took on losses that amounted up to millions of dollars a day. Small businesses relying on daily commerce felt the pinch in the absence of customers and consumers.

In a country where about half the population lives on less than a dollar (BDT 69) a day, it is safe to assume that the common Bangladeshi cares more about being able to earn enough to survive than about who is sitting in the prime minister’s office, or how she got there. As such, even though the new caretaker government was sworn in with the blessings of the army, its real mandate effectively came from an economy deprived of much-needed stability. The interim administration appears to recognise this, and has been extremely active on the economic-policymaking front – taking a wide variety of proactive and reactive measures. The most high-profile of these has been its dealing with trade facilitation and achieving price stability.

The government has achieved substantial success in the former, but is yet to succeed in controlling inflation. Reforms targeted at the country’s deep-sea port at Chittagong – which handles about half of international trade – have been at the centre of the administration’s proactive initiatives. Prior to 11 January, the port was notoriously rife with corruption, mismanagement and political vested-interest groups. Racketeering and extortion were widespread and went largely unopposed, with local businesses reportedly paying premiums in excess of 20 percent for freight handling.

One of the first acts of the caretaker government was to set up a taskforce to assist in port-management reforms, and its success has been extraordinary. The turnaround time of ships has dropped by more than half, even as the number of ships handled has increased. More tellingly, there are now no ships sitting at anchor, whereas previously the average wait to dock was about two weeks. The measures taken by the military-assisted taskforce included aggressive and simultaneous anti-corruption and anti-crime drives, an improved management structure, and privatisation of various port functions. An integrated approach to handling freight has more than doubled the number of containers that Chittagong can handle in a day. The healthy export sectors, including the garments industry, are undoubtedly the principal beneficiaries of these reforms.

Hoarders’ mark-up
Despite the obvious benefits of these port reforms, it is still too early to evaluate their impact on the Bangladeshi economy as a whole. In contrast, the government is being judged on a daily basis over its handling of the rising inflation rate – a long-time problem that has dogged successive governments. With the consumer price index (CPI) very closely tied to the country’s food stores, rising inflation is felt most painfully through the soaring prices of essential food commodities. Any inflation-mitigation policy would thus have to focus on reducing food-price increases. The question is: What policy measures could the government actually take to curb these increases?

The conventional wisdom is that the rising commodity prices are due to strategic behaviour by certain distributors – aptly referred to as ‘hoarders’ by the media. The essential-foods market in Dhaka is something of an oligopoly, with a relatively small number of companies buying wholesale and reselling to the retailers in the capital. These companies have been able to limit the supply to retailers, and consequently charge increasingly high mark-ups on these goods. On significant food items, price increases typically do not notably reduce demand. The Centre for Policy Dialogue, a Dhaka-based economic think tank, has found that there is a cartel of importers of essential commodities that is in complete control of food imports, and is able to mark up prices at will.

Identifying the ‘hoarders’ as the primary inflationary agents, the government has taken three measures to weaken their mark-up power. The first was to reduce tariffs, to make imported foodstuffs more competitive against domestic products. The second was to task various law-enforcement agencies to identify and apprehend the hoarding companies. Finally, the government intervened in the market directly, by deploying the paramilitary Bangladesh Rifles to set up fair-price food-sale centres throughout the capital, to sell commodities at prices lower than could be found in the bazaars.

The economy’s response to these measures has been sluggish, however. From 6.8 percent last July, the inflation rate rose to 7.4 percent in March. Both the Asian Development Bank (ADB) and the World Bank have expressed concern at the ineffectiveness of the government’s approach. The government may have been mistaken in focusing exclusively on hoarders. Various pundits in and out of Bangladesh have argued that the current inflation-rate increases can be ascribed to other factors, most importantly the increases in fuel prices that jack up transportation costs and reduce domestic production. In addition, the ADB has pointed its finger at an economy that has been overheated due to increased remittances, foreign revenue from increased exports, and rapid private-sector credit growth, all of which have exerted strong inflationary pressures on the economy.

Pay and feed
Despite such available insights, the government has yet to formulate a strong policy response to the galloping inflation – although the Bangladesh Bank, the country’s central bank, has recently recognised the importance of a coordinated monetary-fiscal policy strategy. Less-than-expected revenue collection and lower foreign-aid receipts have also left the government with much less to spend this fiscal year. If it is to hold any hope of tightening the money supply, the current administration will need a disciplined fiscal policy, keeping its borrowing at a minimum. With the budget for the next fiscal year yet to be determined, the government’s fiscal policy is going to be watched much more closely this year, both in Dhaka and internationally.

Aside from monetary policies (such as increasing exchange-rate flexibility), the only policy that the government could implement at this stage with any immediately visible effect would be to activate social safety-net programmes, to mitigate the suffering of the poorest Bangladeshis – those who will undoubtedly bear the brunt of higher food and fuel prices. In the medium term, the government can improve delivery mechanisms and facilitate commodity supply. The trade-facilitation policies that the government has in the works might have the secondary effect of addressing this latter objective. However, increasing food prices in neighbouring countries – and hence, the prices of food imports – may blunt the efficacy of any trade liberalisation.

While Bangladesh’s civil society – under the political and media restrictions placed on it by the government – is increasingly impatient for a return to democracy, at this point this discontent does not seem to present an immediate threat to the interim administration’s viability. As such, the survival of this unelected government is largely contingent on successful economic management; and the support of a paid and fed labour force, coupled with that of a thriving business community, will be critical to the government’s continued survival. The caretaker government appears to be cognisant of this reality, and has made attempts at keeping these two support bases happy. This has not been easy for the authorities, given that their anti-corruption drive has made many in the business community nervous, even while their early actions against slum-dwellers in Dhaka were perceived by many as being anti-poor.

While the positive fallout of the trade-facilitation programme will only be able to be judged in the long run – perhaps long after the present regime is gone – it is inflation that will affect the government’s scorecard as far as the common Bangladeshi citizen is concerned. And as of now, the authorities have gotten barely passing grades.

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