Price Hike is one 0f The Main Social Problems in Bangladesh which is Responsible for The Low standard of Living

of Common People of Bangladesh.

i A Report on

EFFECT OF PRICE HIKE ON THE COMMON PEOPLE OF BANGLADESH 20 April 2011 Prepared For The Governor BY AHADUL IMAM (2010160 35) Distribution List: Deputy Governor Executive Director Office Copy
(Approved by the Ministry of Finance, Government of the Peoples Republic of Bangladesh) ii

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report is submitted. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, photocopying, recording or otherwise, without the prior permission of the authority stated above.

iii

Forwarding Letter
The Secretary Finance Division Ministry of Finance Government of the Peoples Republic of Bangladesh. Dear Sir, I have the honor and privileges to present the report of the committee set up by you to research about the Effect of Price Hike on the Common People of Bangladesh. I would

like to place on record the great help I received from Mr. Ershadul Haque who has acted as an adviser. I would like to express my heartfelt thanks and gratitude for the guidance he has rendered to formulate this report into a totality.

Yours sincerely Dated: Dhaka May 12, 2011 MD. NAIM HOSSAIN PATOARY Governor Banglade sh Bank

iv

Preface
The aim of this report is to have a clear view of recent price hike of Bangladesh and its effect on the common people. Price hike has a huge impact on the mass people of the developing countries like Bangladesh. In this report we will sort out the present economic condition and the impact of price hike in Bangladesh keeping in view of world economy and world market. We will also put forward some humble recommendation for kind consideration.

Acknowledgements
First I would like to thank Mr. Ershadul Haque for giving the idea and inspiring me to do the research of this. I also like to thank other members of this project whose participation has made the project substantial. I acknowledge the endless help that I have received from various internet sources. There are a large number of institutions and organizations who have supported and provided with various information, data etc during the preparation of this project. I would like to thank the following institutions: Ministry of Finance Dhaka Chamber of Commerce Petrobangla (Bangladesh Oil, Gas and Mineral Corporation)

BMPL (Bangladesh Maize Products Limited) Bangladesh Export Processing Zone Authority National Association of Economic Development Institute of Economic Affairs IFPRI (International Food Policy Research Institute) Bangladesh Garments Manufacturers and Exporters Association Bangladesh knitwear Manufacturers and Exporters Association Ministry of Industry Bangladesh Bureau of Statistics vi Dhaka Chamber of Commerce and Industries Institute of Microfinance (InM) Federation of Bangladesh Chambers of Commerce and Industries Ministry of Planning Ministry of Agriculture Ministry of Textile and Jute Ministry of Commerce We also acknowledge with thanks the co-operation of the following individuals:

Prof. Dr. Wahiduddin Mahmud, Dept of Economics, University of Dhaka Mr. Shariful Islam, Secretary, MBF Mr. A.F.M. Fakrul Islam Munshi, President, Agribusiness Development Organization of Bangladesh Mr. Prasanta Bhushan Barua, joint chief, Health Economics Unit, M/O Health ATM Mustafa Kamal, JS, Economic relations Division Md. Ershad Hossain , Director, Bangladesh Textile Mills Corporation Md. Muslim Chowdhury, JS, Finance Division Tajkera Begum, General Manager, Bureau of Statistics vii

Table of Contents
Forwarding letter-----------------------------------------------------------------iv Preface-----------------------------------------------------------------------------v Acknowledgement--------------------------------------------------------------vi Summary--------------------------------------------------------------------------xi

1. Introduction--------------------------------------------------------------------1 2. Inflation Or Price Hike--------------------------------------------------------5 3. Classification of ----------------------------5 Inflation [theoretical view]

4. Literature Review--------------------------------------------------------------6 5. Price Hike and Nexus---------------------------------7 Economic Growth

6. The State of Price Hike in Bangladesh------------------------------------8 7. Food Price Hike Bangladesh---------------------------------------------10 8. Fuel price hike, Bangladesh------------------- --14 global economy In and Price

9. Causes of Hike-----------------------------------------------------------17 9.1 Corruption----------------------------------------------------------17 9.2 Unbalanced Economy--------------------------------------------19 9.3 Natural Calamities------------------------------------------------20 9.4 Raising price in world market----------------------------------21 9.5 Lower growth in agricultural sector--------------------------22

9.6 Lack of technology------------------------------------------------23 viii 9.7 Raising price of fuel----------------------------------------------24 9.8 Import oriented--------------------------------------------------24 9.9 Supply Shortage--------------------------------------------------25 9.10 Market Syndication ------------------------------------------- 25 9.11 Increase in wage rate----------------------------------------- 26 9.12 Exchange Rate ------------------------------------------------- 26 9.13 Taking initiative against corruption/ fear among Businessmen----------------------------------------------------27 10. How Natural Disaster affects the Price Hike in Bangladesh-----27 11. How Technological Development Contributes in Price Hike----28 12. Effect of Globalization hike----------------------------------29 13. Effect Of Hike------------------------------------------------------- 31 13.1 A Model----------------------------------31 13.2 Consumers are the Ultimate Sufferers------------------32 13.3 Rural (Quantitative) -----------------------------------------34 on price Price

Macroeconomic

13.4 Change in food consumption (rural) --------------------36 13.5 Malnutrition Due to Price Hike---------------------------38 13.6 Quality of food intake---------------------------------------39 14. CONCLUSIONS------------------------------------------------------------42 15. RECOMMENDATION----------------------------------------------------43 Appendices------------------------------------------------------------------A -1 Acronyms and Abbreviations----------------------------------------------45 List of References-------------------------------------------------------------46 Bibliography------------------------------------------------------------------47 Glossary------------------------------------------------------------------------48 Index---------------------------------------------------------------------------50 ix

List of Illustrations
Table (a): Rate Of Inflation In Bangladesh Table (b): Inflation Rate Of Food And Non-Food Items Table(c): Prices Changes of Selected Commodities Sept 2009- Sept 2010

Table (d): Rice production 2000-01 to 2005-06 (in thousand tons) Table(e): Import Condition Of Bangladesh Table (f): Socio-economic Profile Of The Rural Sample Household Table(g) : Rice consumption by wealth quintiles Table(h) : Per capita daily rice consumption by districts

Summary
With the price increase of essentials capturing headlines of our national newspapers and TVs almost everyday. Because this price hiking problem has become the main social problem in Bangladesh. People are suffering most in this problem specially the poor peoples. There are many reasons behind this problem. According to The finance and planning adviser, Mirza Azizul Islam, international price hike of essential necessities as being responsible for high domestic prices. Of course, international market price is also responsible for domestic

inflation, but only partially. The advisers statement simply ignored other domestic factors, many of which created by the action by the caretaker Government, and also some of which created by the previous government. According to our study we identified some supply-side factors as being responsible, such as hoarding, and loss of business confidence, administered energy price hike, international price hike of essential commodities, bribe and illegal toll collection, structural and institutional constraints etc. corruption of so called political leaders and different government officials etc are also responsible for this problem. And if the food price is not controlled, the inflation rate may reach double-digit level very soon which is currently 7.5%. In our report we tried to figure out these reasons. And we tried to find some solution about this problem. we also tried to figure out the bad effects of this problem. we hope by reading this paper the readers will able to figure out the main reasons behind this problem and also able to reduce or solve this problem.

Xi

1. INTRODUCTION
Bangladesh is a country of middle income. Nearly 65% of total population income is less than $1. Bangladesh is primarily dependent on agrarian economy. 66% of in Bangladesh people are working in agriculture sector. Nowadays price hike is one of the main concerns of Bangladeshi people. Due to the price hike of essential commodities, life has become unbearable for the people of middle, lower-middle and the low income group in

Bangladesh. The price of essential commodities has gone beyond the purchasing power of the common people. Though their income is not increasing as much as need but their expenses are increasing day by day. As a result people consume more than their income. And poor people are getting poorer day by day. Government has taken some short-term policies but those are not paying off. In this report we tried to understand that why price hike in Bangladesh, what is the reason behind it and what consequent are arises among Bangladesh people for these unsustainable price hike in consumption goods and what are the initiative measures government can take to at least make the price level sustainable . Inflation or price hike is the rise in general level of prices of goods and services. In Bangladesh it has become the main social problem. Inflation does not mean that all prices are increasing, even during period of rapid inflation; some prices may be relatively constant while others are falling. The troublesome aspect of inflation is that prices rise unevenly, some raises sharply, some slowly and some dont rise at all. The main measure of inflation is the consumer price index. Recently the inflation rate in Bangladesh is so high that the price of essential commodities has gone beyond the purchasing of the common people. In 2011 the rate of inflation is 8.10% which was 5.04% in 2010.If we go back to the year 2003 the inflation rate was then only 3.10%.The rate of inflation is increasing day by day and for that the living standard of Bangladeshi people is becoming low. 1 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 % per month and if adequate anti inflationary measures are not taken, the overall general inflation might touch a double digit figure.

The current rate of rise in inflationary pressure suggests that the rate of general inflation might reach to 10.71 % by the end of this fiscal year and the food inflation may reach to 12.84 percent in June 2011.Should there be a double digit inflation, this would pose a severe threat to the macroeconomic 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. Last year, the International Monetary Fund (IMF) also warned Bangladesh that excess liquidity and resurgent international commodity and food prices might push inflation to double-digit levels by year-end (The Daily Star, 30 October 2009).Food inflation leaves a harmful impact on the purchasing power when the per capita GDP does not correspond with inflation. From August 2009 to June 2010, the food inflation has risen by 5.7 percent whereas GDP growth rate has fallen by 0.1%, indicating that the purchasing power of the people shrunk drastically. Price hike of petroleum fuels in Bangladesh has aroused growing concerns over misery of common people and adverse impact on economy while different organizations demanded the government to cancel the price hike decision to increase prices of all petroleum products by 33 % to 67 %. Economists said the fuel price rise will push up inflation rate and worsen misery of common people, especially the low-income people, who have already suffered a lot from the soaring prices of essentials. They said the fuel price rise will definitely increase transportation cost of food commodities, resulting in the increase of the food price. Besides, the production cost of rice, the staple in Bangladesh, will also be increased as 2 90% of over 1 million water pumps for paddy irrigation in the country are diesel driven. A local think tank Shamunnay in a report said the increased price of diesel and kerosene

(by 37.5%) will lead to more inflation and create 400,000 new poor people in the country. Meanwhile, many people are living amid fear of losing jobs as industries will suffer a heavy blow because of the fuel price like. The country's garment manufacturers said many ready-made garment factories will be shutdown gradually if the government doesn't reduce the fuel prices. Bangladesh Garments Manufacturers and Exporters Associationsaid the production cost of the exportable apparel items will go up by at least 15% due to the fuel price adjustment. The ready-made garment sector accounts for nearly 76% of the country's total export earning. Around 2,800 garment factories in the country have to pay additional tens of millions of U.S. dollars for transportation cost of consignments and use of diesel-run generators due to insufficient supply of electricity, they said. Bangladesh has no specific reason of inflation at present. Inflation is increasing more and more for several reasons. But formation of syndicate and corruption is the main reason behind this. But lower growth in agricultural sector, raising price in world market, raising price of fuel, decreasing the price of money, import cost, supply shortage, increase in wage rate, exchange rate, power crisis, natural disaster, transportation problem, illegal toll collection, street lack of communication and co-ordination in between different Government officers and taking initiative against corruption/ fear among businessmen etc are also responsible for recent price hike in Bangladesh. Bangladesh is the youngest country in the South Asian region. The economy has experienced accelerated economic growth during the early 1990s in comparison with the 1980s. The GDP growth rate declined moderately during the second half of 1980s when inflation rate gradually decreased to below 8-percent. However, a moderate rate of inflation and an increasing rate of GDP growth are observed throughout the 1990s. Throughout the first half of the 1990s, inflation rate was, on average, 5.37 %, while GDP growth rate was 4.06 %. Although inflation rate increased, on average, to 5.52% in the second half of the 1990s, the growth rate of

GDP continued to increase. The increasing trend of inflation rate during the latter half of 3 1990s had been corrected since the beginning of the new decade after 1990s and was observed at 4.14 %, on average, during 2001 to 2005, when growth rate of GDP was, on average, 5.19 %. So the GDP and inflation rate both the positive and negative relations between them. The development of the economy largely depends on the proportional development of middleclass and poor people. Due to the price hike of essential food items, life has become unbearable for the people of middle, lower-middle and the low income group. The price of essential commodities has gone beyond the purchasing power of the common people. The continuous rise in GDP holds the GDP growth nearly 6% for couple of year.The price level chart shows that increase in price is the main constraint of savings and investment by both public and private. The corrupt rulers of Bangladesh paid no attention to achieving self-sufficiency in food and essential items. The agriculture of the country has been almost destroyed. So, we mostly dependent on import items. Import relates with foreign currency and reserves of foreign currency measure the exchange rate, huge volume of import decrease supply and decrease the real exchange rate as well as PPP. Import destroys our local industry and due to destruction of domestic industry the unemployment rise. So, the living standard of the people of our country decreases. And all this things ultimately affects the GDP, which is the measurement of economic growth and development. In this study we tried to point out the necessary measures that should be taken to overcome price hike problem. We can solve this problem by taking the following measures. Identifying the syndicate groups. By improving law and order.

 By framing appropriate laws by the Government to eliminate middle classes in trading. By introducing effective monitoring system.

Discussions
2. Inflation or Price Hike
Inflation, which some economists have dubbed as the cruelest tax of all, is eroding purchasing power of consumers, especially the fixed and low income groups of people in net commodity importing countries, around the world. Or, inflation is the rise in general level of prices of goods and services. It can be said in other ways that inflation is the decrease in value of money. It means that Each dollar can purchase fewer amounts of goods and service then previous. It reduces the purchasing power of the currency. Inflation does not mean that all prices are increasing, even during period of rapid inflation; some prices may be relatively constant while others are falling. The troublesome aspect of inflation is that prices raise unevenly, some raises sharply, some slowly and some dont rise at all. The main measure of inflation is the consumer price index.

3. Classification of Inflation [theoretical view]

Economists distinguish between two types of inflation, those are described below: DemandPull Inflation: Demand - pull inflation is occurred when the demand for goods and services exceeds the actual production capacity of the economy. It happens for mainly;

 Availability of the money increased in the market. Spending of the people increase. Cost-Push Inflation: Cost-push inflation occurs when per unit production cost increase and profitability of producing is not attractable. As a result the economys supply of goods and services declines and the price level increase. 5

4. Literature Review
In general, the cause of inflation in Developed countries is broadly identified as growth of money supply, based on the famous Premise of the great monetary economist, Milton Friedman inflation is always and everywhere a monetary phenomenon. According to Friedmans quantity theory of money there is a general agreement that growth in the quantity of money is the primary determinant of the inflation rate (Mankiew, 1997:156).In developing countries, in contrast, inflation is not a purely monetary phenomenon, but is often linked with fiscal imbalances and deficiencies in sound internal economic policies. Beside, factors typically related to fiscal imbalances such as higher money growth and exchange rate depreciation arising from a balance of payments crisis dominate the inflation process in developing countries, as discussed by Montiel (1989); Sergent and Wallace (1981); Liviatan and Piterman (1986). Seasonal shortages pertaining to agricultural production and other supply side bottlenecks such as international oil price are also known as the common factors of inflation in developing economics. There are a number of studies in Bangladesh context where the dominant factors explaining the Inflationary processes in Bangladesh have been examined; though only a few of them are recent. In an early study, Taslim (1982) attempted to analyze the inflationary process in Bangladesh in light of the structuralist-monetarist controversy using the data for FY60 to FY80. The author systematically tested both the views in the context of Bangladesh as well as a hybrid model considering both views together. The findings clearly

indicate that the rate of change of money supply and devaluation are the most significant explanatory variables. Any devaluation of the domestic currency is followed by an almost equal proportionate increase in the rate of inflation, while an increase in money supply does not induce an equal proportionate increase in the inflation rate as would be suggested by an extreme monetarist view. In contrast, in formulating a model of inflation for Bangladesh, Begum (1991) considers a detailed approach that concentrates both on aggregate supply and demand. The empirical test shows that the significant variables 6 for inflation are agricultural and import bottlenecks, government expenditure, rate of interest, wage rate, bank credit and expected inflation. The results regarding agricultural bottlenecks, rate of Interest and credit show the dominance of the supply-side cost-push effect, while the results regarding import bottlenecks, government expenditures, wage and expected inflation show the dominance of the demand side effect. On the other hand, in investigating the relationship between money, prices, output and exchange rate in Bangladesh during the period 1974-92, Chowdhury et al. (1995) find that the inflationary process in Bangladesh cannot be explained exclusively by the monetarist or the structuralize factors. The paper noted that monetary shocks have a strong, but relatively short-run, impact on inflation, and therefore suggested that tight money may put a short-term dampening effect on inflation and help stabilize the foreign trade sector, but may also cause a slowdown in the economy. Akhtaruzzaman (2005) attempted to identify the variables that are believed to generate inflation in Bangladesh during the period 1973-2002. The paper observes that inflation is negatively related with real income. In addition, both the level and rate of the devaluation of exchange rate, growth of money supply and deposit interest rate have statistically

significant role in explaining the inflationary process in Bangladesh. The analysis of above empirical studies in the context of Bangladesh suggests that both monetary and structuralize factors are relevant in explaining the inflationary process.

5. Price Hike And Economic Growth Nexus

The nexus between inflation and economic growth remains a controversial one in economic literature as both the monetarist and the structuralists have different opinion on the role of inflation on economic growth. The monetarists view inflation is detrimental for economic growth whereas the structuralists opine that it is essential for growth. Bruno and Easterlys (1998) study supports the views expressed in Dornbusch and Reynoso (1989), and Levine and Renelt (1992) on inflation-growth nexus. Their investigation reports a robust empirical result that economic growth falls sharply during high-inflation regimes. Using data for around 100 countries from 1960 to 1990, Barro (1995) found that an increase in average inflation 7 by 10 percentage points per year reduces the growth rate of real Gross Domestic Product (GDP) per capita by 0.2 to 0.3 percentage points per year and the ratio of investment to GDP falls 0.4 to 0.5 percentage points. His study also shows that although the adverse impact of inflation on growth sounds small, the long run effects on standards of living are substantial. Following a seminal work by Stanley Fischer (1993), there is a broader consensus amongst researchers that extreme inflation rates (for instance, above 40 percent per year), are associated with reduced economic growth. Using nonlinear estimation techniques, Khan and Senhadji (2001) has found a negative relationship between inflation and growth. Their paper shows that above a threshold level (one percent to three percent for industrial economies and 11 percent to 12 percent for developing economies) inflation considerably slows growth. Ahmed and Mortaza (2005) shows there exists a statistically significant long-run

negative relationship between inflation and economic growth in Bangladesh. Their model found that for Bangladesh six percent is the threshold level (that is, structural break point) of inflation. The paper concludes that any rate beyond this adversely affects economic growth in Bangladesh. In short, it can be said with some reservations that a low to-moderateinflationary regime is a sine qua non for the pursuit of economic growth with stability

6. The State of Price Hike in Bangladesh

Recent time during fiscal year [2010-2011] the price of the goods and services increase beyond the capabilities of the poor people. The point-to-point inflation climbed down below the double digit compared to that in July and August. The point-to-point inflation reached 10.10 points in July for the first time in the last two decades and went up further to 10.11 points in August this year. Point-to-point inflation soared to its record high of 10.10 per cent in July and inched up by 0.01 per cent in a month, Bangladesh Bureau of Statistics data showed. Economists and a consumer rights activist said unabated price hike of food items led to the double-digit growth of inflation and called for urgent steps to give consumers a respite from skyrocketing prices and restore business confidence. However, the 8 provisional data prepared by the Bangladesh Bureau of Statistics (BBS) and sent to the planning ministry showed that food inflation has dropped in both rural and urban areas.
Ye ar 200 3 200 4 Inflation rate (consumer prices) Ran k Percent Change Date of Information 2002 est. 80.65 % 2003 est.

3.10 % 117 5.60 % 67

200 5 200 6 200 7 200 8 200 9 201 0 201 1

6.00 % 160 7.00 % 160 7.20 % 163 9.10 % 184 8.90 % 137 5.40 % 148 8.10 % 185

7.14 % 16.67 % 2.86 % 26.39 % -2.20 % -39.33 % 50.00 %

2004 est. 2005 est. 2006 est. 2007 est. 2008 est. 2009 est. 2010 es

Table(a): Rate Of Inflation In Bangladesh The main problem is that the prices increase of daily commodity and essential food items such as rice, powder milk, soybean oil and grains and vegetables. The prices of the shopping goods are moderate in terms of daily convenient goods. Overall inflation rate continues to increase with a 0.85 percentage point increase in April compared to the rate in March. 0.45 and 1.59 percentage points increase inflation rate of food and non-food items. Inflation rate Rural Urban

Food 8.79 9.44 Non-food 7.83 6.09 Table (b): Inflation Rate Of Food And Non-Food Items Many economists raise there cautionary about price increase, The countrys economy would head for a state of stagflation if the government fails to cool Off some heat and check erosion in business confidenceeconomist Atiur Rahman cautioned. Official statistical agencys figures show annualized average inflation kept on creeping up steadily from as low as 1.66 per cent in 2000-01 fiscal year to 7.1 per cent in 2006-07; The

9 rate was 3.58 in 2001-02 and continued to go up since then, with 5.03 in 2002-2003, 5.64 in 2003-04, 7.35 in 2004-05 and 7.54 in 2005-06, according to the economic survey of the finance ministry. The jump was more galloping in pointto-point counts this year, from 5.94 per cent in January to 10.11 in August.

7. Food Price Hike 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 % per month and if adequate anti inflationary measures are not taken, the overall general inflation might touch a double digit figure. The current rate of rise in inflationary pressure suggests that the rate of general inflation might reach to 10.71 % by the end of this fiscal year and the food inflation may reach to 12.84 percent in June 2011.Should there be a double digit inflation, this would pose a severe threat to the macroeconomic stability in the country.

10 Rice price rose by five to 18 percent in last one month in spite of the 11.5 lakh metric tones of the grain in government stocks and projected Aman production of 1.3 crore tonnes.Prices of fine rice now range from Tk 32 a kilogram to Tk 44, while medium quality and coarse rice prices range from Tk 26 to Tk 33 a kg, according to a Trading Corporation of Bangladesh report released on January 6.Meanwhile, rising by 7 to 15 percent, flour now sells at Tk 22 to Tk 34 a kg, which was Tk 19 to Tk 32 a month back. Agronomists say the price hike is basically driven by high international prices, especially as India and Philippines faced production shortfall in droughts and typhoons respectively late last year. India lost 15 million metric tonnes of production while the Philippines imported 2.5 million metric tonnes of rice last year. Rice price in India remains $330 to $470 per tonne, while Thailand is not exporting rice at prices below $500 per tone. India also maintains bans on rice export since 2007.Agreeing to that Food and Disaster Management Minister Dr Abdur Razzaque said cold wave, which hampered milling of rice, also contributed to the rise. This price is not very intolerable and once the cold wave

goes, market will be stable," he also said at a media briefing at his ministry. He stressed starting open market sales to stable market if necessary saying the ministry already allocated 3,20,750 tones of rice for Food for Work and Test Relief. Meanwhile, economist Dr Mahabub Hossain said present price of rice is acceptable provided that farmers get benefit from it, but traders' syndication may manipulate it in line with international prices. He said rice situation now in domestic market is good and so there is no reason for any further price hike. Domestic annual rice demand is 2.7 crore tones, while this fiscal year's production is projected at 3.2 crore tones, including 1.9 crore tones boro next season, Dr Hossain said.

11

Commodities

Average Price (in percent)

increase

Different Types of Rice

32.35

Flour 42.43 Edible Oil 53.78 Pulses 4.02 Milk Products 27.58 Fish 7.69 Meat 19.09 Spices 25.28 Vegetables 6.03 Table(c): Prices Changes of Selected Commodities Sept 2009- Sept2010 The current level of inflation has surpassed BBs expectations. In its monetary policy statement (issued in July 2007), the BB targeted an annual average CPI within a range of 6.5-7.0 percent. The Economist Intelligence Unit (EIU) has revised its inflation figures forecast upwards for Bangladesh to 8.7 percent in 2008 (from 7.7 percent previously). According to the Consumers Association of Bangladesh (CAB), the prices of different types of rice, flour, edible oil, milk-products, fish, meat, spices, vegetables and energy products have increased notably (Table 1) in Bangladesh from September 2006 to September 2007. 12

Wheat prices prices

Rice

Soybean oil prices prices

Crude oil

Bangladesh has had a history of price volatilities; nevertheless, the level of inflation declined in the economy since 2005 in line with other countries, though it has shown an increasing trend in recent month. The low and middle group people in Bangladesh are primarily facing the burden of inflation. The exchequer of Bangladesh is also under severe pressure as oil prices are now hovering around US$100 a barrel in the international market. The Bangladesh Petroleum Corporations monthly loss has already exceeded BDT2.50 billion (US$36 million) per month as the state-owned entity sells petroleum products at much lower prices in the domestic market than their actual import costs. The difference (import price minus local market price) is being absorbed by the government exchequer as subsidies. The losses accumulated in the past have been financed through loans from the state-owned commercial banks.

13

8. Fuel price Bangladesh

hike,

global

economy

and

THE price of crude oil has crossed $146 per barrel. Most of the economies are suffering because of this hike, global

economic outlook is looking bad, and people are wondering where it will end up. Some analysts say it could be $150 per barrel before we see a correction, while others say it could even move up to $200. The price of fuel oil, on which the wheels of industrial civilization run, has been climbing steeply for the last five years. Before 2003, oil price was around $25, crossing $40 per barrel in 2004. By the third quarter of 2005 it was $60, reaching $75 in mid-2006. There was, however, a fall in price in the early part of 2007, and many analysts thought it would continue. But, after taking a breather for a while, the price again started galloping upwards, crossing $100 by the end of December 2007. The current year has been one of continuous breaking of records in price hike of fuel oil. The surge has triggered fears of over-inflation and slower economic growth, sparking protests around the world. The whole world, except possibly oil producers, is in a state of shock in the face of this onslaught. Despite the global community being in such a dire state, why is it that they have not taken any action so far to check this madness in the oil price market. The argument of free market does not apply here because, unless the galloping oil price is reined in immediately through direct intervention by the governments of the advanced industrial nations and the oil producers together, oil itself would be the cause of the death of the technological civilization it has been keeping alive so far. The oil shock of 1970s should still be remembered. It resulted in long-term fall in crude oil prices and a drop in the Saudi's market share. However, the oil biggies do not seem to have taken cognizance of this, and are yet to increase production to cool the market. 14 Though the entire world is suffering because of the extraordinary rise, the condition of weaker economies like

Bangladesh is especially precarious. Bangladesh had so far been supplying fuel at a subsidized rate. Among all the users of this essential commodity, the farmers are the worst hit. The transport sector needs oil at a cheaper rate, otherwise fares will rise, which will have a knock-on effect on the entire price structure. But there is also limit to subsidies, so the government has been compelled to draw the line on oil subsidies. In the budget for the current fiscal (2008-09), the government has withdrawn a large chunk of the oil subsidy, effecting an increase of between 33.84 to 50% in the market prices of different categories of fuel oil. This increase has raised the cost of transportation of goods, hence the prices of essential commodities in the wholesale and retail markets. The common people, who have already been suffering because of rising prices of food stuff, are now facing a worse situation. Looking at the continuing price surge in the global oil market, it appears that the worst for the developing world is yet to be seen. The advanced countries might be able to withstand the topsy-turvy oil price market a bit longer. Emerging economies like Bangladesh cannot hope to live through it without immediate intervention. Bangladesh has so far been able to stand the pressure to a certain extent, but cannot be expected to do so for an indefinite period. Why is the world community not taking a united stand to tame the wild behavior of the oil market? If the problem is the classical demand-supply regime, then there should be judicious use of the existing global stock of oil, and a strategy for survival of the present fossil-based technological civilization until an alternative for fossil fuel is discovered and made available in plenty. At the moment, the only way out is rationing of oil on a global scale. Oil is too strategic a commodity to be left to the speculators of the oil market and the monopolistic cartels who have no sympathy for the general consumers.

15 There seems to be no scarcity of oil, and the current situation could be a politically manipulated one. It is already late. The leaders of the advanced industrial economies must sit with the oil producing nations and decide on a strategy to not only stop further rise in oil price, but also to bring it down to a tolerable level. Countries, which have to import all their oil, should be provided with a safety net so that they may continue to receive it at a reasonable price. The Bangladesh government also needs to be more focused, especially about the condition of the vulnerable people who are the worst hit. Though guaranteed employment for 100 days, direct subsidy, increase of rice procurement price by Tk10, increased remittances, and disbursement of loans by the MFI/NGOs should work as organized "hedging" against the onslaught, easy credit facility at an affordable interest rate and on a long-term repayment basis should be available so that farmers may buy fertilizers and irrigation water in time. This support is particularly essential for the crop seasons. The fuel subsidy should be reached to the real target market by making the distribution channel more effective and accountable. The safety net program should be further widened to accommodate the people marginalised due to fuel price hike, especially in the urban areas. The government also needs to take measures to monitor and regulate the market so that unscrupulous traders cannot take advantage of the situation. Since creation of jobs serves society better than subsidy in any form, which often fails to reach the intended beneficiaries due to systemic bottlenecks, the thrust of the government should be to ensure public expenditure in employment generation activities. At the same time, more than any other issue, conservation of oil and food, measures to economise use of

fuel and food, avoidance of unnecessary luxury and wastage, introduction of food and fuel rationing, bringing in efficiency in public expenditure management including fuel expenses of SOEs, strong monitoring of the market and similar such activities should be topmost on the government's agenda. 16

9. Causes of Price Hike

Bangladesh has no specific reason of price hike at present. Both internal and external factors have contributed to the current price hike in Bangladesh. Inflation is increasing more and more for several reasons. But all reasons are not equally important. Some reasons influence more and some reasons influence less. We have identifies have identified some reasons of inflation after the observation of last several months. Sources said inflation rate in the recent period increased due to price hike of food items in both domestic and international markets. Inflation in Bangladesh also surged due to 21 to 33 per cent increase in the prices of petroleum products by the government. The reasons of inflation are: 1.Corruption 2.Unbalanced economy 3.natural calamities 4. Lower growth in agricultural sector 5. Raising price in world market 6.lack of technology 7. Raising price of fuel 8. Import cost 9.Supply Shortage. 10. Market Syndication 11. Increase in wage rate 12. Exchange rate 13.Taking initiative against corruption/ fear among businessmen.

Description of the reasons:

9.1 Corruption We can highlight the fact that The price hike in goods is due to corruption is a burning question of modern time. Political corruption is the use of legislated powers by government officials for illegitimate private gain. 17 Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Corruption is one of the main reason of low economic growth which leads the way to price hike. if commodity prices increased, a few lorries could be deployed and vegetables distributed or else, temporary solutions could be offered for other issues that crop up. Not only income levels low, commodity prices are increasing. There has only been a marginal increase in the cost of goods. But by going to the market, you know if the cost of goods has increased or not. Unfair cartel among the suppliers might seriously hamper the course of the economy by engendering inflation via the creation of a false supply shortage even during a period of robust growth in production. Such an undesirable event allegedly occurred in FY06 when the food inflation remained high (7.76 percent) in the same fiscal year despite the growth in food production (4.49 percent8 vis--vis 2.21 percent in FY05). Monopolistic control of several food items such as sugar, onion, pulses and edible oil by market syndication seems to have led this situation.9 Obviously such manipulation is a type of supply side disturbance. Taking initiative action against corruption and corrupted businessmen by the recent take-care government put fear among the businessmen. So most of themselves take away themselves from normal business flow or import and this occur shortage in goods and create inflation. Here is a graph shown below which relates the income and price .

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9.2 Unbalanced Economy

Bangladesh is a member of the 3rd world country. Its economic growth is too poor to describe. There is a vast difference between the rich and the poor. Because of this type of economy the rich are getting richer and the poor are getting poorer. Thus the unbalanced economy comes to the focus. Unbalanced economy is one of the main reasons why the price of commodities is rising. As our country is a 3rd world country, the people of our country cant grow or produce the necessary goods. We have to buy a lot of products from abroad. So we nr at great

disadvantage when it comes to import. The countries who export goods to us demand a high price. So Govt has no other choice but to apply tax or vat on those products. Thus the price of good is increasing. Typically import occupies a significant place in the Bangladesh economy, most of the essential food items (for example, sugar, rice, wheat, onion and edible oil) and, more generally, machineries, intermediate goods and raw materials used in production are imported. Cost of imports can, therefore, be expected to have a substantial influence on domestic inflation directly (through final goods) or indirectly (through intermediate goods). According to available statistics, import price index 19 (MPI) of Bangladesh has continuously soared over time. Import is increasing Gradually day-by-day and sudden hike international price or decrease in real interest raise the price of the goods. Bangladesh Bank (BB) has projected continuous inflation in the domestic economy due to constant external pressure on prices and demand side. If we look very closely, we see that most of the goods we import are mainly convenient and household goods like households [rice, oil, powder-milk. grains, flour etc]. So if the world price raises it affects the persons and economy directly. And decrease the purchasing power. Inflation would appear to have a more direct effect on the Bangladesh food price induced inflation than price developments in other food-exporting countries.

9.3 Natural Calamities

Natural calamities of Bangladesh with large population have been one of the main contributory factors of the rising cost of any good. Calamities like Earthquakes, floods, cyclones, droughts and other natural disasters affect infrastructure and physical capital, employment, farm production, energy and other aspects of the economy. These natural disasters affect 20 Agricultural production, produced for the consumers. Floods, for example, can wash away rich soil, affecting crops in the short run. A long-term drought can destroy an entire harvest. So after the disaster there is an shortage of the crops and the supply of the commodities decreases thus the price become increases. Sometimes the equipments that the farmers or producers use to produce anything destroy during the calamity, so they can not use those equipments for these reason the producers cant produce sufficient goods. So the price is to be high. In certain places, disasters prevent goods and materials from being transported for processing

and export because the roads are impassable. As a result, supply is reduced. When the quantity of supply is lowered, the obvious has to be done which is to increase the price. Not only the price of the product has to be increased by the price of anything that the product is a component of, has to be increased as well. The component could be a material from a foreign land where a disaster had recently occurred. The producer of the affected product wants to reduce their chances of making a loss, thus, the price increase.

9.4 Raising price in world market

Being a fundamental input of production, oil constitutes a significant portion of production cost in every sector of the economy. In spite of some recent adjustments in the administered price of energy products, much of the increased cost of imported fuel has not been passed on to end users, especially on diesel and kerosene. An increase in the diesel price stimulates inflation via increases in both food and non-food prices in both urban and rural areas.

21

9.5 Lower growth in agricultural sector

Every year natural calamity like flood and cyclone, and these hamper the agricultural production very much. And also mismanagement in fertilizer distribution, insufficient electricity supply hampers production. In recent years, rice production in the country remains stagnant except for the Boro, high yielding variety rice. 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 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.

22

Table (d): Rice production 2000-01 to 2005-06 (in thousand tons)

9.6 Lack of technology

Lack of technology is another main reason of price hike, especially in Bangladesh. In developed countries farmers or workers use latest technology to produce anything which gives more production within a short time, therefore the price is less. But for using the old technologies in our country we can not produce more in a short time. So the price of the commodities remains high. Sometimes TV, radio and media also helps people to know about the modern technology. for example, what are Chinese people doing to reduce the price of the commodities-now man can see through internet, TV and applying those methods, but for the lack of technology the people of Bangladesh are not aware of internet, satellite

channels etc. So we are not in a position to follow new methods and thus 23 Reduce price. Moreover, lack of good highways raises transportation costs Also. Most imports of Bangladesh originate in the developed countries (medicine, new machines, chemicals etc). Even, trade among developing nations is minor. So here the prices of the commodities are high.

9.7 Raising price of fuel

The net impact of recent fuel price is unlikely to be significant but it would have effect on poor people, whose livelihood depends on the use of kerosene and diesel. In order to catch up with the cost of imported oil, domestic prices have just been announced to go up immediately, which will result in a one-shot increase in CPI, followed by a round of gradual adjustment. Higher price, to some extent, is not domestically induced. Rather it is attributed to an increase in international prices, particularly of several food items as well as items such as steel and oil. If we look at the international price of the oil then we see that oil price that was 25 dollar per barrel in 1999FY now it is 98.99 dollar. Which affect almost every sector such as industry, agriculture, transportation and increasing the cost of production. 9.8 Import oriented Typically import occupies a significant place in the Bangladesh economy, most of the essential food items (for example, sugar, rice, wheat, onion and edible oil) and, more generally, machineries, intermediate goods and raw materials used in production are imported. Cost of imports can, therefore, be expected to have a substantial influence on domestic inflation directly (through final goods) or indirectly (through intermediate goods). According to

available statistics, import price index (MPI) of Bangladesh has continuously soared over time. Import is increasing gradually day-by-day and sudden hike international price or decrease in real interest raise the price of the goods. Bangladesh Bank (BB) has projected continuous inflation in the domestic economy due to constant external pressure on prices and demand side. If we look very closely, we see that most of the goods we import are mainly convenient and household goods like households [rice, 24 oil, powder-milk. grains, flour etc]. So if the world price raises it affects the persons and economy directly. And decrease purchasing power. Year Imports 2003 2004 2005 2006 2007 $8,500,000,00 0 $9,459,000,00 0 $10,030,000,0 00 $12,970,000,0 00 $13,770,000,0 00 Rank 65 65 67 66 70 11.28 % 6.04 % 29.31 % 6.17 % Percent Change Date of Information 2002 2003 est. 2004 est. 2005 est. 2006 est.

Table(e): Import Condition Of Bangladesh The central bank in a study published in its OctoberDecember quarterly also assumed that Indian inflation would appear to have a more direct effect on the Bangladesh food price induced inflation than price developments in other food-exporting countries.

9.9 Supply Shortage

Production in agriculture and fisheries sectors in Bangladesh is still subject to the whims of nature to a notable extent. It has been claimed that one of the main causes of the high inflation rate is the supply shortage of the agricultural and industrial goods.

9.10 Market Syndication

Unfair cartel among the suppliers might seriously hamper the course of the economy by engendering inflation via the creation of a false supply shortage even during a period of robust growth in production. Such an undesirable event allegedly occurred in FY06 when the food inflation remained high (7.76 percent) in the same fiscal year despite the growth in food production (4.49 percent8 vis--vis 2.21 percent in FY05). Monopolistic control of several food items such as sugar, onion, pulses and 25 edible oil by market syndication seems to have led this situation.9 Obviously such manipulation is a type of supply side disturbance.

9.11 Increase in wage rate

The role of inflationary expectations is also important in explaining inflationary process in a given period. If workers expect a rise in the inflation rate, they will demand higher nominal wage to keep their real wage stable. Once people come to expect high rates of inflation, the expectation alone will generate further inflation without any change in the existing labor market conditions. In general, if there is a lack of confidence in monetary policy, inflationary expectations are likely to be self-fulfilling.

9.12 Exchange Rate

Exchange rate exerts inflationary pressure mainly via import prices. Historically, exchange rate in Bangladesh exhibited steady increase over time. The period average BDT-USD exchange rate was recorded at 69.39 during FY07 in comparison to 67.29 in 2006, 40.20 and 50.31 during FY95 and FY00 respectively. The comparable FY06 figure rose to 67.08. Exchange rate generally increases the import cost and that cause inflation.

Real Effective Exchange Rate 26

9.13 Taking initiative against corruption/ fear among businessmen:

Taking initiative action against corruption and corrupted businessmen by the recent take-care government put fear among the businessmen. So most of themselves take away themselves from normal business flow or import and this occur shortage in goods and create inflation.

10. How Natural Disaster affects the Price Hike in Bangladesh

Bangladesh is a disaster prone country and we experience almost all kinds of natural disasters like cyclone, flood,

tornado, river, erosion, draught etc in this soil. Each of these disasters singly affects the economy severely and sufferings of the poor people of Bangladesh increases by many fold as it has direct impact on the price hikes. Following are some of the major causes of price hike due to natural disaster:

a.

Destruction of Agricultural Products : Most of

the times natural disasters wipe out the paddy field, vegetables, poultry firms etc causing severe shortage of food items those are essential for livelihood. If these items are destroyed in any part of the country, it has stern impact on our highly inhabited nation. Shortage of production of rice, wheat, vegetable, meet etc cant match the demand and supply needs causing severe price hike on those commodities.

b.

Labor Cost Increases: Most of our poor people

earn their bread and butter on daily basis working as labor in different fields. When his own house is destroyed he cant go for any work before it is restructured, thus shortage of labors are felt in those days affecting the new firming and production. Such crisis also force to the high cost of essential commodities immediately.

c.

Reduction of Purchase Power vs. Price Hike:

People loose their purchase power immediately after the disaster and it may have prolonged blow. When an individual does not have money in his hand and 27 his earning sources are broken he feels the result of price hike more than others even if it is not severe.

d. Increases the Need of Import: Government is

forced to import the commodities from foreign countries to meet the shortage items those have been destroyed or damaged by the disaster. Such procurement with foreign currency is generally costly and it will definitely cause price hike in the local markets.

e.

Loosing the Agricultural Land: River erosion,

siltation and water logging compel to loose the agricultural land and this phenomenon is common in Bangladesh. Reduction of agricultural land automatically leads to smaller production of critical commodities affecting the supply chain. In this case, demand is more pronounced than supply causing massive price hike of available essentials.

11. How Technological Development Contributes in Price Hike

Technology has changed the world to a great extent in terms of development. However, at times it has negative impact also. Following are some of the issues that may contribute negatively in terms of development.

a. Shortage of Trained Manpower: To take the

advantage of technology, users need to be trained and educated to use the required machineries. Once a society is familiar to use the technology as a matter of routine for their daily works, it may not have the ability to go back to their traditional system. Thus, untrained manpower on advanced equipment may lead to smaller production causing price hike on the societal needs.

b. Loss of Fertility of the Land: To increase the

productivity most of the times fertilizers and pesticides are used in the firms or land. Prolonged and frequent use of fertilizers and pesticides generally causes loss of natural richness of the land. As a result, production cost boosts every year since the fertilizer needs also swell. Ultimately, it would be a direct cause of price hike. 28 c. Health Hazards vs. Price Hike: Use of fertilizers and pesticides contributes more productions but lead to cancerous diseases. Our society now experiences more cancer patients than before due to this reason. Even the

developed societies are now looking for home-grown food items to overcome this problem. But the indigenous production has now become costlier.

d.

Electricity

and

Petroleum

Consumption:

Generally, all kinds of modern equipment consume either electricity or petroleum and Bangladesh has to spent huge amount of foreign currency for both these items. Even the scarce electricity at times becomes the lone source of non productivity causing price hike of limited supplied stuff.

e.Non Availability of Modern Equipment to the Underprivileged Class of People: Due to financial
constraint of farmers and other poor class people of the society who earn their livelihood on daily basis cant purchase modern gears. Even at time they have to procure local or traditional items with high cost as these are also not readily available in present days. Such scarcity of modern machinery to the poor contributes to a smaller amount of production and inadequate supply resulting to price hike.

12. Effect of Globalization on price hike

On price hike globalization has a vast affect. At first we need to know what globalization is.

Globalization:
Globalization is a system of interaction among the countries of the world in order to develop the global economy. Globalization refers to the integration of economics and society of all over the world. Globalization involves technological, economical, political and cultural exchange made possible largely by advances in communication and infrastructure. There are two types of integration.

Positive integration Negative integration

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1. Positive integration:
Standardization and modification of international trade rules and marketing.

2. Negative integration:
Breakdown of international trade barrier. Therefore we can see that on the trade and marketing globalization has a vast effect and affects both. Now let us what are the factors of globalization or how globalization affect on price hike. For globalization we came under a same umbrella. Now a multinational company of United States of America and a local company of any developing country are standing in a same platform. Due to trade policy of globalization, any company can establish themselves in any other counties. So the multinational companies of first world country lay infrastructure in third world countries. Thereby they produce the goods are more addictive then local company. As because the foreign companies have fame and they have the economical backup to capture the advertizing market. So the general people are more seduced to those companies rather than local companies. Now let us see how price increases? 1. In an observation it has been seen that the same goods are sold in India are cheaper than Bangladesh. Because to do the business in Bangladesh the company need to give certain tax and also they certain tax and also they have to calculate the carrying cost, thereby the price is becoming high and higher than other countries. 2. Now consider a company of Bangladesh for example Walton Motorbike Company has a competition with Indian TVS motorbike. Through the government has and reducing the tax over bikes produced by over our country. But even through the general people are more interested in overseas bikes. Now if Walton wants to compitite then they have to produce a better bikes then TVS company, thereby he price

would be higher. And also they need to give better advertisement than TVS. So hence the price would be higher. 30

13. Effect of Price Hike

Prices of essentials, for example- cereals, pulses, vegetables, spices, fish, meat/eggs, milk, oil/fats, sugar, fruits, are always in a hike in the kitchen markets of Bangladesh for the past couple of years. But these prices soar sky-high on and during specific occasions.

13.1 A Macroeconomic Model

We can explain these phenomena by the simple aggregate demand and supply model. According to macroeconomic theories, raw material prices affect short-run aggregate supply. An increase in raw material prices increases a firms costs and decreases the output supplied at each price level.

Figure: The effects of an increase in raw material prices

Due to lack of good governance producers / suppliers costs go up and supply declines (sometimes, a group of traders artificially restrict supply) which is depicted by the upward shift of the SAS curve. They escalate prices to cover that

costs and to make profits. But the extra burden is borne by the general consumers about 40 per cent of whom are already living below the poverty line. 31 As the prices shoot up (from P0 to P1), the demanders are demanding lesser than before. They are forced to cut off consumption because of their fixed and low incomes. Thus a drop in aggregate demand reduces the Real GNP level (in the diagram from Y0 to Y1) which shows the economy itself is getting poorer. Here we are considering essential food that are of inelastic demand. So, Even if the prices increase people are bound to consume a certain level. They need to take three decent meals a day. So they are caught in this vicious circle of price hike.

13.2 Consumers are the Ultimate Sufferers

The consumer movement in Bangladesh is very weak as compared to that of the developed nations just because they are not aware of their rights even though the Right to Life is the first and foremost fundamental of a person. For people with fixed incomes, price surges such as this are having a toll on the quality of life. The poor, the lowermiddle class and the middle class are the most vulnerable. In urban homes, family expenditures on food and groceries have been seen going up by more than 50 per cent within last one year. While the vocal urban consumers, mostly fixed income groups, have raised their voices of anger and frustration, it is the rural folk, who spend almost 80 percent of their income on food, are the worst hit (The Daily Star, 2007). It is unfortunate that in Bangladesh most of the farmers do not have the access to market. The traditional distribution chain, from farm to fork, is too long and cumbersome. It

involves too many middlemen, forcing consumers to pay as much as four times what the farmer gets paid for his products. The following table shows the trade volumes and monthly trader incomes in 2007. 32

It is obvious from the table that the poor farmers get lower incomes than any of the abovementioned trading actors. The rise in prices of essentials on the eve of Ramadan has become a recurrent phenomenon in our country because of the governments inaction. The sufferings are borne by poor consumers who have no alternative but to submit to the profiteers (Khan, S. 2009). Findings from the rural and urban-slum surveys are presented separately. The socio-economic profile of rural households reflects the intra-household changes between 2006 and 2008,While in the urban slum comparisons of 2006 and 2008 reflect sampling differences as well as changes over time. Changes in food consumption, both rice and non rice, were used to evaluate how the change in price may have affected food intake patterns of households across different socioeconomic groups and regions. Households have suffered different levels of stress and have taken a variety of coping strategies, which have also in turn been explored. Changes in nutritional status of the children and mothers are presented with an effort to relate these changes with coping mechanisms.

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13.3 Rural (Quantitative)

Basic socio-economic profile (rural)

The advantage of having a panel survey is that it is examining the same households over time and so any changes are not confounded by sampling. There has not been any change in the basic demographic status of the sampled households as their family sizes and headship remains unchanged. However, the extent of female headship is much lower than national estimates; this is largely due to households having at least one under five year old child in 2006 to be considered in his sampling frame. Since female headed households often do not meet that criterion, they are under-represented in such surveys. Similar to demographic structure, no significant change was observed in the occupational patterns of the main earners.

Table (f): Socio-economic Profile Of The Rural Sample Household 34 It is encouraging to observe that households over time have managed to improve their housing and sanitation, which can also have an impact on health and nutritional status through non food environment pathways. Although the extent of ownership of homestead land increased between 2006 and 2008, there was a significant decline in ownership of cultivable land. One of the key objectives of this study was to reflect on the differences in nutritional status among different poverty groups. In the absence of detailed income/expenditure data, some simpler indicators are often taken as proxy variables of poverty status. For this study, a wealth index was formed in 2006 using 10 such indicators viz. number of adult males in the household, size of the house, main material of the walls,

having electricity connection, type of latrine used, ownership of cows, occupation of the main earner is day labor, log (amount of cultivable land owned), log (amount of homestead land owned) and education of the female. Estimates of the wealth index suggest a very good level of internal consistency (Annex 1A). Based on the score in this index, the households have been classified into five quintiles. Cross-checking of the quintile distribution shows that it is better in reflecting household socio-economic status compared to any single indicators such as housing or occupational groups (Annex 1B-1D). However, the quintiles should be interpreted with care since the richest are not reflective of the richest quintile in rural Bangladesh but only of the sample.

35

13.4 Change in food consumption (rural)

Three major indicators have been used to assess the possible impact of increase in food price, (1) per capita rice consumption per day (2) proportion of food expenditure spent on rice and (3) consumption frequency of non-rice foods.

Table (g): Rice consumption by wealth quintiles Per capita rice consumption has substantially increased across all household quintiles between 2006 and 2008. Because of the increase in rice price, household income eroded in real terms (at least in the short term until adjustment in income takes place). Since the price of all major food items increased, and rice is the cheapest source of energy, households had to substitute other foods with more rice. Consequently, rices share in total food expenditure increased. However, such an effect is more likely to be noticeable among the lower income groups. This is exactly what was observed in this study, with the poorest three quintiles reporting a significantly increased expenditure on rice within the total food budget. However, a comparison with the trend in rice consumption in Bangladesh based on HIES indicates that the HKI 2006 estimate of per capita daily rice consumption that we used as the benchmark in this study may have been underestimated . 36

Trend in per capita daily rice consumption in rural area

Households in the poorest quintile in the sample have increased their per capita rice consumption from 361 gram/per day to 446 gram/per day. They spent 62% of their total food expenditure on rice in 2008 while the percentage in 2006 was only 49%. For the richest quintile, per capita rice consumption also increased by 79 gram/day, although the share of rice in food expenditure increased only slightly.A study conducted by the Unnayan Shamunnay published in theBangladesh Economic Outlook also showed that, as much as 75% ruraland more than 80% of the urban households did not reduce the consumption of rice as a result of food price hike (Shamunnay 2008).

Table(h) : Per capita daily rice consumption by districts

37 However, there is significant variation across regions. In Jamalpur, by far the poorest cluster in the sample, the amount of rice consumed has not increased, while the share of rice in total food expenditure has increased by 11% (Table 3). This indicates that on average, these households have reduced non-rice consumption but have not been able to make up that reduction with the additional consumption of rice. The share of rice to total food expenditure in 2008 was also the highest in Jamalpur among the 6 districts. Such findings indicate that nutritional impact, if any, is likely to be spatially different and higher in poorer areas such as Jamalpur.

13.5 Malnutration Due to Price Hike

Malnutrition levels in Bangladesh, particularly among children, are among the highest in the world. The consequences of this have been studied extensively, though progress has been slow and not sustained. Poor nutritional outcomes of children have lifelong consequences: in terms of productivity, cognitive ability, educational attainment, vulnerability to disease and overall quality of life. Life in utero and the first six months of life when the child should be breastfeeding are critical moments in a childs development, during which permanent patterns

of poor nutrition are often established. This intrinsically links maternal health and nutrition to that of the childs. The cost of malnutrition and the economic benefits of sustained reduction are huge. It is estimated that Bangladesh loses three billion dollars each year as a result of lower productivity and treatment costs arising from under nutrition and that a sustained elimination of micronutrient deficiencies could increase the countrys GDP by 5%, at a cost of only 0.3% of GDP (Gillespie and Haddad 2001). Malnutrition, globally, tends to be closely linked to consumption poverty. In Bangladesh, however, this fairly steady relationship demonstrates some peculiarities. The first is a puzzle at cross country level: when compared to other countries, malnutrition levels in Bangladesh are approximately 16 percentage points higher than what would be expected based on income levels (Deolaikar 2004). The second is that within the country, while, 38 unsurprisingly, malnutrition levels among the poorest quintiles are high, they are also unexpectedly high among the richestquintiles. This puzzling phenomenon places the average malnutrition levels of the richest 20 percent of Bangladeshs population for example, on par with Myanmars national average (Hellen Keller International, 2006a). This backdrop of persistence and peculiarities of the malnutrition question in Bangladesh has motivated this study to examine how child and maternal nutritional status has been affected due to the sharp rise in food prices.

13.6 Quality of food intake

Food consumption in terms of frequency (days/week) data showed that, among the food groups studied, the most frequently consumed item was fish in both 2006 and 2008, but there was significant decrease in 2008 compared with

2006 (Figure 3).Dal (lentil) consumption also decreased significantly between 2006 and 2008. Fish and dal were seen to have been replaced by relatively cheaper vegetables (green leafy and non-leafy) and also to some extent by eggs. Meat consumption (poultry and other meats) which is extremely low (not even once a week) remained unchanged. Differences across wealth groups reflect similar levels of changes (Annex 2A). However, the level of protein consumption (mostly through fish and lentil) was already very low among the poorest quintile in 2006 and declined even further in 2008. Increase in the consumption of green leafy vegetables (GLV) was predominant among the poorer quintiles (Annex 2B).The worsening diet is likely to have serious impacts on childrens short and long-term nutritional status as they require protein to sustain their growth and to prevent anemia.

39

Frequency of consumption of different food items in the last week (rural) Higher prices of food items seriously affected the major macroeconomic variables of Bangladesh economy such as

inflation, revenue expenditures and balance of payment position. The overall trade deficit increased significantly by 57.1 percent from $3.5 billion in FY07 to $5.5 billion in FY08. The highest ever trade deficit was attributed to 397.11 percent increase in rice import of $859.47 million in FY08 against only $172.90 million in FY07 and price hike in global market of all commodities including other food items, though the trade deficit was partly offset by higher external aid flows by the donor agencies and higher workers' remittances. Total import payments for food items shot up by 142.70 percent in FY08 as compared to the previous year. Import payments of rice, wheat, milk and cream, sugar, edible oil and pulses recorded staggering increases of 385.6, 33.9, 65.1, 34.7, 72.6 and 67.7 percent respectively as compared to that of FY07. Fast growing prices of food items enormously eroded the purchasing power as well as standard of living of hard core poor, government and non-government employees, industrial workers, the unemployed and the people with limited income which pushed down a large number of people below the poverty line. If the current food inflationary trend continues for a long span of time, Government's poverty alleviation programme would face a great challenge. Moreover, the plan for reducing 50 percent poverty within 2015 under Millennium Development Goals (MDGs) would be very difficult to achieve. 40 The data of Bangladesh Bureau of Statistics revealed the fact that rice accounts for 71 percent and 60 percent per head total calorie intake in a day in rural and urban areas of Bangladesh. Another Report of Food and Agriculture Organization showed that the share of food in total expenditures for the poorest 30 percent is about 69 percent. Both the people living in rural and urban areas experience short term welfare loses of even only for

10 percent price hike of rice which is higher in the lower section of people. Bangladesh has been experiencing a moderate inflation rate for a couple of years due mainly to price hike of oil and other essential commodities in the domestic and international markets. Bangladesh enchained its inflation under two digits at 9.1 percent in 2007. According to the WEO of IMF (October 2008), inflation is projected to stand at 10.1 percent in 2008 as the authority has already taken some precautionary measures including the adoption of growth-accommodative monetary and financial policies. In this backdrop, actual inflation in Bangladesh stood at 9.9 percent in June 2008. At last, we can say that rapid increase in the prices of food items enormously eroded the purchasing power as well as standard of living of hard core poor, government and nongovernment employees, industrial workers, the unemployed and the people with limited income which forced a good number of people below the poverty line.

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14. CONCLUSIONS
Though Bangladesh is an agricultural country but it is unfortunate that we cannot gain self-sufficiency in the production sector of agriculture. So, Bangladesh is

dependent on imports for most of the essential items. Any increase in international prices is, therefore, expected to be passed on to domestic prices through the import channel. At the end of our report, according to the above discussions, we can say that the main reason of inflation is our internal capabilities of production. Thats why we have to import from foreign. Other all causes like interest rate, supply, exchange rate, and syndication are relative effect of the import. Thats why the main reason of inflation is the huge amount of import. So our suggestion to government will be that government should take the proper steps or plan that increase the total internal production and that can be ensured by concentrate on both local industry and agriculture so that capital per person or employment opportunity and Per capita income rise. But it is not possible for the government to overcome this problem alone. So, people from all sectors should come forward and work with the government to solve price hike problem.

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15. RECOMMENDATION:

Unfortunately, there is hardly any market oriented policy move on the part of fiscal or monetary authorities that can be taken for checking the cost induced inflation. On the fiscal side, although cutting down of the indirect tax on commodities is often proposed as a remedial measure, it only makes a temporary contribution to reducing inflation. Long-term continuation of such policy may cause continuous erosion of the government exchequer. Some also argue in favor of government control on wage increases that are not supported by the corresponding increase in productivity to resist wage-price spiral. In Bangladesh, however, the presence of powerful trade unions tends to render the implementation of such control almost impossible. On a positive note, however, our analysis did not find any noteworthy impact of wage growth on inflation. It is widely recognized, however, that government can effectively use its legal powers to break up the market syndication and thus improve competitiveness of the distribution network. On the monetary side, in the absence of any direct controlling instrument, Bangladesh Bank can initiate some case specific counter-action. Bangladesh Bank can take over some responsibilities such as monitoring modalities of Letter of Credit (L/C) operation so that market forces determines the exchange rate in a process that remains free from much speculative transactions. 1. Renowned economist Prof Rahman at a recent seminar organized by the Center for Policy Dialogue (CPD) said inflation hurts ordinary people of the country. So, monetary policy of the central bank should ensure their welfare. Appreciating government measures after the devastating floods in 1998, he said the central bank should take proper steps in line with those post-flood programmers. 2. The government has already taken some initiatives to check inflation like Open Market Sale (OMS). Price of rice under OMS has been fixed at Tk 24 a kg against the import cost of about Tk 30 per kg.

43 3. The central bank can use two instruments interest rate hike and lower money supply to curb inflation. Central bank can issue government bond and securities in the market to reduce the money supply. 4. The import rate of Bangladesh is highest among other south Asian country [almost 35%], so the price of goods and services fluctuate based on the rise and fall in world price. To stabilize rice price in domestic market, the government should import coarse rice from Myanmar or Indonesia or any other country where rice is cheaper. 5. Government should ensure proper distribution of wealth in a fair manner so that people have a decent income and are able to afford the essential items. 6. Government can develop and provide latest agricultural methods and technologies to increase the productivity of land and should make the best use of all the arable land in the country. 7. Stock market can play an important role in controlling inflation by easing the investment policy and implying effective monetary control on the profit distribution of companies to the investors. 8. Government can imply the flexible terrif and quota system to control the import price and make it stable in the domestic market. 9. Government should find the alternative country or place for importing goods rather than depending only on India. 10. Unethical storing or warehousing should be controlled with developing new laws and efficient apply of consumer law. 11. Government can establish new agencies like TCB or make sure their continuous efficient operation.

12.And at last try to ensure the domestic production is increasing and take active and elaborate plans for that and ensure the swift and smooth agricultural production.

44

APPANDICES

A-1

A-2

Figure 3: CPI Inflation in Bangladesh, 1987-2007

A-3

Acronyms and Abbreviation

AD Aggregate Demand BB Bangladesh bank BBS Bangladesh Bureau of Statistics BEPZ Bangladesh Export Processing Zone BGMEA Bangladesh Garments Manufactures and Exporters Association BMPL Bangladesh Maize Products Limited CPD Center for Policy Dialogue CPI Consumer Price Index DCC Dhaka Chamber of Commerce DSA Development Service Agreement DSM Demand Side Management ERD Economic Relation Division FBCCI Federation of Bangladesh Chamber of Commerce & Industries FD Finance Division FY Fiscal Year GDP Gross Domestic Product GLP Green Leafy Vegetable GNP Gross National Product GOB Government of Bangladesh IEA Institute of Economic Affairs IFPRI International Food Policy Research Institute LAS Long Run Aggregate Supply MPI Import Price Index OMS Open Market Sale SAS Short Run Aggregate Supply TIB Transparency International Bangladesh

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List of References
Khan, S.D., Containing Price Spiral of Essentials, The financial Express, July 26, 2010, Bangladesh. Ahmed, Shamim and Rahman, Inflation and Economic Growth in Bangladesh, November 18, 2008, Bangladesh. Star weekend magazine, Market September 28, 2010, Bangladesh. Getting Hotter,

Power and participation research center, 2007, Exploring Market of Essentials Through a Triangular Study of Producers, Traders and Consumers, Bangladesh. Barua, D., Consumers Deeply Hurt by Price Hike of Essentials, The Daily Star, July 15,2009, Bangladesh. Khan, F.R., Why must the Price Keep on Rising?, The Daily Star, February 10, 2010, Bangladesh. Afroz, T., Consumer Protection Law perspective, August 18, 2007, Bangladesh. Bangladesh

Khan, M.A., Early Action on Consumer Protection Act, September 20, 2009, Bangladesh. Hauqe, A.N.M., The Magic in Market, The Daily Star, June 25,Bangladesh. The Financial Express, Stepping Towards Governance, July 27, 2007, Bangladesh. Good

46

Bibliography
ERD, 2009, Annual Report 2007-2008, Finance, Government of Bangladesh. Ministry Of

Barro, R., 1996, Inflation and Growth, Federal Reserve Bank of St. Louis Review, Vol. 78, pp. 153-169. Bruno, M. and W. Easterly, 1998, Inflation Crisis and Long-Run Growth, Journal of Monetary Economics, Vol. 41, pp. 3-26. Khan, M.A., 2009, Inflation and Economic Growth Bangladesh, The Daily Star, April 10, 2009, Bangladesh. In

Mallik, Girijasankar and Chowdhury, 2001, Inflation and Economic Growth: Evidence From Four South Asian Contries, Asian-Pacific Development Journal, Vol. 8, No. 1, pp. 123-135. Levine R. and D. Renelt, 1992, A Sensitivity Analysis of Cross-Country Growth Regression, American Economic Review, Vol. 82, pp. 942-963. The Financial Express, 2008, Annual Report 2006-2007, Bangladesh. Statical Yearbook of Bangladesh, 2008, Bangladesh Bureau of Statistics, 29th edition.

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Glossary

Consumption: The using up of goods and services having an exchangeable value. Inflation: A persistent, substantial rise in the general levelof prices rel ated to an increase in the volume of money andresulting in t he loss of value of currency ( opposed to deflation). GDP: Gross domestic product. Gross national product excluding payments on foreign invest ments. Commodities: Any unprocessed or partially processedgood, as grain, fruits, and vegetables, or precious metals. Consignments: Property sent to an agent for sale, storage, or shipment. Syndicate: A group of individuals or organizations combined or making ajoint effort to undertake some specific duty or carry out specific transactions or negotiation Supply:

The quantity of a commodity that is in themarket and availabl e for purchase or that is available forpurchase at a particular price. Demand: The quantity of a commodity that is in themarket and availabl e for purchase or that is available forpurchase at a particular price. 48 Expenditure: The act of expending something, especially funds; disbursement; consumption. Volatilities: Tending or threatening to break out into open violence Agenda: A list, plan, outline, or the like, of things to be done, matters to beacted or voted upon, etc. Corruption: Moral perversion; depravity. Indigenous: Originating in and characteristic of a particular region orcountr y; native (often followed by to) Manipulation: Skillful or artful management.

49

Index
A Agrarian (1) Aggregate(31) B budget (15) burden(39) C consumption(1,37,39) commodities(2,4,15,27,28,40) consumers(5,15,32) corruption(27) D domestic(6) devaluation(7) development(28) demographic(34) E economy(4,7,8,13, 14,16,19) F Financial(42) G government(14)

globalization(29) growth(39)

50 I inflation(1,2,3,5,7,13,17,41) import(4,7,24) income(32,36, 38) M ministry(10) market(11,14,16,17,30,32) monetary(12) manufacturers(3) malnutrition(39) P production(5,11,14,28,44) S Scarcity(16) Strategy(16) Statistics(41) Shortage(18) T transportation(3,24) technologies(23) U Unbalanced(19)

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