The increase in public servants’ salaries is feared to disturb common people’s budget as consumers are already reeling from the recent gas and power tariff hikes.
Economists suggest the government should strongly monitor the situation to check inflation as house rent, transport cost and other service costs tend to rise following hike in energy prices and wage.
The cabinet yesterday approved the eighth pay scale for public servants – six days after the new tariffs had been announced.
Under the new rates, retail customers will have to spend 2.93% more on average on electricity and Tk200 extra on gas from this month.
In contrast to the economists’ view, however, Senior Finance Secretary Mahbub Ahmed yesterday told the Dhaka Tribune that implementation of the new pay scale would create huge demand and, as a result, local production and consumption would increase.
He said inflation will not increase in the local market because the government has already estimated inflation in the new pay scale.
“Taka is now in a bullish trend, and so the domestic inflation will not peak up,” he said.
Former governor of Bangladesh Bank Dr Salehuddin Ahmed said: “Obviously, there will be an indirect effect [of the latest pay hike] on inflation.”
He said whenever salary and energy prices are raised, commodity prices, house rent and other services costs tend to increase, which ultimately contributes to inflation.
Although the gas and power tariff hike is not too high, it will have an impact on transport cost.
Rising inflation might make consumers cautious while spending, Salehuddin said, suggesting that coordinated action plan is important now when fuel oil price falls on the global market to reduce burden on the consumers.
Professor Mustafizur Rahman, executive director of the Centre for Policy Dialogue, said the ongoing flood might disrupt the supply chain, putting a pressure on inflation in the days to come.
The government should observe the situation so that no one can increase transport fares and house rents taking advantage of the pay scale hike, he said.
“Pay scale hike was needed to adjust with the inflation that rose 45% and nominal national income 70-75% after the previous rise.”
Bangladesh Bank in its latest monetary policy statement tried to find the relationship between inflation and pay scale hike.
Inflation rates after the third and fourth pay scales showed downward trends although they had risen before the announcements.
The fifth, sixth and seventh pay scales were followed by rising inflation rates, but despite that trend it would be unwise to conclude that the eighth pay scale would also follow suit, the central bank policy statement says.
“Inflation rates were caused by a variety of factors during different pay scale periods. The major factors reported were: higher prices of oil and food items in the international market, distortions in supply side factors, natural calamities/disasters, political instability, and disruption in domestic and/or global food production,” it says.
Other factors mentioned in Bangladesh Bank’s annual reports include effects of private credit expansion, high government borrowing, sharp depreciation of taka, disruption in industrial production, food supply shortage, and pay hikes.
However, except a few well-documented factors such as oil price hike, high food prices in the international market, supply shortage caused by natural calamities or low global production and political instability, it is difficult to clearly attribute to which factors led to higher inflation, the central bank said.