International trade facilitates competitive pricing and brings a cheaper product home. However, the Russia-Ukraine war has brought forward the main negative in dealing with such trade, which is the inability to exclude oneself from the effect of other countries' affairs.
Because of the war in Ukraine, the global economy is going through a shock -- with slow economic growth, unavailability of raw materials, inflation, and a volatile dollar rate etc.
Bangladesh is no exception in this regard. How a country like Bangladesh, that is successfully recovering from the effect of Covid-19, is dealing with inflation needs to be analyzed to predict the future of the country's economy.
Russia and Ukraine together account for almost one-third of global wheat exports and are known as one of the top fuel suppliers. Since the Russian invasion of Ukraine, the prices of essential commodities, such as fuel and food, have increased globally because of the global supply chain disruptions that the war has created.
For instance, the expected inflation was predicted to reach 4.7% from data collected before the invasion, but after the start of the war, the expected inflation rate increased to 5.6%. The precision or accuracy of the prediction needs no further audit as the whole world can see how every country is facing economic downturn and volatility.
The war has created a great deal of geopolitical turbulence and a host of problems in the global economy. Bangladesh has been affected by the war as well. Since the war began, prices of energy and agricultural products have risen high due to unavailability. Lack of energy and fertilizers on one side and the rising cost of import prices on another side has caused record high inflation.
For the last five years, Bangladesh was maintaining an inflation rate below 6%, but the war has changed the trend. In August 2022, the rate was 9.52% which was last seen a decade ago. Bangladesh bank has tried every possible tool to keep the inflation within limits -- the current inflation rate is 8.57% as of January 2023.
For a country that had been absorbing inflation of 5-6%, how did it manage to survive with more than 1.5 times higher inflation -- and what can be done to survive for longer if the war continues?
Usually, the impact of inflation varies from person to person based on their income level, stability of employment, family size etc. The impact is most severe on the lower income groups, but it is usually more notable in urban areas rather than in rural areas.
Keeping this in mind, the government has taken steps to provide essentials to the lower income group in a way that doesn't disturb the market equilibrium. The government has been giving support to the groups who are more vulnerable through their “social safety net programs.”
In a seminar arranged by Banglar Pathshala, Kolkata Director of the Institute of Development Studies said that to deal with increasing inflation, for lower and limited income groups, the state needs to increase social protection programs. This is exactly what Bangladesh has done. Bangladesh has increased its social protection programs to serve the marginalized communities.
Through Open Market Sales (OMS) the government is selling necessary food items like rice, sugar, edible oil, and lentils to the public at an affordable price. For the year 2021-22, OMS beneficiaries have increased by 3 lakh compared to the last year.
Around Tk10.2 billion were spent to protect the lower and middle income families from the rising inflation rate. Moreover, funding for the Vulnerable Group Feeding (VGF) was increased to Tk14.55bn from Tk9.41bn last year. This shows how the country has been prioritizing food security for its people amid the global inflation scenario.
The country has also increased the old age allowance, allowance for widows, financially insolvent disabled, and working lactating mothers. Total social safety net was increased by Tk12bn and thus around 3.11% of GDP was used to serve groups more vulnerable to the increased inflation rate.
The country could tackle the inflation to some extent only because the rate fluctuated from 7% to 9%. Had the country faced double digit inflation, OMS or other social safety net programs would have been difficult to implement successfully.
Increasing social safety net programs is to protect the citizens directly. The country also assisted corporations in surviving this difficult inflationary period.
Bangladesh has waived 15% VAT at production and 5% at marketing of soybean and palm oil until April 30 of this year. The country has also reduced import tax on rice, diesel and other commodities. Though such steps have reduced government earnings, they were nonetheless necessary to keep the inflation under control. On top of all that, as a precautionary measure, the country also took out a loan from the IMF.
Although these were all commendable steps, it must be kept in mind that they deal with inflation only for a short period. OMS or safety net programs and loans are not permanent solutions to the economic volatilities that the country is experiencing.
The country needs a long-term plan to deal with inflation. Inflation needs to be brought down to the optimum level so that purchasing power of the people doesn't fall below the inflation rate. There is no better alternative than increasing domestic production in this regard.
Although Bangladesh is not totally an import-dependent country, there is no doubt that the country's aggregate export always falls below the aggregate import. So, it's time the country focuses on increasing production.
The country should formulate a long-term plan focusing not only on RMG, but also on developing other sectors like agricultural production and tourism. From investing in rural infrastructure, hilsa resource development, employment training, to boosting bilateral relations and trying for FTA, the country is leaving no stone unturned to safeguard itself from an economic collapse.
However, it is going to take a long time to reap the benefits of such investment. The state needs to be very careful in its every step and develop alternative plans so that any unpredictable incident doesn't make it all go in vain.
Dr Ashraful Alam Chowdhury is an Independent Researcher and Columnist. He completed his MSS in economics from Dhaka University. Then, he pursued post-graduation and PhD in economics from Emory University, Georgia, USA. He has experience of working in the US, Bangladesh, Myanmar, and India.