|Volume 6 | Issue 08 | August 2012 ||
Who pushes the price?
ASJADUL KIBRIA investigates how different quarters including wholesalers and retailers work to push prices of essentials during the month of Ramadan and sets the records straight about effective government monitoring.
As the month of holy Ramadan begins, volatility in the prices of essentials becomes a major issue of discussions and debates. Weeks before Ramadan, prices of different food items start to climb and reach a new high in the first week of the month. Interestingly, the government vows to check price hike of essentials and some moves are also visible like monitoring the kitchen markets and operating the mobile courts. But, little yield is there as people are bearing the brunt of price spiral. This is, however, not a new phenomenon in the current year. The similar trend has been repeating for the last few years, which arises a fundamental question: who is responsible for price hike in Ramadan? There is no clear-cut answer to the question due to complexity of the issue. Moreover, several myths are there to create ambiguity in the minds of general people. Let us try to explain the myths with reality.
MUNIR UZ ZAMAN/DRIK
Price hike imports a trade of blame game. Retailers blame wholesalers for charging high, wholesalers blame importers and producers for not supplying enough, and importers, in turn, blame wholesalers for stockpiling. Importers also blame international market and complexity in import procedure. Moreover, traders blame cost of transportation and series of extortions at all levels.
On the other hand, consumers blame traders and sellers for higher prices as they have to purchase directly from retailers. Consumers also blame government for not taking enough or tough actions to contain price hike. In fact, it is the government who creates expectation among people that price would be stable. Failing to meet people's expectations, the government in turn blames traders for charging more prices and profiteering. Civil society and media also join the bandwagon of the blame game. All of them make the traders responsible for price hike. They point fingers to a 'powerful syndicate' or cartel for fixing price in higher levels. It is now strongly believed that some powerful businesses and traders' syndicates are controlling the supply of many essentials and determining the prices to grab huge profits.
The question is, if there are such strong syndicates, why is the administration not detecting and scrapping them? Are these syndicates more powerful than the government? Do the government and media have strong evidences of syndication? For the last one decade, people of Bangladesh are hearing about market syndication. Every government is aware of that but no one can detect syndicates let alone control them.
In a similar vein, middlemen are also blamed for price hikes especially in agri-products. Some economists even argue that middlemen are pushing prices by profiteering from time to time. But a basic thing is ignored in the whole process. Before blaming the middlemen, one has to determine whether such intermediaries are essential or not in the whole supply chain. The reality is, supply chain cannot be complete without middlemen or intermediaries. It is almost impossible to eliminate middlemen. Unfortunately, the way critiques blame them for price hike often implies their elimination by the government.
Another interesting thing is meeting and sitting with the traders, refiners and importers. For the last few years, the government i.e. the commerce ministry has regularly arranged meetings with different traders and importers of essentials to keep the price level stable.
While such a move appeared as a serious effort of the government to check undue hike of prices in different times of a year, the real outcome is frustrating. In most of the cases, people found that prices of the products have escalated. Edible oil is a good example of such a case. In several meetings, presided by the commerce minister or commerce secretary, a ceiling was imposed on the retail price of edible oil. Surprisingly, the ceiling was higher than the prevailing market price. For example, when per litre edible oil was available for Tk 105 in the retail market, the meeting set the ceiling at Tk 108. By this, the government itself has actually pushed the price.
Thus, meeting and sitting with traders have little positive impact on market prices. Even then, the government does not discontinue the practice. In the first week of July, the commerce ministry sat with the business representatives to fix the profit margin. The meeting set one percent profit for the wholesalers and 10 percent profit for the retailers. The rationale for setting such profit margins is not clear. But many believe that 10 percent profit in retail level actually encourages the retailers to increase prices of many items. When retailers are enjoying 5 or 7 percent profit in several items, enhancing the margin becomes a bonus for them. Thus, the idea to fix profit margin is not well calculated.
Whatever the reasons are, the first and foremost reason of price hike is the supply-demand mismatch. Movement of prices has to be analysed in the supply-demand framework of economics. Otherwise, distorted and misleading scenario will appear. Another thing also needs to be kept in mind. Bangladesh economy is moving on market-based economic philosophy. Neo-liberalism, the extreme version of market-oriented economic philosophy, is detecting the economic policy and functions. There is no doubt that during the month of Ramadan, demand of some food items like edible oil, sugar, onion, pulse, gram and date has increased significantly. The additional demand is originated by the people of the country who are the ultimate consumers, not by the traders or governments. The upswing in demand is mainly due to a different food habit in Ramadan.
Take an example of gram. The demand for gram is several times higher in Ramadan than rest of the year. Huge demand needs to be catered by huge supply. Now, gram is fully import-oriented. There are not many importers as it is basically a seasonal business. Not all regular importers of essentials are interested to import gram and the government cannot force anyone to import the item. So, a limited number of importers have some advantages as they control the supply. But, they also want to maximise profits and so it is unwise to keep or store imported item for long. Thus they supply the gram to wholesalers and wholesalers also pass it on to retailers. When the process is slow, the price stays at higher levels. Once supply becomes smooth, price also becomes stable in a certain level.
This gives rise to a valid question -- why did the price of per kg gram jump to Tk 85 when it was Tk 65 per kg just before the Ramadan? Let us try to answer the question in a different way. Do we know why people do not purchase their required gram when the price was lower? They were aware that price would shoot up just before Ramadan, just as it happened before. Then why did they not go to the market earlier?
In fact, the real demand of gram started to pick up just before Ramadan. The rise in demand pushed the price level. No doubt traders also made some windfall profit initially. But they also needed to offload their stocks in time. Suppose some traders think that they will make very high profit by creating artificial shortage of gram in market and continue to charge high for the first 10 days of Ramadan. Obviously, prices will be very high. Interestingly, 10 days later, the traders will find that the demand has gone down. They may continue for another five days with the expectation that consumers will return to the market but in the mean time, most of the consumers will have chosen an alternative without rushing for gram again as half of the Ramadan has passed. So the demand will reduce further. The traders will find that reducing prices is not enough to offload their stocks. So, they have to bear the losses with huge stocks of gram. Obviously, traders are more intelligent and usually do not make losses! They will try to sell at a stable price during the first few days. Price of gram also becomes stable within the first few days as market demand reaches an optimal level at that time. Additional supply is a must to meet the additional demand. But this is not always easy as supply chain is complex and determining the actual demand level is really difficult.
A problem with intervention in market is also there. Government relies on Trading Corporation of Bangladesh (TCB) to sell selected essentials like edible oil, sugar and gram or chhola. But against the huge demand, TCB's move is like a few drops of water in a sea! Those who can avail themselves of the TCB mobile outlet are very few in number and may get some respite. In fact, the capacity of TCB has not been strengthened properly. With poor infrastructure and inadequate manpower, the organisation is in a bad shape where corruption and irregularities are rampant. So, expecting some good result in the retail market through the operation of TCB is a foolish one. The previous commerce minister of the incumbent government made several rhetorical assertions to revamp the organisation but nothing happened.
In its election manifesto, Awami League proclaimed to strengthen TCB. Assuming power, Prime Minister Sheikh Hasina ordered the commerce ministry to take initiative in this regard. A committee was also formed and a report with a set of recommendations was also submitted to the PMO. Reviewing the report, the PMO ordered the commerce ministry to go ahead step by step. Among the major recommendations, PMO only rejected the proposal to transform the organisation into a public limited entity. Other recommendations included strengthening the power of the board of directors, determining the price of assets and liabilities, increasing the number of go-downs and capacity to import around 25 percent of total imports of essentials.
Interestingly, no significant move has been taken so far to implement the recommendations. In January 2010, the commerce minister asked the TCB authority to draw a work plan on strengthening the body in light of the recommendations. A draft was submitted to the ministry which was initially rejected. Later, a revised work-plan was submitted. But there has been little progress so far.
Thus, there is actually no effective arm of the government to intervene in the market to check price volatility. Nevertheless, some small steps have helped to reduce volatility in the kitchen market before Ramadan. The commerce ministry has banned export of green chilli, onion, garlic and egg-plant for a certain period of time to ensure domestic supply.
The projection of demand of essential items is also a big question. Bangladesh Tariff Commission has prepared a matrix of annual and Ramadan demand of 9 food items. But the estimation has some flaws. For example, the annual demand for potato is estimated at some 8.34 million tonnes whereas demand for Ramadan is only 15 thousand tonnes. This is obviously a gross underestimation. In a similar vein, annual demand for gram is estimated at one lakh tonne while the Ramadan demand is only one-fourth of the annual demand. Interestingly, tariff commission estimation also showed that the stock of gram in the country was 1.78 lakh tonnes up to mid-May of the current year with another 34 thousand tonnes in the pipeline of import. If this is the scenario, then there should be huge surplus of gram in the country. But, this is not reflected in the market price as it shoots up significantly in response to the supply-demand gap.
In fact, projection of demand of essentials is not an easy task. It requires sufficient data of production, storage and consumption as well as in-depth analysis of consumers' behaviour. The rigorous exercise of data compilation and update is very important. The quality of data in Bangladesh is still poor in many areas and so easily misleads policymakers and people. Governments past and present have little attention to improve comprehensive database for different areas. Thus, in most cases demand projections become assumption based.
The huge income discrimination in the country due to neo-liberal approach is a matter of concern. It appears that almost everybody is aware of this, with little wish to do anything. The higher income group of society has comparative advantage in purchasing power and this also helps push and keep prices of some items at a higher level. Again, food habit in Ramadan also plays a role in price hike. What is the rationale for food items like beguni (a preparation of egg plant) which is quite unhealthy? Why look for oily-spicy foods that require good quantity of edible oil and onion? Why try to purchase tomato in off-season and complain for excessive high price (Tk 110 per kg)? In the month of self-restraint, we sometimes totally sideline the spirit and start a competition for feast in the name of Iftar.
Let us not forget the ill-governed trading activities. Suppliers and traders indulge in an unhealthy competition by manipulating measurements or weights of items like edible oil. Some are engaged in food adulteration and no consistence effort is there to check such life-threatening activities. People are paying heavy tolls for ill-governance.
So, there is a long list when we try to find answer to the question as to who are behind the price hike. It is a complex matter and there is no quick respite from this suffering. It requires proper action and monitoring from policymakers and consumers' consciousness as well. It requires traders' obligation, and market functioning with rules-regulations. Otherwise media hype on price hike will continue, wrong policy intervention will fuel inflation and people will continue to suffer.
Asjadul Kibria is the business-page editor and can be reached at email@example.com
© thedailystar.net, 2012. All Rights Reserved