|Volume 6 | Issue 06 | June 2012 ||
Photo: Sk Enamul Haq
Anchoring Inflation in Budget
ASJADUL KIBRIA points out how rental power plants and the government's myopic as well as wrong policies in setting development priorities have caused runaway inflation which will continue to take its toll on the upcoming budget.
The government is now busy with last minute adjustments for the next fiscal years' budget that will be tabled in the national parliament on June 7, 2012. Although placed as a proposed budget, the whole package usually remains unchanged finally, except for few revisions in fiscal measures during the period of three weeks. Debate and discussion continue.
Generally, peoples' attention to budget is centered on movement of prices of goods and services essential for them. That is why when economists and experts are busy to examine the level of deficit financing, mass people want to know how much they have to pay additionally as bus fare or to purchase onion. 'Prices may go up, prices may come down'-- titled news items are probably the most scanned and read items in the newspaper the day after the budget is formally announced in the parliament.
In fact, for the mass people budget is the vital instrument to strengthen or weaken their purchasing power. Any democratically elected government is aware of this fact. The current government is no exception. In fact, in several pre-budget meetings Finance Minister AMA Muhith makes it clear by raising his concern on current inflationary pressure. The inflation rate is still in double digit. Muhith, however, expects that it will come down to a single digit and set in 9 per cent by the end of the current fiscal year (FY12). The inflation rate is also on the decline for the last few months. The trend, however, does not imply that general price level is reducing. Actually, it is the rising tide of price level that becomes slow. Moreover, due to base effect, lower rate is also an issue of concern.
Against this backdrop, the important question is how the finance minister attempts to check the inflation with budgetary steps and whether he will be able to do so. It is interesting that national inflation rate (on monthly basis or point-to-point as termed) jumped to double digit in March last year and continued up to April this year. Several hikes of fuel prices and its cascading effect on public transport have significantly contributed to inflation. The hike or adjustment of energy consumption price is mainly due to get some relief on subsidy burden generated from rental power.
Photo: Amran Hossain
In the name of quick fix of power problem, without properly analysing the consequence, the government's move to rental and quick rental power generation was not a prudent move. As government agreed to purchase electricity at an inflated rate between Tk 9.75 and Tk 22 per unit, the private sector sponsors found it a hefty business. Moreover, assurance to supply fuel oils at a subsidized rate enhanced their enthusiasm. Bangladesh Power Development Board (BPDB) is currently purchasing electricity at Tk 7.5 a unit from the private power plants to sell at Tk 2.50 a unit to its subscribers across the country. This creates huge fiscal burden as the country has to spend a whopping Tk 6 thousand crore as fuel subsidy in the current fiscal year.
On the other hand, some 32 rental and quick rental power plants have been established during the last three years, of which only 20 are in operation currently. These power plants altogether produce around 1300 megawatts (MW) of electricity per day against the capacity of around 2000 MW.
Some experts are of the view that quick rental is a temporary solution only while others believe that it is misallocation of resources. As huge amount of money has to be spent for it to sustain, many essential development works had to be curtailed.
The ongoing budget, passed in June last year, makes things worse. Overambitious expenditure plan without well preparation of financing forced the government to borrow directly from the central bank. Thus increased the high-powered money (bills printed and circulated in the monetary system) and push money supply fueling inflation further.
In fact, the government started to spend money on big projects and it created compulsion to continue. But sources of fund became squeezed mainly due to lower disbursement of foreign aid. To meet the gap, the government moved to heavy bank borrowing causing pressure on private sector. Therefore, banks and financial institutions have been suffering with liquidity shortage.
Mega construction projects like several flyovers in the capital city to reduce traffic congestion are another example of resource diversion ignoring the real priority. Even half of the fund for these projects could go into restructuring the railway, as it would make overall transportation smooth and easy. This could easily dampen the inflationary pressure as the movement of essentials across the country became cheaper and safer. When every hike of fuel price forces the people to pay extra cost for public transport and the traders to bear additional charge on carrying goods in trucks, revival of railway is the best option to fight price pressure in the medium and long term.
Along with reduction of profit rate, the move to impose 10 per cent tax at source on profit generated against investing in savings instruments in the previous fiscal year was also a wrong step. Such moves discouraged peoples' safe savings and pushed them into risky, speculative investment especially in the stock market. Although the tax rate has reduced to 5 per cent in the current fiscal year, the damage has been done. During the first nine months of the current fiscal year, net sale of savings certificates is very negligible. To avoid crowding out impact in bank lending, government finally revised profit rates on different savings instrument which are yet to attract desired investments.
Bangladesh Bank's move to contain inflation by rising policy rates also come under question as fiscal measures contradict monetary stance. Although government later tried to resort to fiscal conservatism by increasing fuel prices, it again pushed the general price level upward. In fact, oil is a universal input that directly and indirectly enters into the cost of production of different commodities. So, the increase of oil price has direct and indirect cost-push effects that are likely to aggravate inflationary trends. This thing has been happening in Bangladesh for the last one and half years.
In such a complex situation, our finance minister is going to table his budget where he has to accommodate a lot of political demands as the time of national election comes closer. This means, relaxing tax measures to make several business quarters happy, continuation of allocation for mega projects and adoption of new development projects without examining the necessity. These measures will create fiscal burden. Again, to comply with conditions of the International Monetary Fund (IMF), some reduction of subsidy and limited increase in the allocation for social safety nets will be there. Another round of energy and fuel price hike will be there very soon also.
All these measures will definitely fuel inflationary pressure in the next fiscal year. For instance, relaxing several tax measures will create a gap in revenue generation and government has to go for huge bank borrowing. This surely will fuel inflation. Again, subsidy cut in agriculture will increase production costs. Finally, price hike of energy will substantially erode the real income of the mass people. So, it is very unlikely that budgetary measures will bring some respite of inflation in the next fiscal year.
Asjadul Kibria is deputy business editor, Prothom Alo and can be reached at email@example.com
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