1.

Introduction:
For every government, price stability is one of the most desirable economic scenarios. To facilitate the overall growth of a country, the Government always tries to stabilize and maintain a price level within the limits of purchasing power of common people. But Bangladesh is experiencing an increasing inflation rate in recent years especially in food sector. The report aims to present an analysis on the current scenario of the inflated food market and investigate into the probable causes and impacts and suggest some reasonable measures to mitigate the severity of the situation. In this report a logical relationship has been formed between food inflation and other macroeconomic variables like CPI (consumer price index), food grain production, monetary policies, food subsidies and national poverty line with the support of relevant data. The report is mainly based on secondary data collected from different journals, newspapers, reports and publications of NGOs and bureaus, and working paper of some knowledgeable people working on food inflation of Bangladesh. 1.1. Inflation: In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money a loss of real value in the internal medium of exchange and unit of account in the economy. A prominent measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. In terms of severity inflation can be of 4 kinds: low, moderate, high and runway whereas runway inflation refers to the highest degree of inflation. 1.2. Food Inflation:

Food inflation can be defined as a consistent rise in the price level of all agricultural food items. It happens when too much purchasing power exists against small steady production. This rise in price level is neither seasonal nor sudden; it keeps on increasing over a period of time. This is one of the biggest problems faced by the economy. As food consumption constitutes the largest portion (59%) of total consumption, food inflation contributes largely to CPI inflation

CPI weights
non-food 41% food 59% food non-food

Figure 1: CPI weights

2. Bangladesh scenario:
2.1. CPI Inflation: According the recent CPI (consumer price index) report published by Bangladesh Bureau of Statistics, as of April 20011 the national general inflation rate is 10.67.In rural area it is 11.49, whereas in urban area it was 8.62.The national general inflation in march was 10.49 .So it indicates that inflation rate is increasing by leaps and bound even in monthly basis.

2.2. Food Inflation in Bangladesh: 2

With an ever increasing population Bangladesh is going to face food insecurity in the upcoming years due to food inflation. Inflation has accelerated mainly due to a surge in the price of rice, the staple food for the population of more than 160 million. Higher prices of wheat, edible oil, meat, vegetables, spices and fruits also contributed to this continuous inflation. Though Bangladesh is blessed with so many natural gifts like fertile soil, conducive climate around which evolves our agriculture, still she is stumbling to feed her enormous population. More and more people are being added to be fed, but food production is not increasing proportionately. So there is prevailing food inflation which is rising day by day because of expanding gap between supply and demand. Inflation data from three levels -- national, rural and urban -- shows that food inflation increased at every level. But non-food inflation has decreased in the rural areas, whereas it marked a rise in the urban areas. Food is mainly produced in the rural areas, where food inflation is also intense. In April, it was 15.38 percent, which was 12.04 percent in the urban area.

14 12 10 8 6 4 2 0 july august september october novemberdecember

national rural urban

Figure 2: Food inflation in percentage (2010)

2.3. Food Price Situation:

The overall food price situation in the country has raised serious concerns. Prices of essential food commodities particularly, rice has shot up even after good harvest of Boro crop. The retail prices of 3

food grain in the local market have increased significantly in the recent months and likely to increase further until the next harvest. Prices of other essential food commodities like wheat flour, pulse and vegetables have also gone up. The wholesale prices of both wheat and rice rise at a higher rate than those of the retail prices of both the commodities during the year 2010. During January to December 2010, the wholesale average price of rice increased by 25 percent while the wheat price has risen up by 16.67 percent. At the same time the retail prices of rice have gone up by 20 percent while the wheat prices have increased by 13.04 percent. The gap between wholesale and retail price of rice is 5 percent while for wheat it is 3.63 percent. The main reason of enormous gap between the wholesale prices and retail prices is liable to the hoarding of food grains by the wholesalers. This provides room for the wholesalers to maneuver the prices in favor of them. This maneuverability allows them to dictate retail price at the cost of the consumers. Table 2: Quarterly rice and wheat price change in 2010 Month Jan-March March-May May-July July-Sep Rice 8.33% -3.84% 12% 5.35% Wheat 0.57% 8.82% 1.51% 22.38%

2.4. Food Production: Bangladesh, being a disaster-prone country, faces food availability problem frequently. Production of crops through proper utilization of the limited land resource base is also a great challenge. Despite the impressive achievements in food grain production during the last few decades, food security at farm households and individual levels remains a major concern for the government. Although rice production increased more than three-fold in the last three and half decades, the country has still not attained self-sufficiency in food. Gradual decrease of cultivable land on one hand and increased population on the other, coupled with depletion of natural resources, frequent natural disaster and competitive world market, are daunting challenge. Although there has been a gradual decrease of the area under crop production, the harvested area under rice still had positive growth over the years. Due to technological advancement in the rice sector, there has been substantial progress in the yield level.

45000000 40000000 35000000 30000000 25000000 20000000 15000000 10000000 5000000 0 2008-09 2009-10 2010-11 land area (hectres) rice production tons

Figure 3: Land and rice production Rice is our staple food, and rice production is vital to the economy. It constitutes about 95% of the total cereal grains produced annually. Rice occupies about 80% of the total cultivable land, and more than 90% of the population derives most of their daily calorie requirements from it. Recent statistics indicate that per capita availability of rice increased from 140 kg in 1972 to 166 kg in 2010, despite the fact that population increased tremendously. But at present demand is growing faster than supply, as a result there is existence of food inflation. From the above graph we can see that though the cultivable land has remained more or less same the productivity has increased to a great extent. For the current fiscal year 2010-11 the productivity did not increase so much because farmers are cultivating fine rice instead of coarse rice to get better price. So despite of expectation of bumper harvest production will be relatively lower. 2.5. Government subsidies: Against the backdrop of price hike of food grain, the government has decided to introduce food rations system for the ultra-poor. Besides the Government is continuing its fair-price programmes like OMS (open market sales) and, TR, GR, Food for Work, food for education etc. To ensure food security (access to food by all people at all times: the availability of food and the ability to acquire it) for the people the Government of Bangladesh is increasing its subsidies in food sector every fiscal year. In the latest budget it is 1759 crore taka.

2000 1800 1600 1400 1200 1000 800 600 400 200 0 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 food subsidy

Figure 4: food subsidies The government has planned also to start selling rice and wheat to 3.01 lakh class-four government employees, village defense police and village head of the Ansars through ration cards, and 11.2 lakh ultra-poor people through fair-price cards across the country. Under fair price programme a card holder would get 10kg of rice and 10kg of wheat or 20kg of rice or 20kg of wheat (whichever is available at the time of distribution) every month at Tk 24 and Tk 20 per kg which cost 35 and 30 tk in respect.

3. Causes of food inflation:

Historically, a great deal of economic literature was concerned with the question of what causes inflation and what effect it has. In spite of different schools of thought, currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. The inflation rate is essentially dependent on the growth rate of money supply. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, natural disasters, and political unrest and influenced by the relative elasticity of wages, prices and interest rates.

3.1. Weak infrastructure: Due to lack of post harvesting infrastructure such as cold chains, transportation, and storage facilities, most of the commodities like vegetables get spoiled within a short time. So it can not reach the consumers in spite of being produced. For example in recent years farmers are producing potatoes in larger amount than the previous years but the capacity of the existing cold storage is too 6

little to preserve this huge amount. So every year a huge portion of potatoes produced by the farmers gets destroyed for lack of preservation facilities. Even though Government has launched programme to distribute fertilizer and pesticide among the farmers, many farmers can not get them for faulty management system, and distribution leakage. Small holding agriculture is increasing here, reducing the economies of scale. Our farmers are mostly uneducated; they are dependent on back-dated cultivation rather than advanced scientific process. Moreover, agricultural food processing industries are not growing here. 60% of the country's total cropped area is not irrigated, resulting in a lower level of food production, shortage and ultimately inflation. Crops on vast land area get destroyed due to heavy rainfall, flood, cyclone and salinity in monsoon period or due to scarcity of water during dry season. 3.2. World economy: Food inflation in Bangladesh is also attributable to food price spiral in the global market. A report on food availability early warning prepared by FAO indicated that there will be a sharp decrease of about 6% in food supply in the world market this year. Furthermore, food prices increased by 4.2 % in the meantime due to the shortage in the world market. Since food prices increased, many countries that give food subsidies will have to incur about 12% additional costs for procurement of required food.

Figure5: Rice price in the world market

Severe food inflation in India and high international prices of food commodities mean there would be no calming influence on food prices from imports by private sectors -- another reason why local rice prices are high and rising even after a good aman harvest. 3.3. Supply and demand: If the present trend of population growth - two million people per year - continues, Bangladesh will face even greater food shortages in the next few years, reaching a critical level by 2050, according to a study by Unnayan Onneshan, a Dhaka-based research group. It said every year 5 lakh tonnes of additional food grains are required for population boom. Climate change is also contributing to food grain supply uncertainty, leading to concerns that rice production will drop by 80 million tons by 2050 - or about 3.9 percent each year according to experts estimation. There appear to be no major supply-demand imbalances in food grain stocks at the aggregate level but because of hoarding, syndicating, black-marketing and distribution difficulties the supplydemand gap is being magnified. This type of imbalance is prominent especially during Ramadan. The production target for food grain in FY 2011 is 36.6Mt, with 35.4Mt of it for rice, and 1.2Mt for wheat. Both Aus and Aman fell short of their targets by 21 percent and 5 percent. The grain import target for FY 2011 is 3.75Mt, of which 1.65Mt will be imported by government and the rest by the private sector. But while deciding to import food grains from abroad it has to be remembered that retaining the farmers in the agricultural system is very important for the country.

3.4. Monetary Issues: Inflation has always been a monetary phenomenon explained with the quantity theory of money, which states that any change in the amount of money in a system will change the price level. This theory begins with the equation of exchange: MV = PQ P=MV\Q Where,M is the nominal quantity of money ;V is the velocity of money circulation; P is the price level and Q is output. general

In this formula, the general price level is related to the level output (Q), the quantity of money (M) and the velocity of money (V). The velocity of money is unaffected by monetary policy (at least in the long run), and the real value of output is determined in the long run by the productive capacity of the economy. Under these 8

assumptions, the primary driver of the change in the general price level is changes in the quantity of money which is manipulated or determined by monetary policies.

Figure 6: Money supply and inflation The supply of money into the Bangladesh economy is getting larger and larger through increment in income of the people, social safety net programme, government subsidies, increased remittances and monetary policies formulated by Bangladesh Bank. For increased money supply the purchasing power (MV in the equation) of people is going up but the out put Q is not growing that much. As a consequence inflation prevails in the market. 3.5. Theoretical perspective According to the Keynesian economic theory changes in money supply do not directly affect prices, and that visible inflation is the result of increasing aggregate demand and expenditure in the economy. The supply of money is a major, but not the only, cause of inflation. If we want to relate the food inflation with Robert J. Gordons triangle model" we will see that the existing inflation is attributable to the following issues.

Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Along with the growth of economy wage and purchasing power is rising which push up the aggregate demand or expenditure which results in demand-pull inflation. Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply. This may be due to natural disasters, or increased prices of inputs. For example, when wage level rises, cost of production increases and is transferred to the customers as cost-push inflation. Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. 9

Phillips curve:

A fundamental concept in inflation analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. As a developing country Bangladesh has to accept some level of inflation for minimized unemployment level and satisfactory economic growth.

4. Impacts:
Bangladesh has a large population of 160 million to feed for which she has to import food grains from abroad besides producing domestically. Moreover 40% of her people live below the poverty line for which food affordability is the greatest concern. In this context food inflation can have several negative impacts on the living condition of the people as mentioned below. High food inflation can prompt people to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages in turn can help further inflation. In a sense, inflation begets further inflationary expectations, which beget further inflation. When people see food price rising they start to buy and store non perishable food items in order to earn profit by selling them later (syndicating) and create a apparent shortage of food products in the market and push the price level up and causes further inflation specially during Ramadan in Bangladesh. It is identified that hoarding by wholesalers as the main contributing factor of the enormous gap between the wholesale and retail prices.

Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the 20102011 Tunisian revolution and the 2011 Egyptian revolution, according to many observators including Robert Zoellick, president of the World Bank.So this unpleasant incident can take place even in Bangladesh if the government fails to control the food inflation.

10

About 40 percent of Bangladeshs 160 million people live on less than $1 a day and are food insecure, and rising food prices a rapidly - combined with expanding population, rising unemployment, and unpredictable weather-related disasters - is leading the country to a sluggish economy and deeper into a food crisis where a growing number of people are struggling to survive.

Food inflation is raising food insecurity which severely affects the populations health and the nutritional situation in the country. People are too poor to buy food and consume less than the minimum daily recommended amount of food. Nearly seven million children under five are underweight and three million are acutely malnourished, according to WFP. Moreover Bangladesh has the highest proportion in the world of newborns with low birth weight. We must recognize that addressing malnutrition would have a significant economic impact. A recent estimate showed that iron deficiency anemia among Bangladeshi children alone caused an annual gross domestic product loss of more than $4 billion per year.

The economic think tank apprehends that the rise in global food grains price together with supply constrains could threaten Bangladeshs macro-economic stability. Despite the fact that the outlook for growth remains buoyant, the persistence of inflationary pressure led by stubbornly high food inflation remains a major concern for the present. No doubt, high inflationary expectations pose a complex challenge for the conduct of monetary policy by BB.

Coarse rice consumed mostly by the poor and accounting for more than 30 percent of household expenditure by the representative household in the bottom 40 percent of the population peaked in price in Dhaka in late December,2010.

Figure 7: Price of coarse rice in Dhaka 11

As the food inflation increases, the additional number of people goes under the poverty line. Price hike of food items particularly staple rice will exacerbate poverty, as nearly 40 percent of its over 150 million people live on less than one U.S. dollar a day and spend 70 percent of their income on food purchase. According to the World Bank food price shock has increased Bangladeshs poverty rate by around 3 percentage points and nearly 8 percent of the surveyed households pulled their children out of schools to get jobs to assist their families cope with the crisis.

5. Challenges:
Some important concerns in meeting the challenge: Because of its geographical location, the country is often at the mercy of natural calamities such as floods, cyclone, drought etc. The situation is likely to aggravate due to the global climate change; An increase in population by about two million every year means that an increase in production by 0.5 million tons every year must be targeted; Without development and distribution of new technologies for unfavorable environments, sustaining the growth in rice production will be highly difficult; Since the international market can no longer be relied upon as a source of food grains (when there is a shortage in the domestic market), the urgency of raising domestic production in meeting the growing demand should be emphasized. To convey the benefits of high price to the poor farmers through avoiding middlemen is a tough challenge A shift in strategy from self-reliance to self-sufficiency in food has become imperative. Diversification of food consumption is also very difficult as we are struggling to meet the staple demand.

6. Recommendations:
Today the primary tool for controlling inflation is monetary policy. The Bangladesh bank can affect inflation to a significant extent through setting interest rates and through other operations to ensure a slow growth of the money supply. In Keynesians view reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand). Crackdown on hoarders and black marketers could help prevent prices from rising further. This step might not significantly reduce prices but will ensure that prices don't escalate 12

further. The Government should allow the private sector to import and store the primary agricultural commodities at zero import duty. This will help ease the prices to a large extent. The Government also needs to unload the food grain inventory it has in its storage locations. This will have an immediate impact on the prices. Proper care must be taken of warehouses where all agricultural especially perishable goods are kept for preservation. Buffer stock should be released on time. Wastage of food items must be avoided. Political factors must be properly balanced. Consumers should plan their budget according to their need. Government should take strict action to investigate the high price of rice during this harvest season. The government can introduce various projects so that the remittances are used in investment instead of buying consumer goods. Fiscal measures like subsidized food grain sales from public-stock may need to be expanded to ease hardships of low income population. The food crisis requires coordinated international response and financial support from the international community. A system of cost-of-living allowance (COLA) should be initiated to adjust salaries based on changes in a cost-of-living index to adapt with inflation.

7. Conclusion:
Food inflation has a profound nexus with poverty and inequality. It is true that the aggregate capital stock of the country is increasing, but the rising inequality in our society is also alarming. After some years, one strata of our population will perhaps be able to consume sufficient food and the poor farmers may also get their return from food grain production, but the huge population besides these two will lose their food purchasing power. So, being self-reliant is a must for us considering the upcoming food crisis and food inflation throughout the world.

13

Table of contents:
1. Introduction: ........................................................................................................................................ 1 1.1. Inflation: ........................................................................................................................................ 1 1.2. Food inflation: ............................................................................................................................... 1 2. Bangladesh scenario: ........................................................................................................................... 2 2.1. CPI Inflation: .................................................................................................................................. 2 2.2.Foodinflation...4 2.3. Food price situation: ..................................................................................................................... 3 2.4. Food production: .......................................................................................................................... 4 2.5. Government subsidies: ................................................................................................................. 5 3. Causes of food inflation: ...................................................................................................................... 6 3.1. Weak infrastructure: ..................................................................................................................... 6 3.2. World economy:............................................................................................................................ 7 3.3. Supply and demand: .................................................................................................................... 8 3.4. Monetary issues: ........................................................................................................................... 8 3.5. Theoretical perspective ................................................................................................................ 9 4. Impacts:.............................................................................................................................................. 10 5. Challenges: ......................................................................................................................................... 12 6. Recommendations: ............................................................................................................................ 12 7. Conclusion: ......................................................................................................................................... 13

14