Food Inflation & Its Effects in Bangladesh

Letter of Transmittal
5th November , 2019
Ratan Ghosh
Lecturer
Course: ALD-2204
Department: BBA in Accounting and Information Systems
Bangladesh University of Professionals
Mirpur Cantonment, Mirpur
Dhaka- 1216
Subject: Report on Analysis on Food Inflation and Its Effects in Bangladesh
Dear Sir,
Greetings!
We present before you the report on analysis on food inflation and its effects in Bangladesh. The
report has been completed by the knowledge that we have gathered from the course
Macroeconomics (ALD-2204). We are thankful to each and everyone who has aided us in
preparing this report. The report was assigned to us as a part of one of the evaluation tools for
our final term examination. We have prepared this paper to get a in depth view of the situation of
food inflation in Bangladesh and how it has impact in the economy and also the changes in the
livelihood of people it has.
We have tried our level best to complete this paper meaningfully and correctly, as much as
possible. In this case it will be meaningful to me. We are grateful for your guidance, supervision
and inspiration. I look forward to receiving your valuable feedback.
Sincerely,
Ahmed Yeameen Farabee (18211002)
On behalf of my team members who helped me in this analysis,

Kh Md Rifat Arafin (18211008)

Syed Tahmid Rahman (18211014)
Md. Halimuzzaman Himel (18211026)
Mustakim Ibne Kausar (18211044)
Acknowledgement
We have given efforts in this paper. However, it would not have been possible without the kind
support and help of many individuals. We would like to extend our sincere thanks to all of them.

I am highly indebted to Lecturer Ratan Ghosh of Bangladesh University of Professionals for his
guidance and constant supervision as well as for providing necessary information regarding the
project & also for his support in completing the project.

I would like to express my gratitude towards him and the other members of the group for their
co-operation and encouragement which helped me in completion of this project. However, some
limitations were faced because of shortage of the time and also lack of experience.
Table of Contents
Abstract......................................................................................................................................................1
Introduction...............................................................................................................................................2
Objectives of the study:...........................................................................................................................3
Literature Review......................................................................................................................................4
Causes of food inflation:............................................................................................................................7
International reasons:...............................................................................................................................7
Impact of Bio-fuels:.................................................................................................................................7
Domestic long-term reasons:...................................................................................................................8
Controlling Supply Chain through Syndication:...................................................................................8
Negligence of agriculture sector:.........................................................................................................8
Increasing Dependency on Import:......................................................................................................9
Methodology............................................................................................................................................10
Sample Selection...................................................................................................................................10
Data sources..........................................................................................................................................10
Selection Period.....................................................................................................................................10
Findings and Analysis:..............................................................................................................................11
Food Inflation in 2014:..........................................................................................................................11
Food Inflation in 2015:..........................................................................................................................12
Food Inflation in 2016:..........................................................................................................................13
Food Inflation in 2017:..........................................................................................................................14
Food Inflation in 2018:..........................................................................................................................15
Limitation.................................................................................................................................................16
Abstract
Food inflation is a very important part of the economy of Bangladesh. It has been a part of
research which has been deliberately researched globally. As usual this is also a brief study on
the recent figure of the Food Inflation of Bangladesh. We did a qualitative research where we
compared the graphs of the past year and interpreted the causes and current scenario of the food
inflation fluctuation. This paper utilized secondary data to carry out the study.

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Introduction
Over the last few decades both the developed and the developing countries of the world have
been suffering from the problem of inflation. However, the intensity with which inflation
afflicted the developing countries was much more serious than that suffered by the developed
countries.1 Many economists believe that this markedly different rates of inflation experienced
by the two groups of countries can not possibly be attributed to mere chance factors or 'faulty'
monetary policies ; rather the reason must be sought in differences be- tween the socio-political
and economic structures of these countries. They believe that there are some fundamental
differences between the factors that generate inflationary impulses and the mechanisms by which
a price spiral manifests itself in the industrial and the developing countries of the world
[ CITATION ECL61 \l 1033 ] [ CITATION Hag77 \l 1033 ] [ CITATION Kir76 \l 1033 ][ CITATION Myr68 \l
1033 ] [ CITATION See64 \l 1033 ] [ CITATION Sun60 \l 1033 ] and, therefore, it is unlikely that the
models of inflation pertaining to countries which have highly developed market economies with
elastic supply responses in all sectors are applicable to the developing countries characterized by
factor immobility, market imperfections and rigidities and disequilibrium between supply and
demand in different sectors of the economy. Such a belief, strengthened by the failure of the
stabilization policies pursued by many governments under the aegis of the IMF, led to the
development of the "structuralist" school of thought during the fifties and sixties in Latin
America. The structuralists viewed inflation essentially as a phenomenon inseparable from the
forced growth process of the developing countries which was taking place under various
structural constraints. Opposing this school were a group of economists loosely labelled
"monetarists" who defended the official IMF position that inflation was a nominal phenomenon
and could be controlled by appropriate monetary and fiscal policies. These two schools still
continue to have very powerful influence on all economic analyses of inflation in the developing
countries.

Being an agricultural country about 48% people directly and more than 80% indirectly depend
on agriculture. The Food and Agriculture Organization (FAO) considered Bangladesh as one of
the thirty–seven countries in ‘crises’ due to the rise in food prices. Agriculture alone is the
highest subsidy provided sector. Government of Bangladesh have to spend this large amount of
money to keep the price of daily necessities inside the purchasing power of poor and lower

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middle class people. In spite of those efforts price of essential food fluctuate a lot in Bangladesh.
As a result marginalized people suffer a lot because an average household in the country spends
close to two–third of its income on food. Price hikes force them to cut back on the quantity or
quality of their food as well as change their consumption patterns.

Objectives of the study:

The objective of this paper is to generate analysis and discussion on some key issues of the
Bangladesh food inflation, identify major challenges and suggest policy recommendations. In
doing so selected macro-economic indicators like Consumer Price Index (CPI), inflation rate,
retail price of selected goods, Producer Price Index (PPI), Personal Consumer Expenditure (PCE)
and the food situation have been critically reviewed. The objectives of this study are listed
below:

I. Summarize the food inflation scenario in Bangladesh.

II. Understand the causes of food inflation in the Bangladesh economy.
III. Understand the consequences of food inflation in the Bangladesh economy.
IV. To find applicable strategies to cope with such food inflation in Bangladesh.

To conduct this study the researchers have not followed any mathematical model to check
relation between food inflation and long run economic indicators. The rationale behind this study
is to focus on recent causes of food inflation in light of the global crises and try to find out the
consequences and applicable strategies to overcome it. Previous findings in developing countries
tried to find out the relationship between inflation and other macroeconomic factors with the
basis of complex mathematical models. Our paper tries to focus on some basic causes and
consequences related to food inflation that might help government find out possible strategies
encounter that.

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Literature Review
The data of Bangladesh Bureau of Statistics revealed the fact that rice accounts for 71 percent
and 60 percent per head total calorie intake in a day in rural and urban areas of Bangladesh.
Another Report of Food and Agriculture Organization showed that the share of food in total
expenditures for the poorest 30 percent is about 69 percent. Both the people living in rural and
urban areas experience short term welfare loses of even only for 10 percent price hike of rice
which is higher in the lower section of people. To arrest the higher inflation, the Government has
already adopted several precautionary measures such as reducing import duty on food items,
raising food-grains imports, extensive rehabilitation programs for flood affected areas and
effective measures for higher food production. Bangladesh Bank continued its prudent monetary
policy stance and a more flexible exchange rate management without accelerating inflationary
pressures. Moreover, the Government has launched a guaranteed employment program for rural
people during lean seasons. Several Social Safety Net Program like food for work, vulnerable
group feeding, vulnerable group development, test relief and open market sales of essential
commodities were expanded for the poor section of people living below the poverty line.
[CITATION Sah132 \l 1033 ]

The inflation-growth nexus and the threshold level of inflation have received a fair share of
attention in the literature. Using cross-sectional and panel regressions, [ CITATION Fis93 \l 1033 ]
showed that growth is negatively associated with inflation, mainly through a reduction in
investment and productivity. However, although there is a broad consensus in the literature
regarding the adverse effects of inflation on growth, there is not enough agreement regarding the
threshold above which inflation starts affecting growth adversely. Bruno and Easterly (1998)
argued that growth is adversely affected only in years of very high inflation—greater than 40
percent—and that recovery is strong and fast once inflation falls. Khan and Senhadji (2001), on
the other hand, estimated the threshold of inflation to be 1–3 percent for industrial countries and
11–12 percent for developing countries. There appears to be greater agreement about the
negative effects of inflation on poor populations (Easterly and Fischer 2001).

Another important issue is the link between relative prices and overall inflation. Ball and
Mankiw (1995) showed that large shocks to some commodities have a disproportionate effect on

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the overall price level, mainly because of firms’ adjustment costs. Aggregate inflation depends
on the distribution of relative price changes, and inflation rises when the distribution is skewed to
the right. Ball and Mankiw (1995) suggested that measures of supply shocks, such as relative
prices of food and energy, work better than traditional measures of core inflation. In his earlier
work, Fischer (1981) reached somewhat similar conclusions; these go against the classical
monetarist notion that relative price changes occur because of real factors and therefore do not
affect overall inflation, which is the result of changes in money supply.

A more recent work on relative food inflation by Walsh (2011) used consumer price index (CPI)
data for 91 countries and argued that in lower-income countries, food inflation is not only more
volatile but is also, on the average, higher than nonfood inflation.2 The study shows that food
inflation is more persistent than nonfood inflation and that food price shocks are strongly
propagated to nonfood inflation in many countries. Given the larger percentage of poor
populations in many developing countries and the larger share of food in total expenditure of the
poor in general, these findings have serious implications.

In Bangladesh, too, there has been some extensive researches about the food inflation scene in
the economy. But it mostly explains the historical trend of food inflation in Bangladesh. The
papers investigates the main factors that were the driving forces of food inflation in Bangladesh
over the years. Using 12 years data it is found that some of the short run factors like floods,
cyclones, droughts, lack of grain reserves and high oil prices as well as some of the long run
factors such as controlling supply chain through syndication, negligence of agriculture sector,
trade liberalization and increasing trade deficit, increasing dependency on import, fluctuations of
food grain prices in domestic Market and currency depreciation are mainly responsible for rising
food inflation in Bangladesh. Consequences of food inflation are most severe on poor and middle
class people. Due to middle men and brokers farmers did not get the benefit of increase of price
of food grain. [ CITATION Sah131 \l 1033 ]

In India, too, food inflation has received considerable research attention. Mishra and Roy (2011)
showed that food inflation in India is concentrated in a few commodity groups such as milk;
fruits and vegetables; eggs, meat, and fish (EMF); and cereals. They mainly attributed this
inflation to production shocks compounded by excessive government intervention in the
country’s food markets. Chand (2010) argued that most of India’s food inflation is due to

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production shocks. He recommended augmenting buffer stocks, improving storage facilities, and
dovetailing trade policy with production scenarios in the country. [ CITATION CSC17 \l 1033 ]

The results of the abovementioned studies, particularly those of Chand (2010), Nair and Eapen
(2012), and Nair (2013), are revealing. These studies show that food inflation trends, as well as
the underlying causal factors behind those trends, can undergo quick changes. For example,
production shocks, not-so-comfortable stock levels, and exports in the preceding years were cited
as factors responsible for rice price increases from 2007/2008 to 2009/2010. However, India
imposed export bans in 2008, which continued until 2011. In addition, India’s production was
impressive and stocks rose far above the buffer norms in these years, except in 2009 when
production suffered due to a severe drought. Despite these favorable factors, rice prices
continued to be high. Similar cases can be seen with some of the other commodities as well, in
which a change in the trend of perceived causal factors has not always resulted in the expected
inflation outcomes.

It is clear from the foregoing review that food inflation is complex, with several factors at work
simultaneously, including supply, demand, external factors, policies, and so on. Most of the
previous studies, although rich in detail and insights, have drawn inferences mainly based on one
or two episodes of inflation. More important, years of low inflation were not factored into these
analyses to check the robustness of the conclusions drawn. Therefore, the present study proposes
to carry out the analysis over a longer time horizon at a disaggregated commodity level in order
to identify the patterns and determinants of food inflation.

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Causes of food inflation:
Food price rises due to many short-term reasons like flood, drought, lower reserve of food grain, high oil
price etc. Besides short-term causes there are some long-term causes remain that concentrate the food
crisis over the years. Food inflation in Bangladesh is triggered by both domestic and international reasons.
Without solving those reasons Bangladesh cannot control food inflation.

International reasons:
According to FAO over the last 20 years, food production has risen steadily at over 2 per cent a year,
while the rate of population growth has dropped to 1.14 per cent a year. Population is not outstripping
food supply. The overpopulation argument seems like an obvious one, but when considering who
consumes what, in what quantities and whether much use of resources is actually productive or not
suggests that there may be other issues, though overpopulation concerns could become real at some point.
For example

 A lot of land goes into producing products that could be considered unnecessary or excessive in their
production (e.g. tobacco, sugar, beef, bio-fuels, urbanization, etc.).
 Some 80 per cent of the world's production is consumed by the wealthiest 20 per cent of the world
suggesting an inequality in resource use due to social, economic and political reasons.

Impact of Bio-fuels:
Developed countries have attempted to blame demand from rising poorer countries as a bigger cause.
World Bank study stated that: "Rapid income growth in developing countries has not led to large
increases in global grain consumption and was not a major factor responsible for the large price
increases." The report mentions the following ways in which bio-fuels have distorted food markets:

 Grain has been diverted away from food to fuel; (Over a third of US corn is now used to produce
ethanol.
 About half of vegetable oils in the EU goes towards the production of bio-diesel.
 Farmers have been encouraged to set land aside for bio-fuel production.
 The rise in bio-fuels has sparked financial speculation in grains, driving prices up higher.

The World Bank has also estimated that an additional 100 million more people have been driven into
hunger because of the rising food prices. Another institute, the International Food Policy Research
Institute (IFPRI)estimates that 30 per cent of the increase in the prices of the major grains is due to bio-

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fuels. In other words, biofuels may be responsible for some 30-75 million additional people being driven
into hunger.

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Domestic long-term reasons:
Controlling Supply Chain through Syndication:
Syndication probably the most destructive reason for food inflation over the last few years. This is the
man-made obstacles to control the normal of supply of goods in the market. Unfortunately, there are no
data to identify such cases. However, according to information of some traders suggests that the presence
of market power either through collusion between two or more traders or because of the existence of large
individual traders may be a problem at the import stage. There are roughly 10 to 20 trading houses in
Bangladesh who have the capability to import in bulk (edible oil, sugar, wheat, pulses) and the financial
capacity to hold on to the stocks in order to influence prices. But they too face constraints: commodities
are perishable, there is competition from small suppliers and there are vagaries of international prices. In
the supply chain of good produced domestically, there are just too many traders at the levels of
middlemen (traders collecting from producers), Aratdars (link between beparis and wholesalers
essentially performing a storage and matching functions), wholesalers and retailers for syndication to be
possible. Extreme caution is needed in the drive against syndication. Indiscriminate crackdown on traders
can aggravate the problem by creating panic in the trading system. To play it safe, traders may choose to
cool their business for a while by not importing at all or not importing as much as they would have
imported under normal conditions. Those syndicate holders mainly import product from a country when it
is quite cheap in that country and reserve it and thus create an artificial shortage in the market. Specially
during the time of some religious festival like Eid-ul-fitr, the food items are really needed that time. At
that time syndicate holders supply their products at very high price. As a result, a real shortage can
emerge and domestic prices increase even in the absence of collusion. People are now confined to them
and due to their political connection, no government take any actions against them.

Negligence of agriculture sector:

Bangladesh has an agrarian economy. Agriculture contribute about 14.74% of the GDP. But allocation of
public expenditure in this sector reduced drastically in the last few years. Shrinking government support
to agriculture has made the production hardly viable over the years. Drastic reduction in public
expenditure in agriculture increased the input costs and shrinking price incentives in an imperfect
unregulated market structure ultimately swept the farmers out of their business. In terms of share of GDP,
real public investment in agriculture did not grow over the years. Poor performance of agriculture sector
is the result of low budget allocation in agriculture sector. Though there’s an increase in FY2019-20
budget allocating 16,985 crore i.e. 7.86% increase from last year’s budget. To keep this sector alive and
make the farmer affordable to buy the agricultural inputs, government is giving subsidy. Even the
allocation of subsidy is not enough especially when cost of agricultural inputs as well as fuel price are

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rising rapidly and farmers don’t get fair price of their product. Moreover, the government kept allocations
of 9,000 crore as subsidy but never spent more than 5,201 crores. Besides this benefit of this subsidy has
not reached to the marginal farmers. Subsidy is also not enough compared to other neighboring countries.

Increasing Dependency on Import:

As a result of trade liberalization, dependency of import increased significantly, especially, from India
and China. These two countries are the main sources of Bangladesh's import, especially, of food and other
essential commodities. Bangladesh accounted for, on an average, around 28-30 per cent of her total
import from these two countries in the last four years or so. This makes the food market volatile. Because
if any country denies to export any certain food product then the food price will increase drastically
making it harder to buy for the poor which can be seen from recent price hike of onion.

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Methodology
This section describes the methodology of this study. It contains the sample selection procedures,
data sources, period selection and the different technique which were used for content analysis.

Sample Selection
We decided to choose the country Bangladesh as our sample because it has one of the most
fastest growing economies. As of 15th October, 2019, the World Economic Forum has done
extensive analysis about the fastest growing economy of the country. It has lifted 8 million
people out of poverty since 2010 and the income per head has almost tripled. It has four crucial
factors for its economy growing faster. These are:

1. World’s second largest garment industry only losing to China and exports increasing 16%
per year.
2. It has a young and large workforce, where half of the country is under the age of 25 years.
3. Bangladesh has 600,000 freelancers and development of tech is helping them to join the
formal economy.
4. Otherwise known as an agricultural country, it is slowly moving towards a knowledge based
society, diversifying from just agriculture and manufacture to building their own tech hub in
the capital.

All these factors make Bangladesh a suitable candidate for this analysis.

Data sources
We decided to go through thoroughly each monetary policy of each half fiscal year of the
selection period which is a secondary data source. Also we have taken help from other research
papers which have been given as citations as APA format and also as bibliography at the end.

Selection Period
We decided to take the years from 2014 to 2018 for the most recent data selection and also for
relevance to the current world problem the country of Bangladesh. This will help us project a
paper which talks about modern problems and look for relevant solutions for the sample country.

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Findings and Analysis:

Food Inflation in 2014:

Food inflation has risen steadily from 5.02% in January 2013 to 9.09% in May 2014 .Food
inflation for June 2014 declined to 8.00% possibly due to declining global and regional food
prices. There is some correlation between Indian and Bangladeshi inflation. Indian food inflation
has fallen a little bit but it remains high and only further significant declines will make a material
difference to inflation in Bangladesh.

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Food Inflation in 2015:

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Food inflation fell from 7.68 percent in January 2015 to 6.68 percent in June of the same year.
Here runs the public perception that the fuel price reduction mainly affected general inflation.
But, the government did not adjust that reduction to domestic prices. Although expectations
owing to the global fuel price might have played a positive role in dampening inflationary
concerns, the food component that occupies almost 60 percent of the consumption basket played
the major role in pulling the general inflation figure downward.

Food Inflation in 2016:

The rate of annual average food inflation depicted a declining trend while point-to-point
food inflation showed mixed trends in 2016. Point-to-point food inflation stood at 6.07 percent in
July 2015 and had followed a sustained fall before reaching to a fairly low rate of 3.77 percent in
February 2016. With some fluctuations in the following few months, point-to-point food
inflation ended up 4.23 percent in June 2016. Point-to-point food inflation for 2016 is still much
lower than 6.32 percent that prevailed in June 2015. Annual average food inflation continuously
declined from 6.53 percent in July 2015 to 4.90 percent in June 2016.

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Food Inflation in 2017:

The food inflation in 2017 was fluctuating. The food inflation in July was 6.95%, 7.32% in August and
7.87% in September. The 12 months average after the quarter is 6.72%.

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Food Inflation in 2018:

Annual average food inflation had a sustained rise during July 2017 (6.23 percent) to April 2018
(7.32 percent), which posted consecutive lower rates in the remaining two months of 2018.The
average food inflation rate for May 2018 and June 2018 stood at 7.25 percent and 7.13 percent
respectively. The average food inflation rate was 6.02 percent in June 2017. On the other hand,
the annual pointto- point food inflation recorded a mixed trend during July 2017 (6.95 percent) to
January 2018 (7.62 percent) followed by a declining trend for rest of the financial year, that is
from February 2018 (7.27 percent) to June 2018 (5.98 percent). The point-to-point food inflation
stood at 7.51 percent in June 2017. Higher global commodity prices and weather-related stocks
raised food inflation to above 6 percent in July 2018.

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Limitation
We faced certain limitations while carrying out the study which might have affected the study
directly or indirectly. So basically, we had several limitations while conducting the work. First,
we had to take secondary data for working out as a result we had a lack of few information.
Basically, we couldn’t get information on a specific year. It was hard enough for us to work with
the information we had because we lacked experience. We did find researches related to food
inflation but it was not up to the mark to carry out our research. We did a qualitative research so
we didn’t quite come us with mathematical figures on how the fluctuation is happening.

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