WELCOME TO OUR PRESENTATION

ON

ANAYZING THE CURRENT INFLATION SITUATION IN BANGLADESH & ITS IMPACT ON ECONOMY.

University of Dhaka Department of Tourism and Hospitality Management Submitted to: Mr. Santus kumar deb. Lecturer Dept. of Tourism and Hospitality Management University of Dhaka Submitted by: EXPLORER

I. II. III. IV. V. VI.

The current economy of Bangladesh. Definition of Inflation. Current inflation situation in Bangladesh. A Macroeconomics view to inflation. Factors of Inflation in Bangladesh. How Inflation can be brought under control.

has grown 5-6% per year since 1996 despite political instability, poor infrastructure, corruption, insufficient power supplies, and slow implementation of economic reforms. Bangladesh remains a poor, overpopulated, and inefficientlygoverned nation. Although more than half of GDP is generated through the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product. Bangladesh's growth was resilient during the 2008-09 global financial crisis and recession.

The economy

Definition of Inflation:
Inflation is a rise in general level of prices of goods and services over time. Inflation can be thought of as a decrease in the value of the unit of currency.

In classical political economy, inflation meant increasing the money supply.

Combining these three definition,we can say inflation is a situation of an economy where prices of goods increase, the value of currency unit decreases and the money supply increases .

Bangladesh has been experiencing high inflation rates for the last few years. The rate has been increased from 1.9% in fiscal year 01 to 9.06% in current fiscal year.

Table: Trends of Inflation

Fiscal Year(FY) FY01 FY02 FY03 FY04 FY05 Inflation rate(in %) 1.94 2.79 4.38 5.83 6.48 Fiscal Year(FY) FY06 FY07 FY08 FY09 CURRENT(APRIL,10) Inflation rate(in %) 7.06 7.20 9+ 8.51 9.06

 It

has been suggested by economists that inflation rate below 9% is favourable for economic growth. It is widely believed that moderate and stable inflation rates promote the development process of a country, and hence economic growth. Moderate inflation supplements return to savers, enhances investment, and therefore, accelerates economic growth of the country. Though the world is going through financial crisis Bangladesh is able to keep the inflation rate under control in a moderate position.

INFLATION IN SAARC(IN %)

26.8

14.2 13.2

9.8 8.51 8 7.3

3.3

Afghanistan

Bangladesh

Bhutan

India

Maldives

Nepal

Pakistan

Sri Lanka

Inflation is measured by the price index number. A price index number is the general price level in any year relative to price In a base period. The rate of inflation can be calculated for any specific year by subtracting the previous years price index from that years index , dividing by the previous years index and multiplying by 100 to express as a percentage. Example: Suppose the CPI(consumer price index) was 165.28 in 2008 and 170.21 in 2009.So the rate for inflation is calculated as below: Rate of inflation=170.21-165.28 100 = 2.98% 165.28

 RULE

OF 70 provides a quantitative grasp of

inflation effect. Dividing 70 by the annual rate of inflation, measures the number of years which takes to double the prices level. Example:7 percent annual rate of inflation will double the price level as following Approximate number of years required to double the price level = 70
annual percentage rate of inflation

70 7 = 10 years.

 Economists

distinguish between two types of

inflation:

Demand-pull inflation Cost-push inflation.

AS

THE PRICE LEVEL P e

e AD

AD

Demand-pull inflation occurs When changes in price level are attributed to an excess of total spending beyond the economys capacity to produce. As resources are fully employed the extra demand can not be met by expanding production. So the excess demand bids up the price of the limited real output. In brief, too

REAL GNP

much spending chasing too few goods.

THE PRICE LEVEL

AS AS

COST-PUSH inflation is also known as SUPPLYSIDE inflation. It occurs when supply shock happens. It is a situation where aggregate supply declines and pushes prices up.

REAL GNP

Many economists think that prolonged inflation is a monetary growth . According to the equation of
exchange, MV=PQ, where: M= MONEY. V= VELOCITY. P= PRICE. Q= OUTPUT. With constant velocity, excessive monetary growth occurs when money supply grows more rapidly than output.

THE PRICE LEVEL AS e

AS

THE RATE OF INTEREST(PERCENT)

M M

110 104 100

b a

10
8.5 7 LP LP a e

AD AD

0
Yn y REAL GNP a) Aggregate supply and Aggregate demand

1000

1100

MONEY SUPPLY b) The money Market.

Same thing happens when government decides to increase fuel price or other public utilities, which mostly affect the commoners. The pay hike of the government officials there was tendency among other working classes to bargain for an increase in nominal wages greater than expected inflation. The producers, on the other hand, continued to increase prices higher than the anticipated inflation. These together triggered the price spiral.

Policy Mismatch: Central bank has been persuading contractionary monetary policy, while over the past few years budgetary measures were expansionary. Tightening monetary policy initiated in early 2005 following an instruction of IMF; IMF reasoned that the economy was overheated, which triggered inflation; BB raised SLR, CRR & Bank Rate This followed by an unhealthy competition within the banking as well as non-banking financial institutions to rise the interest rate. Currency Depreciation is an Inflation Booster. Depreciation tends to increase the domestic price of imported goods which led to an increase in price of final output and then wages. The higher inflation requires further depreciation to maintain export competitiveness.

According to the vicious circle of hypothesis, under a floating exchange rate system, an initial disturbance(either domestic or foreign)can create an exchange rate inflation. That is the disturbance can set into motion a cumulative process of inflation and exchange rate depreciation. Lack of Financial Instruments. Trade liberalization and Increasing Trade Deficit. Over the last decade the (weighted) average tariff has been reduced. Number of restricted items which were 193 in the import policy of 1991-93 was reduced to 63 in the import policy of 2003-06. This has intensified the dependency of import . High trade deficit also leads currency to depreciate thus has an impact on inflation.

Expanding Budget Deficit. Using Pricing Policy is Unsustainable to Mitigate Budget deficit. Increasing Workers Remittances Creates Expansionary Demand.

 Making

a sustainable monetary roles. Strictly controlling the wages and price and imposing government rules to govern prices and wages. Adopting supply side program through increasing the real growth of output. Through TAX incentives. Increasing export and reducing trade deficit.