The Financial Express

On wage adjustment against persistent inflation

| Updated: December 29, 2022 22:48:51

Low-income people are purchasing rice at subsidised price as persistent inflation erodes their real income significantly	—FE File Photo Low-income people are purchasing rice at subsidised price as persistent inflation erodes their real income significantly —FE File Photo

The economy of Bangladesh faces a number of longstanding structural weaknesses. These weaknesses have exacerbated owing to several external factors including the Covid-19 pandemic, the Russia-Ukraine war and consequent supply chain disruptions. Indeed, macroeconomic management has never seen such a difficult phase in the recent history. The most critical areas are: high level of commodity prices, external sector management, power and energy sector, banking sector, and fiscal balance. In view of the emergent challenges, Centre for Policy Dialogue (CPD) seeks to present a set of policy recommendations towards managing the ongoing economic crisis

Currently, Bangladesh is experiencing high inflationary pressure which started even prior to the start of the Ukraine crisis. Bangladesh has lately seen dramatic fluctuations in energy prices, which has exacerbated this predicament. Domestic factors, such as market distortion by a few dominating businesses, and weak monitoring have also contributed to the ongoing price increase.

Several necessities, whether they are produced locally or imported from a developed country, are costlier in Bangladesh than in other developing or developed nations. As the burden of rising prices is increasing, low-income households are struggling to manage their expenses. Many households, including workers on minimum wages in almost all industries, are having trouble in making ends meet

The 12-month average food and non-food inflation rates have fluctuated in a cyclical pattern over the past ten years. Increases in food inflation were generally accompanied by decreases in non-food inflation, so the overall general inflation rate has remained largely stable in the short-term. Recently, the overall general inflation rate has experienced a slight increase.

Engel's law states that as income increases, people spend a smaller proportion of their total income on food. In Bangladesh, nominal household income increased by 7.86 per cent per year on average and real household income increased by 0.16 per cent per year on average between 2010 and 2016. 

Food expenditure as a share of income decreased from 53 per cent in 2010 to 46 per cent in 2016. and food expenditure as a share of total consumption expenditure decreased from 55 per cent in 2010 to 48 per cent in 2016.

However, the weights used for food in the calculation of CPI are significantly higher than the share of food expenditure in either income or consumption expenditure. Thus, the consumption basket used for calculating overall general inflation was created in 2005 and does not reflect the current consumption pattern of consumers or the actual prices in the market in 2022.

CPD's analysis shows that at least 29 imported essential food items currently face a high incidence of tax. The government is dependent on such indirect taxes for domestic resource mobilisation. A fiscal measure based on indirect taxes is discriminatory against the low-income households and also contributes to inequality.

Assuming that each person consumes the average amount of food, as indicated by the Bangladesh Urban Socioeconomic Assessment Survey 2019 conducted by the Bangladesh Bureau of Statistics (BBS), the average monthly cost of a basket of 19 common food items ("regular diet") for a household of four persons in Dhaka city was Tk 23,676, as of December 15, 2022.

Assuming that a household lives on a "compromised diet", and never consumes fish, mutton, beef, or chicken, the average monthly cost of food for a household of four persons in Dhaka city was Tk 9,557, as of December 15, 2022.

Assuming a 5 per cent annual increment of the basic salary since latest year of wage review, the minimum wage in 2022 for workers in all industries would not be sufficient to afford a "regular diet" for a household of four persons.

Assuming a 5 per cent annual increment of the basic salary since latest year of wage review, the minimum wage in 2022 for workers in the shrimp industry, fish and trawler industry, hotels and restaurants industry, soap and cosmetics industry, tea packaging industry, tailoring factories, cotton textile industries, bakery, biscuit and confectionery industry, automobile workshop industry, garments industry, glass and silicate industry, plastic industry, leather and footwear industry, and rice mills would not be sufficient for affording a "compromised diet" for a household of four persons.

Thus, high inflation is directly threatening the food security of workers earning a minimum wage. Hence, it is urgent to revisit and revise the minimum wages of workers in all industries immediately.

RECOMMENDATIONS: A new consumption basket should be formulated for calculating CPI inflation, based on rigorous research as regards consumer behaviour and expenditure patterns. All targets, projections, and plans in the monetary policy and the Eighth Five Year Plan (8FYP) should be revised in accordance with this new consumption basket for CPI and new base year for inflation.

The National Board of Revenue (NBR) needs to consider removing the advance income tax (AIT), advance tax (AT) and regulatory duty (RD) on imported essential food items.

The role of the Bangladesh Competition Commission also needs to be strengthened, particularly in the case of the essential consumer goods market. The Commission should develop a database, regularly monitor the dominant market players' operations, examine the market control and manipulation (if any), and take proper measures. In fact, the Bangladesh Competition Commission should adopt a strong stance against cartels and a zero-tolerance policy towards collusive practices. The Competition Act 2012 should be revised to directly address monopolies and include specific anti-trust clauses, along with concrete penalties for violators.

The Minimum Wage Board should consider increasing the minimum wages in all industries so that workers earning minimum wages may at least afford basic food.

Private sector corporations should consider a higher salary increment during times of high inflationary pressure since workers are having to compromise their standard of living.

The volume of sale of essential commodities through the open market system (OMS) should be increased. Distribution of these commodities must be managed effectively and without any corruption, so that the eligible people have access to these items at low prices.

The government also needs to provide direct cash support to the poor, enhance social protection for low-income families, and extend stimulus to the small businesses for their survival during difficult times.

Dr Fahmida Khatun is Executive Director, Centre for Policy Dialogue (CPD); Professor Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam Moazzem, Research Director, CPD; Mr Towfiqul Islam Khan, Senior Research Fellow, CPD; Mr Muntaseer Kamal and Mr Syed Yusuf Saadat, Research Fellows, CPD. [email protected] 

The piece is based on CPD's PowerPoint presentation at a dialogue on the current economic crisis held on 17 December 2022, in Dhaka.

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