expanayzing the current inflation situation in bangladesh & ...

8/12/2019 ExpANAYZING THE CURRENT INFLATION SITUATION IN BANGLADESH & ITS IMPACT ON ECONOMY. lorer

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WELCOME TO OUR

PRESENTATION

ON

ANAYZING THE CURRENT INFLATION

SITUATION IN BANGLADESH

&

ITS IMPACT ON ECONOMY.


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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


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I. The current economy of Bangladesh.

II. Definition of Inflation.

III. Current inflation situation in Bangladesh.

IV. A Macroeconomics view to inflation.

V. Factors of Inflation in Bangladesh.

VI. How Inflation can be brought under

control.


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The economy 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 inefficiently-

governed nation. Although more than half of GDP isgenerated 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 2008-09global financial crisis and recession.


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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 .


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

Table: Trends of Inflation

Fiscal Year(FY) Inflation rate(in %) Fiscal Year(FY) Inflation rate(in

%)

FY01 1.94 FY06 7.06

FY02 2.79 FY07 7.20

FY03 4.38 FY08 9+

FY04 5.83 FY09 8.51

FY05 6.48 CURRENT(APRIL,10) 9.06


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It has been suggested by economists that inflationrate below 9% is favourable for economic growth.

It is widely believed that moderate and stableinflation rates promote the development process

of a country, and hence economic growth.Moderate inflation supplements return to savers,enhances investment, and therefore, accelerateseconomic growth of the country.

Though the world is going through financial crisisBangladesh is able to keep the inflation rate undercontrol in a moderate position.


8/22Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

26.8

8.51

8

9.8

7.3

13.2

14.2

3.3

INFLATION IN SAARC(IN %)


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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 inflationis calculated as below:

Rate of inflation=170.21-165.28 100 = 2.98%

165.28


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Economists distinguish between two types of

inflation:

Demand-pull inflation

Cost-push inflation.


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AS

THE PRICE LEVEL

P e

P e

AD

AD

Y Y

REAL GNP

Demand-pull inflation occurs

When changes in price levelare attributed to an excess oftotal spending beyond the

economys capacity toproduce. As resources arefully employed the extrademand can not be met byexpanding production. So theexcess demand bids up theprice of the limited real

output. In brief, toomuch spendingchasing too fewgoods.


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THE PRICE LEVEL AS

AS

P e

P e

Y Y

REAL GNP

COST-PUSH inflation is

also known as SUPPLY-

SIDE inflation. It occurs

when supply shock

happens. It is asituation where

aggregate supply

declines and pushes

prices up.


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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 growthoccurs when money supply grows more rapidly than

output.


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THE PRICE LEVEL

AS AS

110 e

104 b

100 a

AD AD

0

Yn y

REAL GNP

a) Aggregate supply and Aggregate demand

THE RATE OF INTEREST(PERCENT)

M M

10

8.5 a e

7

LP LP

0 1000 1100

MONEY SUPPLY

b) The money Market.


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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 therewas 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 higherthan the anticipated inflation. These together

triggered the price spiral.


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Policy Mismatch: Central bank has been persuading

contractionary monetary policy, while over the pastfew years budgetary measures were expansionary.

Tightening monetary policy initiated in early 2005following an instruction of IMF; IMF reasoned that the

economy was overheated, which triggered inflation;BB raised SLR, CRR & Bank Rate This followed by anunhealthy competition within the banking as well as

non-banking financial institutions to rise the interestrate.

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 inflationrequires further depreciation to maintain exportcompetitiveness.


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According to the vicious circle of hypothesis,under a floating exchange rate system, an initialdisturbance(either domestic or foreign)can createan exchange rate inflation. That is the disturbancecan set into motion a cumulative process ofinflation and exchange rate depreciation.

Lack of Financial Instruments.

Trade liberalization and Increasing Trade Deficit.Over the last decade the (weighted) average tariffhas been reduced. Number of restricted itemswhich 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 todepreciate thus has an impact on inflation.


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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 thereal growth of output.

Through TAX incentives.

Increasing export and reducing trade deficit.


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