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Mission inflation impossible

Target to contain it at 7.5pc doubted by economists

Sohel Parvez
The government targets to contain inflation at 7.5 percent in the forthcoming fiscal year, heartened by this year's bumper food production, falling commodity prices on the global market and promises of higher foreign exchange supply.
Economists, however, say bringing down the inflation from over 10 percent at present will be difficult in the face of high bank borrowing by the government to fulfil its election pledges and likely hikes in fuel and electricity prices.
"It will be very difficult to attain the target," Salehuddin Ahmed, former governor of Bangladesh Bank, told The Daily Star yesterday, pointing out that there was no guarantee that prices will continue to fall on the international market.
Citing satisfactory food production at home and the outlook of declining trend in food prices on global market, the finance minister in his budget speech yesterday hoped food prices would "settle at a tolerable level."
"The increased supply of foreign exchange will keep the exchange rate stable. As a result, inflation will moderate," said Muhith.
To contain inflation, he added, the government would continue monetary tightening along with Fiscal consolidation.
"Our efforts to control the flow of credits to nonproductive sectors are continuing. I hope these steps will create a positive effect in containing inflation."
This is the second time Muhith pledged to keep inflation within 7.5 percent. Despite promises, he failed to do so in the outgoing fiscal year.
The average inflation stood at 10.86 percent during July-April of the current fiscal year owing to soaring subsidy cost to buy fuel for rental power plants, excessive bank borrowing and fall in taka's value.
Rise in fuel and power prices fuelled the inflation further cutting deep into the low-income people's pocket.
In the last two months, inflation dropped below 10 percent mark mainly due to falling prices of food, including rice. A credit tightening pursued by
Bangladesh Bank helped calm the domestic market.
Non-food inflation dropped in May to 12.72 percent from 13.77 percent in April, according to the Bureau of Statistics.
Pointing to the non-food inflation, Salehuddin Ahmed said the government added Tk 11,000 crore subsidy burden of the outgoing fiscal to the next fiscal. Costs of fuel, electricity and transport will rise, if this subsidy burden is adjusted with the current prices of fuel, he said.
"This will cause further rise in non-food inflation," he said.
Salehuddin also pointed to the risk of declining exports and remittance earning due to global economic slowdown.
"If exports and remittance earnings do not grow and imports do not fall further, pressure on foreign exchange reserve will increase. It will lead to depreciation of taka and thus make imports costlier.
"In addition, bank borrowing by the government will fuel the inflation," he said.
Mirza Azizul Islam, former adviser to caretaker
government, told The Daily Star recently that inflation was unlikely to come down in the coming fiscal year.
However, if the prices of fuel and food grains fall on the global market, it may have a positive impact on inflation, he said.
Research organisation Centre for Policy Dialogue in its report on the macro-economic performance in 2012 warned that inflationary pressure would sustain inthecomingyear.
Presenting the findings, CPD's distinguished fellow Debapriya Bhattacharya told reporters that private sector credit flow might be reduced through a tighter monetary policy but government's borrowing from banks would be hard to check.