An unexpected honeymoon?

Posted in economics by jrahman on November 28, 2008

Politics is the price of rice, wrote fellow blogger Rahnuma Ahmed earlier this year. Rising prices, or more accurately, rising inflation, is intricately linked with political fortunes in Bangladesh. Regardless of the election result, could the incoming government receive an unexpected honeymoon from softening inflation?

Yes, inflation has softened. The chart below shows that inflation — nationwide, food price, and rural — has moderated in the year to October compared with the year to September.


And there are reasons to expect inflation to subside a bit more. Firstly, taka has appreciated markedly against the Indian rupee — from 1.75 to about 1.50 taka/rupee — in recent months. This should make food import cheaper. Second, energy prices have fallen sharply in the global market, which should feed through to our prices. And finally, without any natural disaster (so far), we have had bumper crops, and this is expected to continue until the spring. Of course, at 7.3%, inflation is still too high. Inflationary expectations might have set in. There is still a lot of liquidity in the system. But all considered, inflation may yet fall to 5-year lows by the time a new government takes charge.

To understand the importance of inflation for our politics, consider two examples. AL managed to bring inflation down after the 1998 flood, while BNP let it rise — the result is that AL is now widely considered as the party of low prices. Example two is of course the current regime. When all is said and done, if it could bring inflation down to 4% or less, its various political objectives, including perhaps minus-2, would have been successful.

So, if inflation subsides, the new government will have an unexpected honeymoon. To be sure, it may still have immediate economic worries — falling remittances or weak exports — not to mention structural problems or development challenges. But if it earns a respite on the all-important prices front, it should use that break wisely.

The hard question is, will they?

(Cross-posted at UV)

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2 Responses

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  1. Team BDBloggerz said, on November 28, 2008 at 5:10 pm

    “The hard question is, will they?” yeap… really a hard one!

  2. […] end of 2008, with commodity prices tumbling world wide and taka appreciating against the rupee, I predicted that the incoming government would have a respite on the prices […]

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