Economic Performance of Bangladesh Over the Last 5 Years - Report Example

Inflation Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecturer Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 18th June, 2012. 1. Introduction This report sets out to discuss the economic performance of Bangladesh in the last five years. This will be done by a definition of the concept economic performance which will be intertwined performance of the country in the last five years and supporting information such as data, graphs, tables will be used to offer supporting evidence on how the country is performing economically. In relation to this report will mainly consider one of the major indicators of economic performance that is inflation. The report also sets out to outline the impacts that the economic performance of Bangladesh may have on the future economic performance and other related issues the report will also offer a conclusion which will sum up the findings of the report. 2. Economic performance of Bangladesh over the last 5 years Bangladesh economy has been on the rise since the year 1996 despite the many factors that tend to pull back the country economy, this are aspects such as political instability in the county, corruption, slow rate of implementation of economic reforms as well as poor infrastructure. A country economic performance is a concept that has attracted attraction from a wide range of individuals such as the economists and the politicians and all the other citizens since it tends to affect everyone in the country. When a country economy is doing well the citizens are able to find more job opportunities and they are usually paid higher salaries for their services (Rudiger & Stanley 1994, pp. 60). Economic performance is said to be those issues that mainly deal with the amount as well as the value of money, investment, debt and wealth. Bangladesh has achieved numerous economic growth over the last five years. The aspects that are mostly used considered when assessing the economic performance of a country are national income and its growth rate, unemployment rate, inflation rate, balance of payment and currency exchange rate. In assessing the economic performance of Bangladesh we will mainly focus on inflation (Rudiger, Stanley & Richard 2012, pp. 10). Inflation Inflation is termed as that percentage rate of alterations in price index over a given period of time. Too much money in a country economy mainly leads to lose of value. In relation to economics inflation is termed as the rise in prices of both goods and services in a country economy over a period of time. In essence it refers to the rise in prices that leads to the loss of purchasing power for most of the people in the country (Rudiger, Stanley & Richard 2012, pp. 3). The inflation rate as the year 2012 in Bangladesh stood at 9.93 percent. Since the year 2001 up to the year 2012, the average rate of Bangladesh inflation rate was about 8.2700 percent, it reached the highest rate by September 2011 when the inflation rate was 11.9700 percent. In general terms inflation rate is termed as general rise in prices of commodities when assesses against the standard level of the purchasing power. In general inflation is measured using several methods such as CPI and GDP deflator (IMF 1997). The figure below shows the inflation rate of Bangladesh as of January 2007 to January 2012. Based on the graph it is evident that the inflation rate in Bangladesh have never been constant and have been changing from time to time. Graph showing the inflation rate of Bangladesh The graph below shows the inflation rate of Bangladesh as from the year 1991 to the year 2009. The graph shows that the inflation rate has been rising and falling at the same time. 3. Impacts to the future economic performance Inflation acts as a hindrance to the economic performance of most countries. Inflation affects various sectors of a country economy such as a country production, distribution of the income and wealth and effect on the government. High and low levels of inflation basically have an effect on the economy of a country. In essence also rate of inflation rate tend to be of much benefit to a country while negative or zero rate of inflation is also considered as bad for the economy. High rates of inflation tend to harm a country economy and it tends to affect a country in various ways. Inflation will affect a country economic performance in that, in instances where a country experience high inflation there is a distortion in consumer behavior. This is so because most purchasers fear the price increase and may at times tend to buy the commodities in advance thus they may end up establishing the economy since they will create unwanted and unnecessary shortages in certain commodities (Ministry of Finance 2006). Another impact that will be brought about by the high rates of inflation is that it will tend to redistribute the income of various individuals thus those who work on a fixed salary basis and those lacking the bargaining power will be affected since their purchasing power will ultimately decrease. By these workers will be advocating for a pay rise so as to meet the standards of living that they are used to since the amount of money they are been paid have lost value to the extent that it does meet their needs (Centre for Policy Dialogue 2006). Inflation will also affect the economic performance of a country in that if the inflation rate of a country tend to be higher than that of the competitor country, the country with high rate of inflation will seem inappropriate to the purchasers, this will ultimately led to lesser level of sales of commodities and the services of the country thus the creation of a trade deficit and the inflation will also weakens the country’s competitive position in the global market, thus the economic performance of a country will end up been affected. Since there products will not be purchased at the same rate (Bangladesh Institute of Development Studies 2006). Inflation also affects economic performance in that it tends to cause disruption in the business planning process. Most businesses experience uncertainty of the future operations which leads to difficulties in planning and this ultimately leads of low level of capital been invested which leads to a slower economic growth rates (Mishkin 1998). Inflation leads to uncertainty on the future profitability of investments most projects. In respect to this organizations tend to be more conservative when making their investment decisions, this at times leads to lower levels of investment as well as economic growth. Inflation tends to affect the tax system to distort the rate of buying and lending decisions. Through this investment which may have been made by borrowing may from the banks will not be done thus leading to lower level of economic growth of a country thus a country’s economic performance will be affected. A positive impact that is brought about by inflation is that the banks are able to adjust the nominal interest’s rates in the aim of mitigating recessions as well as encouraging individual to investment in projects that do not involve non-monetary projects (Bangladesh Bank 2006). 4. Other relevant issues/ discussion and other Causes behind inflation Inflation is not mainly caused by the monetary phenomenon but at times it is also linked to the fiscal imbalances as well as deficiency that exist in internal economic policies. One of the major causes of inflation is the availability of so much money in a country. At times governments print excess money so as to be able to deal with a crisis. Due to this the prices of commodities rise and also at high speed so as to be able to keep with the currency surplus (Agenor & Montiel 1999, pp. 77). Another reason behind inflation is the rise in production cost. A rise in the production cost ultimately leads to the rise in price of the final product. An increase in the cost materials will ultimately have a substantial increase in the cost of the final product (Hossain 1996, pp. 60). Another aspect that is said to bring about inflation is the government taxes. Government at times places federal taxes on certain consumer products such as the cigarettes as well as fuel. The tax rise is essentially passed on to the consumer. The last aspect that leads to inflation is a country’s national debt and international leading. Most nations survive by borrowing money from other country and when repaying the money they have to deal with the interest rates been charged and this eventually leads to an increase in prices so as to ensure that the debts are paid on a timely manner. A drop in the exchange rates in a country can also lead to inflation this is basically based on the fact that countries have to deal with the differences when importing and exporting their products (Dombusch 1987, pp. 77). Needed steps for policy makers and development partners In the aim of increasing the investible funds, the minimum amount of cash reserves and the statutory liquidity has been reduced from 8 and 23% respectively to 5 and 20 % respectively. The decisions to reduce the cash reserves as well as the statutory liquidity requirements have reduced the inflation rate to a considerable level (Bangladesh Bank 2006). The policy makers as well as development partners in Bangladesh ought to be aware of the fact that inflation rate will ultimately affect the purchasing power of individual and also increase the cost of living. Also based on the fact that Bangladesh balances the credit requirements in both the private and public sectors alongside the balance of payments pressures and inflammatory pressures, it therefore become difficult for the authorities to increase the nominal interest rates above the actual rate of inflation by the use of contractionary monetary rule. In solving the issue the monetary authority can come up with ways of meeting the expectations so as to reduce inflation to considerable levels (Davidson & James 1993, pp. 80). Conclusion Based on the above discussion inflation tend to have a lot of impact of the economic growth of a country should therefore aim at maintaining a constant inflation rate in that they should ensure that the inflation rate does not go below one and does not rise to unmanageable levels. When all this is ensured a country will have a constant economic growth which will lead to a higher economic performance as compared with other countries. References Agenor, P & Montiel, P 1999. Development macroeconomic. Princeton, New Jersey: Princeton university press. Bangladesh Bank 2006, Economic Trends, Various Issues, Bangladesh Bank. Bangladesh Bureau of Statistics, 2006. National Accounts Statistics, BBS, Ministry of Planning. Bangladesh Institute of Development Studies 2006. Policy Recommendation for National Budget 2006-07: Background Paper, BIDS. Centre for Policy Dialogue 2006. State of the Bangladesh Economy in FY2006 and Outlook for FY2007, CPD. Davidson, R & James, M 1993, Estimation and inference in econometrics. New York: Oxford university press. Dombusch, R 1987. Exchange rates and prices American economic review, vol 77 pp 93-106. Hossain, A 1996. Macroeconomic issues and policies: the case of Bangladesh. New Delphi: Sage publications. International Monetary Fund’s 1997. World economic and financial surveys: world economic outlook, October Washington: international monetary funds. Ministry of Finance 2006. Bangladesh Economic Review 2006, Government of Bangladesh. Mishkin, F 1998. The economics of money, banking and financial markets. New York: Addison Wesley. Rudiger D, & Stanley F 1994. Macroeconomics. United States of America: McGraw Hill Co. Rudiger, D., Stanley F., & Richard, S 2012. Macroeconomics. United States of America: McGraw Hill Book Company. Read More