Despite making tremendous advances in the path of food security, Bangladesh is still navigating its way through food inflation which adversely affected the lives of many Bangladeshis, including the low-income group.
Bangladesh is the 3rd largest global producer of rice, onions, and vegetables and 4th in global potato production. However, food inflation in Bangladesh is making the daily essentials inaccessible to the underserved segments of the country. In July 2023, food inflation rate was 9.76% which increased to 12.54% in August 2023. This article investigates the factors responsible for the country’s food inflation and what the Government of Bangladesh (GoB) can do further to rein in the spike in food prices.
COVID-19 and Ukraine Crisis: Supply Side Shocks
The COVID-19 pandemic disrupted the global food supply chain. The Russian invasion of Ukraine exacerbated the situation by disrupting the supply chain further. According to the Global Report on Food Crisis 2022, around 193 million people in 53 nations and territories are experiencing food insecurity.
There are geographic locations in the world who are known as ‘food baskets’. These food baskets are agricultural powerhouses which are responsible for the world’s largest share of food production. Some of these food baskets are Brazil, San Joaquin Valley in the US’s California, China, Canadian Prairies, South East Asia (ASEAN countries), Russia and Ukraine. The Central Black Earth Region in Ukraine and Russia is extremely fertile and this region alone is responsible for 30% of global wheat production and 65% sunflower production worldwide. Due to the ongoing war in Ukraine and sanctions imposed on Russia, the food supplies cannot go outside from Russia and Ukraine. The war even severely halted the food production in Ukraine. When the world’s one of the largest food baskets failed to provide food supplies, it created a global food crisis.
First, Bangladesh heavily relies on rice for its caloric intake as rice supplies around 68% of total calories. Despite the dominance of rice, wheat is also quintessential for the country’s caloric intake – supplying around 7% of total calories. Since 2000, Bangladesh’s wheat consumption has tripped. But the growing demand wasn’t satiated by the domestic production since the country imports more than 80% of wheat.
Second, Ukraine and Russia together account for 75% of the world’s sunflower oil exports. Even though Bangladesh is not a major importer of sunflower oil, there is a ripple effect of sunflower oil supply shock throughout the vegetable oil market and Bangladesh does import palm and soybean oil as well as rapeseed and soybeans to process.
Indonesia used to be Bangladesh’s major source of palm oil imports, accounting for around 80% of Bangladesh’s palm oil imports. In March Indonesia imposed a progressive export levy on palm oil which created a shock in the global market. While Argentina, the country that accounts for about two thirds of Bangladesh’s soybean imports, also restricted exports of soybean oil and meal in March which was eventually lifted but with the imposition of higher taxes of 33%. All of these factors contributed to higher oil prices for Bangladesh. Considering the effects on both grains and oilseeds markets, according to our export restriction tracking data, 38% of Bangladesh’s total imported calories is likely to be impacted by such measures, equivalent to a quarter of the dollar value of total imports.
Third, Bangladesh’s main agricultural produce, rice, relies heavily on fertilizing. On average, we have to use 286 kg of fertilizer per hectare, and we import more than 1.2 million tons of fertilizers every year. Which includes 31% of nitrogen needs, 57% of phosphate needs and 95% of potash needs. Sanctions on major global fertilizer exporters such as Russia and Belarus have contributed to an increase in fertilizer costs. Almost 75% of our potash needs are imported from Russia (34%) and Belarus (41%). Sourcing these ingredients from other countries now requires paying higher prices. On the contrary, using lower yielding nitrogen-based fertilizers could reduce rice production, resulting in increased rice imports.
According to computation based on the FAOSTAT food balance sheet, Bangladesh imports 44% of its corn and soybean supplies, and these have rising global prices. This impacts the feeds that are fed in poultry farms, to the cattles and fishes. Reducing the availability of animal products in the coming months could compound the food security impacts from disruptions in the key staple products of wheat, vegetable oils, and rice.
Due to increased exchange rates, and the supply shock, Bangladesh has to buy commodities at higher prices, pressurizing the foreign currency reserves and increasing demand for USD to further increase exchange rates like a cycle. Since the producer price index (PPI) increases, it is also affecting consumer prices, amplified by a weaker exchange rate, and more pressure on public finance, trapped between servicing the country’s foreign debt (already $460 per capita in 2021), and the increased cost of domestic programs.
Bangladesh will need to identify alternate sources now that those sources have been weakened. Bangladesh has previously acquired wheat from exporters including Australia and India. India has said it may be able to supply up to 10 million metric tonnes (MT) to international markets this year and is anticipating a good harvest.
Following the epidemic, the overall demand for food products surged, but the market’s supply side was unable to keep up with the rising demand. Because there was a lack of overall supply on the market, prices rose sharply, leading to substantial inflation. The value of money decreased as a result, and people’s real income decreased.
Although Bangladesh has been successful in producing the majority of its staple foods domestically, it still depends on other nations for its supply of rice, wheat, pulses, edible oils, milk products, etc. Freight and other prices surged sharply as a result of the supply chain disruption, directly impacting the low-income consumers. Particularly when natural gas prices rose as a result of sanctions on Russia, it made it more expensive to sustain domestic production of food and fertilizer.
Food grain production in the United States totaled 39,229 thousand metric tonnes in FY2022, while imports accounted for 3,412 thousand metric tonnes (FPMU, 2023).
How to Build Immunity from Global Shocks?
Any global shocks are difficult to control or directly influence as the source or origin such global downturns reside outside Bangladesh. However, such global volatility can be managed effectively by deploying prudent, realistic and timely policies.
- Focusing on research and development to invent new breeds of crops and animals can increase production domestically.
- Also, looking for other alternative suppliers constantly can also ease the pain and diversify the risk.
Distorting Supply Chain through Syndication
Even though the prices of agro products that are imported from abroad are sensitive to global price shocks and supply chain disruptions, the same cannot be concurred for products that are domestically produced and managed by the internal supply chain of the country. exogenous factors such as the pandemic and Ukraine crisis can directly affect the prices of wheat, edible oil, sugar – products which are mostly imported. However, even when the global prices for these products become stable or reach equilibrium, in Bangladesh’s domestic market the prices still remain higher.
According to the World Bank and the BBS, the world soybean oil prices fell by 10.46% during February 2022 to February 2023. However, in the Bangladeshi market the price of soybean oil ascended by 12%. Whereas the world price of sugar has surged by 31.45% during the same period, the price ascended by 41.91% in Bangladesh.
The domestically produced agro-product prices are also high. Even though the cost of 1 kg of beef has decreased by 5.98% on the foreign market, the price has grown by 25.70% on the domestic market. Of course, over the period of February 2022–February 2023, the rate of price increase for local rice is lower than for Thai and Vietnamese rice. While the prices of Thai and Vietnamese rice climbed by more than 30% during this time, the prices of Nazirshail, Paijam, and Irri/Boro rice from Bangladesh increased by only 21.61, 9.85, and 14.29 percent, respectively. However, Bangladesh has a higher per-pound price of rice than those nations do. For instance, Thai five percent parboiled rice costs Tk 49 per kg whereas Bangladeshi Nazirshail costs Tk 84 per kg.
Hence, the high global prices are passed on to Bangladeshi consumers. However, it seems that the passing out effect is limited to only high prices for imported agro products. Because somehow low global prices do not reach the Bangladeshi markets and households.
This disconnect can be explained by oligopolistic practices by a handful of powerful businessmen and traders who through collusion form syndicates to control the prices in the market – only to maximize their own profits. These unscrupulous businessmen distort the market mechanisms by adopting unfair practices like hoarding. When they realize an opportunity to spike prices, they start hoarding the products and supply very less in the market which creates an artificial supply crisis in the market. This is especially true in instances of Ramadan where the aggregate demand for commodities significantly rises. These traders see a potential opportunity to raise prices significantly by supplying a low quantity of products in the market as the demand for at least the food essentials remain inelastic. Hence, the consumers are forced to pay exorbitant prices due to these syndicates.
In cases of soybean oil, a Supply Order (SO) is used to charge high prices to the consumers. This SO allows the dealers to buy a specific quantity of oil from suppliers. Then, the SO is passed on to a third party which results in the oil price spike in the market. These middlemen or go-betweens make huge profits of around 50 takas for each 37.32 kilograms of oil sold in the market.
How to Tackle the Syndicates?
Close Market Monitoring
Around 11 government agencies are dedicated to monitor the food market in the country. These organizations are: Ministry of Commerce, Directorate of National Consumer Rights Protection, Bangladesh Standards and Testing Institution (under Ministry of Industries), Bangladesh Food Safety Authority, City Corporation, Rapid Action Battalion (RAB), District Administration, and 4 intelligence agencies. These organizations often conduct raids in markets to prosecute traders who are engaged with malpractices. In August 2023, a mobile court of RAB fined 7 businesses, including egg wholesalers around BDT 2.1 lakh for charging exorbitant prices for essentials.
However, these raids do not realize their intended outcomes. For instance, at the New Market’s kitchen market, some traders immediately started selling products at the government’s fixed rates after seeing a team from the Directorate of National Consumer Rights Protection (DNCRP). Some traders were fined. But after the team left, traders returned to selling the commodities at higher prices.
Therefore, a stringent close market monitoring and surveillance system will be key to keep the market in check and hold anyone who does not comply accountable. Channels to report any unfair practices directly to the pertinent authorities should be opened and easily accessible. Information regarding such unfair practices, lodging complaints etc. should be made widely available to the public.
Strengthening Bangladesh Competition Commission
In 2012, the Bangladesh Competition Act (BCA) was promulgated, followed by the establishment of Bangladesh Competition Commission (BCC). The purpose of BCA and BCC is to regulate the market and take any action against unfair market practices. The BCA’s Section 15 directly addresses oligopolies and syndicates and Section 16 addresses taking unfair advantage of dominant position.
In September 2022, the BCC filed a case against CP, Paragon, Kazi Farms, Diamond Egg, and Tejgaon Egg Traders Association’s President Md Amanat Ullah because of the ongoing instability in the Bangladeshi egg market.
- The BCA does not allow any dawn raids. This means the BCC cannot directly conduct unannounced on-site inspections to investigate instances of BCA infringements. Japan’s Fair Trade Commission is permitted to conduct on-site inspections and search and seize records from the site. The United Kingdom, Australia and South Korea also have provisions for dawn raids. The BCA should include the provision of dawn raids and allow BCC to conduct such search and seizure operations.
- A provision for leniency should also be included. Leniency provisions allows companies involved in cartels to disclose information like cartel agreement or cooperate with the pertinent authorities in exchange of reduced penalties like fines. Such provision may facilitate the crack down of syndicates.
- The BCA does not allow private entities to directly file complaint against anti-competitive actions and seek for remedies. Allowing private entities to take actions will decentralize enforcement authority and ease the pressure from under-resourced BCC.
Dominance of Middlemen
Middlemen or intermediaries in the supply chain connect the farmers to the final consumers. Middlemen skim off a significant amount of the price paid by customers as profit. For instance, Md Mohsin Ali, a farmer in Rangpur’s Mithapukur, grew 12,600kg of potatoes on 1.5 acres of land. As he lacked preservation facilities, he sold the potatoes at Tk7.5 per kg from his field. Potatoes are now selling for Tk32-35 per kg in markets in Dhaka and elsewhere. Thus, Mohsin has been deprived of Tk23.45-26.45 per kg of potatoes. He received only about 26.71% of market prices for his products.
Farias, Beparies, and Arathdars play a significant role in the agricultural supply chain in Bangladesh. Farias serve as middlemen for small traders in the nearby 3 or 4 local markets and handle relatively small quantities of products. On the other hand, beparies are professional buyers who acquire agro products from farmers and farias. Arathdars act as middlemen between beparis and retails and charge a fixed commission for storage services provided by them.
1. Fragmented Supply Chain
The dominance of multiple middlemen and a lack of coordination among them results in a fragmented supply chain. This leads to production and supply chain inefficiencies, mismanagement, delays, and additional costs which adversely affect the food prices.
2. Asymmetry of Information
Low farmer literacy rate contributes to poor practices of cultivation which increases cost. Farmers often fail to access accurate, real-time market information. Intermediaries take advantage of this information asymmetry. While procuring from farmers, these middlemen negotiate a low price to acquire agro products from the farmers and charge sky high prices while selling to the final consumers.
3. Lack of Modern Storage Facilities
Most farmers are reliant on indigenous storage systems such as woven-split bamboos, bamboo baskets, jars, pitchers, mud-walled goals. Lack of modern storage facilities and warehouses increases the price as agro products, especially perishable goods become more prone to expiration before their shelf life. This increases wastage which in turn increases food prices. The outdated warehouse act of Bangladesh exacerbates this problem. Due to the failure of preservation, 30% of goods get wasted.
4. Bribery and Corruption
Middlemen, such as bepari and aratdar, may engage in corrupt practices, paying bribes or charging excessive commissions. These additional costs are often transferred down the supply chain, leading to inflated prices that consumers bear. Arif Shikder, a wholesaler in Karwan Bazar, sells products as a street vendor. He says he has to pay Tk720 in bribes every day to conduct business on the street. “Local goons do not allow one to do business on the street if the money is not paid. Storehouse owners also take commissions. That is why I have to charge at least Tk 5 per kg of vegetables in addition to the price paid to middlemen,” he said.
5. Market Power Imbalance
Limited Bargaining Power for Farmers: Farmers, especially those in remote areas, often have limited bargaining power in negotiations with middlemen. Exploitative practices by middlemen result in farmers receiving lower prices for their produce, while consumers face higher retail prices. Aminul, who sources vegetables from Rangpur, told The Business Standard that the supply was low due to rains.”I have to spend Tk4 on per kg of vegetables as trucks cannot be filled with products. Storehouse owners in Karwan Bazar take Tk2 in commission per kg of vegetables from both buyers and sellers. Also, storehouse owners take away 10 percent of the selling price of some products,” he explained.
How to Eliminate the Middlemen?
- Digitalizing the entire agricultural supply chain in Bangladesh will be instrumental in eliminating the middlemen. Mechanisms to directly connect the farmers to the final consumers should be deployed so that farmers get their deserved rates, at the same time prices of the essentials get reduced. Blockchain technology, especially digital twins, can be used to give real-time information to the pertinent stakeholders across the supply chain and reduce the dominance of middlemen.
- Making information widely available to all the pertinent stakeholders will be quintessential. Information regarding seed and feed prices, machinery prices, agro products prices in the market and so on should be made available to the farmers.
- Establishing storage facilities at the sub-district level will be key in facilitating efficiency across the supply chain.
Transportation Bottlenecks
Previously, a lack of transportation facilities such as roads, bridges created inefficiencies in the supply chain. The traffic congestion at the roads increase wait times and costs. At the same time, the standstill at roads hampers the speedy movement of goods from one part of the country to another.
The massive infrastructural projects undertaken by GoB tackles this issue head on. More roads means enhanced connectivity, less transportation, and freight cost. This mega project saves time and money for farmers, traders and consumers. Because when the transportation costs increase, it increases the final food price – directly contributing to the food inflation.
For instance, Padma Bridge connects the previously isolated southern districts of Bangladesh which now facilitates trade as it takes 30 to 40 minutes to transport goods from Southern districts to Dhaka.
Unwarranted Extortion in Roads
The practice of rent-seeking through collecting money from vehicles carrying products on the way to the marketplace adds to this cost. All these costs ultimately affect the prices of goods and are paid by the consumers.
Fiscal Support Needed to Tame Food Inflation
Monetary policy won’t be able to solve the supply-driven price hike in Bangladeshi food markets. Thus, fiscal support from the government is essential to tame food inflation.
A combination of short-term and long-term policies should be implemented. Short-term policies are important to ease the pain of the underserved segments of the population. GoB conducts Open Market Sales (OMS) to sell essentials at the subsidized rate. Also, Trading Corporation of Bangladesh (TCB) sells daily essentials at a reduced price through TCB trucks and provides family cards to make food accessible to millions of households.
Recommendations for TCB and Other Fiscal Support
- Food aids can be provided to the low-income class segment. At the same time, direct cash transfers under Social Safety Net Programmes (SSNPs) can also be provided to them so that daily essentials become much more accessible to the poor.
- The coverage of Open Market Sales should be expanded.
- To monitor and control the illicit activities of its dealers, TCB must implement a strict policy. If any nefarious activities are discovered, all of the dealers must be held accountable. For breaking the guidelines, the TCB revoked the licenses of 700 dealers in 2020. Even in times of crisis, these acts must continue.
- Targeting those who use this service the most, TCB’s truck- and store-based sales should be increased across the country.
- The TCB is required to undertake an assessment to determine the supply and demand for vital commodities, as well as the maximum and minimum resource needs. Additionally, TCB can use their expertise in handling crises like COVID and the Russia-Ukraine War to get ready for new difficulties. As a result, TCB will be able to buy goods in advance and enter the market when it is appropriate. To determine the demand for critical items, the government must update its database.
- Many people who don’t deserve the subsidies might get them via deceitful tactics. To properly target those who require these food subsidies the most, the government must use some type of means-testing.
- In order to efficiently target the most vulnerable, the government can collaborate with pertinent associations. Garments workers require special attention from GoB since they are experiencing difficulty in making the ends meet. A Sanem study on garment workers found that garment workers on average work more than 10 hours each day, yet even with overtime, the cost of food and rest eats up the majority of their earnings. The government can enter into a contract with the RMG owners’ association to launch their ration cards. This approach significantly reduces the burden from the shoulders of the government. At the factory level, the government can set a ceiling that workers or employees under a certain threshold will get a card to purchase their necessities. If goodwill is shown from factory owners, TCB can open its outlets or park their trucks near the factories to provide its services.
- TCB’s food grain management system also has to be improved. In March 2023, fire broke out at a warehouse of TCB in Tejgaon, Dhaka damaging about 20 tonnes of soybean oil and 10 tonnes of chickpeas. Authorities need to ensure such accidents do not occur frequently and if any such adverse situations arise, they need to be prepared to protect the stocks and workers. Additionally, wastages have to be minimized.
GoB needs to look for other efficient subsidy programs like the “Food for Education” program for the long run. In the 1990s, Bangladesh was a pioneer in this area of social safety-net development with the help of US foreign aid by providing cash or food vouchers to families that promised to send their kids to school.
About the Author
Shah Adaan Uzzaman is the Blog Administrator at The Confluence. A former Bangladesh Television Debate Champion and winner of several policy & debate competitions, he is currently a student of IBA, University of Dhaka.