Kazi Zahidul Hasan :
Economists on Monday said that the latest public servants’ pay hike will have a ‘little’ impact on domestic inflation as well as the overall economy because increase in civil service salaries is unlikely to impact on aggregate demand.
“The impact on inflation depends on the size of impact on aggregate demand. But there might be an insignificant increase in demand. This will lessen expectations of higher inflation in the domestic economy,” Dr Zahid Hussain, lead economist, the World Bank’s Bangladesh office told The New Nation on Monday.
Justifying the view, he said, the size of the impact on aggregate demand depends on the extent of pay increase and the share of public consumption expenditure in total expenditure.
“The share of public consumption expenditure is 10 per cent of GDP and the extent of pay increase is maximum 2.0 per cent of GDP. This means aggregate demand may rise by 0.2 to 0.3 percentage point of GDP if the entire increase is spent on consumption.
Dr Zahid further said, assuming no output response to aggregate demand increase, this implies temporarily adding 0.2 percentage point to inflation on account of pay increase. This number will be lower if there is any positive output response to the aggregate demand increase and if part of the pay increase is saved.
“So, the public servants salary hike will have ‘minimal’ impact on domestic inflation as well as economy,” he said, adding, “A small increase in non-food inflation may be expected thereby, but it will last for a limited time”. He, however, said that it will be higher if the public sector pay increase spills over to the private sector wages. When asked, Dr Zahid said, the public servants pay hike may not create extra burden on national budget because the government had already allocated the fund keeping mind in such a pay hike. The government on Monday approved the new pay-scale for public servants, fixing basic pay at a maximum of Tk 78,000 and a minimum of Tk 8,250. “The pay hike would not create any additional demand on public servants’ consumption. If the demand increases, it would be modest. So, there would be an insignificant impact on inflationary pressure,” Dr Ahasan H Mansur, a leading economist of the country, told The New Nation yesterday.
Dr Mansur also said there might be a hike in house rent and transport fare, but it might not affect the ongoing trend of overall inflation.
Inflation rate determined on the basis of consumer price index, stood at 6.17 per cent in August, which was 6.36 per cent in July.
“The pay hike may not accelerate inflation affecting the economy,” Dr Salehuddin Ahmed, former Governor of Bangladesh Bank (BB), told The New Nation on Monday.
He added, usually prices of essential commodities sees a rise following announcements of new pay-scale. But there is a little chance to increase their prices due to falling trend of global food, commodity and oil prices since second half of 2014.
“This helps lower domestic commodity prices as well as helps to ease domestic inflation,” he added. Dr Salehuddin Ahmed, however, said that the pay hike may lead to an increase in increase house rent and transport fare which is not acceptable at all.
“The government must take necessary measures to prevent such illegal move by house and transport owners. Otherwise, the public servants will be deprived from the real benefit of their pay hike.”
