Individual purchasing power indicates financial strength

There is no substitute for consumer purchasing power when it comes to personal happiness. Although it's often said that money is the root of all evil or that money is dirty, we cannot ignore its necessity in life. The reality is that we cannot get by without money, even for a moment. Money is the medium of exchange that underpins consumer purchasing power and paves the way for peace. Human life revolves around three types of energy: physical strength, mental strength, and financial strength. When these three forces are combined in one's life, one can be considered truly happy.

Typically, these three types of energy—physical, mental, and financial—are not fully integrated into everyone's life. However, money plays the most significant role. There was a time when the source of one's earnings was scrutinized, and people who earned money through illegal means had low social status. Even though they were wealthy, they were not considered respectable in society, and respectable individuals would avoid personal relations with them. Nowadays, the situation has completely changed. People are now judged primarily by their wealth, regardless of how it was earned. In other words, money has transformed social values.

The average national income per capita in the country is on the rise, as evidenced by various statistics. According to the Bangladesh Bureau of Statistics, the average national income per capita was $1,316 USD in the fiscal year 2014-15. By the fiscal year 2023-24, this figure had increased to $2,784 USD, more than doubling in just ten years. This substantial increase is a source of pride and happiness. The rise in average national income per capita is seen as a significant achievement for the government, which attributes this success to the implementation of its planned policies. Consequently, Bangladesh is being hailed as a role model of economic development for less developed countries.

However, it is important to remember that a country's economic development and the happiness of its people cannot be measured by average national income per capita alone. This metric does not reflect individual purchasing power or economic status accurately. Using average national income per capita can be misleading, as it does not provide a true picture of an individual's financial situation. National income is calculated by combining the goods and services produced within the country each year, along with remittances and foreign financial assistance. Dividing the gross national income by the population gives the average national income per capita. But can we be certain that this income is distributed equally among all citizens? The gross national income is the sum of individual earnings, yet it does not guarantee equal distribution among the population.

Let's say one person earns 10 crore taka annually from various sources both inside and outside the country, while another person earns 1 lakh taka a year. The combined income of these two individuals would be 10 crore 1 lakh taka. When determining the average national income, this total income is divided by two. The resulting average would be 5 crore 50 lakh taka, which is considered the average national income for both individuals in that year. However, this method of calculating the average national income is flawed. It unfairly reduces the income of the person earning 10 crore taka per annum while artificially inflating the income of the person earning 1 lakh taka annually. Therefore, the actual purchasing power of individuals cannot be accurately assessed by simply showing the average national income per capita.

Purchasing power is crucial in the life of an individual or consumer, as it significantly influences their overall happiness. To illustrate, if the price of eggs in the market is 5000 taka for a dozen, a consumer won't face any issue if they have 5000 taka to buy it. However, if the price of a single egg is 50 taka, it is of no benefit to the consumer if they lack 50 taka to purchase it. This highlights the importance of purchasing power. No special technique is needed to realize its significance; we can observe it through various events around us. For instance, a highly educated person who cannot find work truly understands the importance of purchasing power in life. Therefore, decent employment and continuous income generation are essential for creating, increasing, or developing people's purchasing power. It’s not just about earning money; it's about having the capacity to maintain consistent income.

Income should be incremental and increase over time. Specifically, as inflation rises in a country's domestic market, purchasing power should increase at the same rate or higher. Otherwise, people's purchasing power will inevitably decrease. Recently, deposit growth in the country's banking sector has been declining. Many depositors are withdrawing their money from the banks and not redepositing it. Some attribute this to concerns about the banking sector's health. However, this idea should be questioned. The primary reason for these withdrawals is the abnormally high inflation that has plagued the domestic market for over two years, with no signs of abating.

In this situation, the financial capacity of common people has decreased significantly. Many have lost the ability to save new deposits in banks, and those who previously had savings are now forced to withdraw their deposits to meet daily family expenses. If people's incomes do not increase as expected, especially if they do not outpace inflation, purchasing power will decrease, leading to financial hardship. Inflation and wage growth are closely related; if incomes rise at the same rate as inflation, people will maintain their purchasing power. If incomes increase faster than inflation, purchasing power will grow, and people will be better off. Conversely, even if incomes remain stagnant, people can be better off if inflation trends negatively. For example, if a person's annual income is 100 taka, they will be better off if inflation decreases, maintaining or increasing their purchasing power.

If the price of a product is 100 taka and, after one year, inflation decreases by 10 percent, the price of the product will drop to 90 taka. If an individual's wages remain fixed at 100 taka, their purchasing power will increase despite their income not rising. With increased purchasing power, the individual can buy more goods and services with the same amount of money. However, in recent times, the prices of various goods and services in the domestic market have risen abnormally, while people's real income has not kept pace. In some cases, incomes have even decreased. Consequently, many people are managing family expenses through borrowing. Data from the Bangladesh Bureau of Statistics highlights this inconsistency between income and expenditure. In May 2023, the overall inflation rate in Bangladesh's domestic market was 9.94 percent, while the wage growth rate was 7.32 percent, indicating that inflation outpaced wage growth by 2.62 percent.

Wage growth has been 2 to 2.5 percentage points lower than inflation over the past 12 months. If wage growth does not exceed inflation, it will lead to problems. Currently, high inflation is the biggest challenge for the country's economy. Unless inflation is reduced to a manageable level, it will be impossible to increase the purchasing power of the common man. Bangladesh Bank has implemented measures to control inflation, but it is unclear whether these measures are effective or exacerbating the problem. For example, a few months ago, the maximum interest rate on bank loans was capped at 9 percent. When the war in Ukraine began, inflation in the United States surged to 9.1 percent, the highest in 40 years. In response, the Federal Reserve took steps to raise the policy interest rate, among other measures. Over the past two years, they have increased the policy rate at least 13 times.

A common strategy to curb inflation is by raising the policy interest rate. Economists argue that when the central bank increases the policy interest rate, the interest rate on bank loans also rises proportionately. This makes borrowing from banks more costly than before, leading many potential borrowers to lose interest in taking out new loans. Consequently, the money supply in the market decreases, naturally lowering inflation. Central bank policies in at least 77 countries worldwide have successfully controlled inflation by raising interest rates.

Bangladesh Bank has followed suit by increasing the policy interest rate multiple times over the past two years. Previously set at 5 percent, the policy rate has now risen to 8.5 percent. Until recently, the maximum interest rate for bank loans was capped at 9 percent, making borrowing from banks easier and more affordable. Consequently, borrowing levels in the private sector surged, with borrowed funds circulating in the market rather than being invested in productive sectors, thus contributing to inflation. Did Bangladesh Bank not anticipate the consequences of increasing the policy rate while fixing bank loan interest rates? Many argue that these actions were taken to benefit specific groups. Any economic policy should prioritize enhancing the purchasing power of the average person, as public welfare cannot be achieved if purchasing power remains stagnant or declines.

M A Khaleque: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economics.