poverty line (which is defined at 2005 prices) as well, had it not been for the fact that food prices have risen at a faster rate than the general consumer price index (CPI) since 2005 (by 52% as compared to 45%). Given that the poverty line is anchored to a fixed basket of food items necessary to meet the basic minimum calorie needs of an individual in 2005, a rise in the _relative_ price of food would necessarily imply that the same poverty line will no longer be sufficient to purchase the basic food basket.<sup>23</sup> Therefore, the poverty line for 2009 and 2010 must be adjusted upwards to reflect the same level of welfare as in 2005.

We adjust the 2005 poverty line upward using the food and non‐food CPI for 2009 (or 2010), weighted by the food and non‐food shares in the poverty line. This yields a 2009 (or 2010) poverty line at current prices, which is then deflated to 2005 prices using the appropriate general CPIs (see Annex 2, Table C). The poverty line that results – effectively the poverty line for 2009 (or 2010) at 2005 prices – is slightly higher than the original 2005 poverty line since the weight of food in the poverty line is higher than that in the CPI.<sup>24</sup> The adjusted poverty line for each year reflects the number of _takas_ required by an individual to be able to afford the same food basket despite the disproportionate rise in food prices.

Food prices – most significantly rice prices – in Bangladesh rose sharply during 2008 in response to the worldwide food price shock, which likely led to a temporary spike in poverty rate (as mentioned earlier). Since rice prices have moderated since late 2008, the food CPI projections for 2009 and 2010 are likely to reflect the expected trend of prices rather than the temporary spike in 2008. One question that arises, however, is how the poverty projections will change if the financial crisis were to have a significant _dampening_ effect on domestic food prices. No alternate projections for food and general CPI, which take into account the dampening effect of the financial crisis on domestic prices in Bangladesh, is available at this stage. Our only recourse appears to be the _world_ food price projections by FAO, which show a sharp downward movement of rice prices in 2010 (see Box 1 for a description of alternate poverty projections based on FAO world price projections).

**Box 1: Alternate poverty projections for 2010 using FAO data** .

<mark>We compute the alternate poverty estimates for 2010 under the assumption that rice prices in Bangladesh will follow the trend in world prices projected by FAO. Under this assumption, the food price inflation during 2005‐ 2010 will be 5%</mark> _<mark>lower</mark>_ <mark>than general inflation, which would require a small</mark> _<mark>downward</mark>_ <mark>adjustment of the poverty line to ensure that it represents the same purchasing power with regard to the food basket.</mark><sup>25</sup> <mark>With this adjustment, the poverty rate projected for 2010 under the</mark> _<mark>crisis</mark>_ <mark>scenario is slightly lower – 25.4%, compared to the earlier projection of 25.8% (see Annex 2, Table D.1, last column). This translates to a 0.8 percentage point</mark> increase in poverty rate as a result of the financial crisis, instead of the 1.2 percentage point impact seen earlier.

> 23 The implicit assumption here is that all nominal incomes (that translate to expenditures) would rise over time at the rate of inflation given by the general CPI. The higher rate of inflation in food prices, however, would mean that the nominal income of an individual who was consuming at the poverty line level in 2005 would lag behind the rate at which the food component of the poverty line will inflate. Thus the poverty line would have to be shifted up to reflect the fact that such an individual will no longer be able to afford the basic minimum food needs.

> 24 Note that this adjustment would not be necessary _if_ the share/weight of food in the poverty line were identical to that in the CPI.

> 25 Note that a decline in food prices will also imply a decline in general CPI, albeit at a lower rate. Our adjustment to the poverty line follows a method identical to the one described earlier.

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