Hiked fuel prices, high govt borrowings fuelling inflation

The Centre for Policy Dialogue (CPD) fears the higher government borrowing from the banking system by supplying ‘high-powered money’ will further balloon the inflation and also disrupt the macroeconomic discipline of the country.

“Bangladesh Petroleum Corporation (BPC) is making Tk 5.0 profit in selling a litre of diesel and Tk13 a litre of octane at the current prices. The higher retail prices than the current global price indices are creating an additional pressure on the people,” said CPD’s Executive Director, Dr Fahmida Khatun, while briefing journalists.

The independent policy think-tank arranged the budget-review function titled ‘State of Bangladesh economy in the financial year 2022-23’ on Saturday at its office in Dhaka, days ahead of a new budget placement in parliament.

According to CPD, the petroleum corporation’s total profit in the last seven years between the fiscal year (FY) 2015-16 and FY 2022 was about Tk 438.04 billion. Except in the last FY2022, the BPC had made profit in the previous seven years.

After paying Tk 77.27 billion as income tax, the net profit in BPC bag was Tk 360.74 billion in the seven years under review, said the CPD.

Meanwhile, the government raised the oil price in August 2022 when the global crude-oil price was about US$90 per barrel. Now the price on the global market has come down to $77 per barrel.

Distinguished fellow of the CPD Prof Mustafizur Rahman told the meet that the price hike attuned with the International Monetary Fund (IMF) lending conditions, at the retail level, is not a good solution for reducing the subsidies on fuel, rather it needs better reforms for the target of cutting the fiscal burden.

When asked, Research Director of the CPD Dr KG Moazzem said only the price adjustment cannot be a single instrument of reducing subsidy— better the government should go for reforms in addition to the IMF conditions.

“Subsidy adjustment does not mean the price hike of the fuel only, rather it needs to cut the payment to power producers as capacity charge for reducing the pressure on the budget,” he added.

“Actually, the government’s current policy instruments are not working properly. Its anti-reform attitude has been affecting the macro-economy,” Dr Moazzem said.

Senior Research Fellow of the CPD Towfiqul Islam Khan came down heavily on oil “monopoly” on part of the state corporation.  “Being a monopoly in the fuel sector as a state-owned enterprise, penalizing the citizens of the country cannot be justified,” he said.

As the government is going to introduce an automated price- adjustment formula, the BPC’s pricing mechanism, tax policy and profit should be analysed publicly, he suggests.

About the government’s upward borrowing from the banking sector, CPD Executive Director Dr Fahmida Khatun noted that unabated borrowing from the central bank would surely create a higher flow of money supply, and  hence, the inflationary pressure.

The government borrowing from the banking system till April this FY2023 was Tk 743.93 billion, which surpassed all the thresholds by a considerable margin, she said.

The borrowing from the central bank may have created gross new money to the tune of Tk 3.83 trillion, the CPD economist estimated.

“A cross-country literature survey reveals that many countries have put legislative limits.”

She suggests that the government should prioritise mobilising foreign-funded budgetary support under negotiation, as a better means of deficit financing in their view.

The CPD perceives that the persistent inflation crisis remains a major pressure point for managing the Bangladesh economy in the current context.

About the higher inflationary pressure, Dr Khatun said: “Previously the global price hike was a key reason for higher inflation in Bangladesh but not now. Lack of competitive environment, market syndication, absence of necessary monitoring and lax enforcement of existing laws by concerned institutions are the key factors in this connections.”

She argued that compared to the global market-price indices, all the products are costlier on the domestic market in Bangladesh. 

About the downturn in export earnings, the CPD ED said export- sector performance has been rather muted, with adverse domino implication for net export earnings.

Over the last July-April period of the current fiscal, the RMG export earnings grew by 9.1 per cent while it declined by 11.1 per cent compared to the same period last FY2022, she said about the arithmetic of Bangladesh’s main source of forex earning. 

Dr Fahmida Khatun also pointed out that the import restrictions  affected the industrial-growth momentum as import of capital machinery, intermediate goods and other raw materials declined.

On the remittance income, the CPD has noticed a surprise trend where the inward remittance from the USA has increased suddenly instead of a comparative declining trend from the largest manpower- export destination—Saudi Arabia.

“We are apprehending that the laundered money to USA is returning  home in the name of remittance for getting the favour of 2.5-percent incentives and easy whitening scope of the black money,” CPD distinguished fellow Professor Mustafizur Rahman replied to a question.

The central bank should go for research on the sudden spurt in remittance from the USA, he added.

The government should go for bilateral agreements with different countries to get back the laundered money, siphoned off the country over the years, Prof Mustafiz said.

The CPD  suggests that the government should frame a realistic budget rather than ambitious one amid the worst global scenario and the local macro-economy.

An analysis by the think-tank shows that if the government wants to achieve 7.5-percent GDP growth, keep the inflation within 6.0-percent limit and import growth at 14.2 per cent, it needs to increase tax collection by 13.5 per cent in the next FY2024, which is not possible following the global and domestic macroeconomic scenario.

The CPD has urged the government to restore the macro-economic stability rather than only the attitude of higher GDP-growth target.

Instead of incentivising illicit financial flows and illegal earning of money through direct and indirect measures, strict administrative steps and punishment should be imposed as per existing laws, the CPD recommends.

[email protected]