The Financial Express

Oil shock to fuel inflation further

Oil shock to fuel inflation further

This is an oil shock. The government has raised the prices of diesel and kerosene at the retail level by 23 per cent or Tk15 per litre 'to keep them in line with the global market.' The new price of per litre diesel and kerosene in the country is Tk 80 now. The shock came at midnight of Wednesday (or zero-hours on Thursday) and extended further by a rise in Liquefied Petroleum Gas (LPG) price by 4.30 per cent. 

The fuel price hike ignores rational alternatives and warnings about severe economic consequences especially inflation which is on an upward curve for the last three months. The monthly inflation rate increased to 5.59 per cent in September this year from 5.54 per cent in August which was 5.36 per cent in July. The county has already entered a 'low growth high inflation' cycle and oil shock is likely to prolong the round. The growth rate of annual gross domestic product (GDP)  declined to 3.51 per cent in FY20. It, however, increased modestly to 5.47 per cent in FY21.

During the first quarter (July-September) of the current fiscal year (FY22), non-food inflation increased significantly and reached 6.19 per cent in September from 5.80 per cent in July. At the same time, food inflation declined slightly which did not reflect the food price situation in the market. Non-food is around 44 per cent of the Consumer Price Index (CPI) which is used by the national statistical agency to calculate inflation and an upward push on the prices of non-food items contributes to putting pressure on inflation.

Again, in the CPI basket, the share of 'gross rent, fuel and  lighting' is 14.80 per cent and 'transport and communication' is 5.80 per cent.   These two items are half of the non-food portion of CPI. So, the oil shock is going to push the non-food inflation further as the transport sector consumes about 72 per cent of the diesel. Kerosene is mainly used for cooking, lighting and aviation fuel. Moreover, 20 per cent of diesel is consumed by agriculture farming and the price hike will increase the production cost of boro rice and other winter crops. The rising cost is going to push food inflation in the near future.

Not that the policymakers are unaware of the consequences. So what drives them to give the oil shock at a time when rising inflation is hurting most of the people? The official version, provided by Bangladesh Petroleum Corporation (BPC), has repeated the old song. The state-owned agency argued that the adjustment of price was necessary to recover the loss against the backdrop of price hikes of petroleum on the international market.

Thus, it is the loss of BPC that matters.It is, as though,the state-owned agency's failure to make profit would create a heavy burden on the exchequer! BPC made the highest net profit of Tk 58.39 billion in FY21 among the 49 state-owned non-financial enterprises in the country. The government also earned tax on BPC's revenue.

There is another argument from the BPC's side. As there was no hike or upward adjustment of oil prices in the last five years, it is not irrational to increase the price now, no matter what is the rate of the hike. This kind of argument is not valid in reality as the government did not go for regular adjustment with the global market. Earlier, the prices of petroleum products were reduced in April 2016. The government last hiked the price of diesel in 2013, and then on April 24, 2016, it was brought down by 4.4 per cent to Tk 65 a litre. In December 2018, the oil price in the global market came down to near US$40 per barrel and in April 2018, it came down to around $20 per barrel. There was no reduction in oil prices in the country at that time.  If the government wants to link the domestic prices of oil with global prices, it has to do a frequent downward and upward adjustment. As this kind of adjustment mechanism is likely to create too much volatility in the domestic market, it is difficult to follow such policy.

If loss reduction of BPC is the main goal, the government needs to cut the taxes and take some reform measures to contain the corruption and irregularities in the corporation as well as other state-owned enterprises. By operating efficiently, many of the SOEs may be able to reduce the loss.

The current oil shock is probably driven by the growth-obsessed policy which has already increased socio-economic disparities in various forms. Due to rising inequality, the lower-income and poor people have become more marginalised as they do not have enough earnings in the post-Covid period. The deposit rate in banks is hovering below the inflation rate which erodes the real purchasing power of people. Through the oil shock, the government has transferred a significant portion of the burden of increased international oil prices to the domestic consumer. Since oil is considered to be a 'universal input' that enters into the cost of production in different commodities through direct and indirect means, the price hike would have pushed inflation further. Thus, inflation will continue to haunt the low-income and middle-class people.

Nevertheless, the policymakers do believe that economy has been turning around significantly and the growth of GDP would return to a 7-plus trajectory in the current fiscal year. Indeed, some signs of strong recovery of the economy are already there as demonstrated through a jump in exports earnings and better revenue collections in the first quarter.  The rebasing of GDP has enhanced the size of the economy to Tk 27.93 trillion in FY21 which was Tk 12.07 trillion as per the old base year. In a similar vein, the country's per capita income has increased to $2554 from $2227, a jump of nearly 16 per cent, thanks to a new base year for calculating the GDP. The government recently finalised 2015-16 as the new base year to calculate (GDP) by replacing the years 2005-6. This may be a pure coincidence that oil shocks follow the news of a jump in per capita income.

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