a year ago

Hikes in fuel, fertiliser prices double whammy for economy

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A sharp rise in fuel-oil prices, unveiled in a nighttime decree last week, leaves almost all in the countrydumbfounded, excepting a few who did not find anything wrong in such a coercive step. The government increased the prices of all types of fuel oils by 42 per cent to 52 per cent by an executive order, bypassing the Bangladesh Energy Regulatory Commission (BERC). Legally, BERC is responsible for approving any price hike in the energy sector after reviewing the proposal and a public hearing thereafter. However, the procedure was not followed in the case of the latest hike, which showed that the government was in a hurry.

 The policymakers knew that  the proposal for such a steep rise in fuel-oil prices would not get approval in the BERC procedure. So, they did not waste time and used the executive order to make the price-hike effective as early as possible. As a result, diesel price has increased by Tk 34 to Tk 114 per litre while octane price shot up by Tk 46 to Tk 135 and petrol by Tk 44 to Tk 130.

However, the arguments behind the sharp rise in fuel oil prices are flawed. The increase in global oil price, mainly due to the Russia-Ukraine war, made the imports costlier. So, the state-owned Bangladesh Petroleum Corporation (BPC) has been losing out in oil marketing. To offset the loss, there was no alternative but to increase or adjust the domestic fuel-oil prices, according to the state minister for power and energy. Moreover, the ministry added that there was a risk of smuggling fuel oils to the neighbouring country, where petroleum prices are higher than in Bangladesh.

BPC is not a profit-oriented commercial entity. So profit- and-loss arithmetic should not be its prime consideration in enhancing the domestic fuel prices. When the corporation had made a combined profit of Tk 420 billion for six years at a stretch since FY15, consumers did not get any dividend.

BPC is also paying 34percent tax on oil imports from abroad. The tariff includes customs duty, value-added tax or VAT and advance income tax. It is paying a tax of Tk 20.70 per litre for diesel import and Tk 23.5 per litre for octane import. Thus, there is room for cutting the import duties to reduce the financial pressure on BPC along with some upward adjustments, not a sharp hike like the latest one.

Again, the smuggling of fuel oils seems incomprehensible when two countries' border guards are active. Smuggling in oils could be contained by taking extended administrative measures and enhancing vigilance. It is unclear why and how the price hike would help prevent the smuggling if there is laxity in border vigilance.

As the government has already sought some $4.50 billion from the International Monetary Fund (IMF), there is wide speculation that the oil-price hike is a pre-condition forgetting the loan. The policymakers have brushed aside such speculations. They have argued that any formal discussion about negotiating the terms and conditions of the said loan are yet to be initiated.  

The reality is that the government has sought the loan from the IMF as an advance cautionary step. Crises in the economy have been intensifying for the last couple of months. These are reflected in a number of developments  and indicators. Resuming the load-shedding system to curb the use of electricity, rapid depreciation of the taka against the US dollar, yawning trade gap coupled with current-account deficit, and dwindling foreign-exchange reserves are some of the worrisome developments. So, it is not unusual to seek IMF credit to overcome the economic crisis.

Now, there are some inbuilt conditions to avail IMF credits, like subsidy cuts, market-oriented interest rates, withdrawal of administered price regimes etc. Therefore, it will not be surprising if the government soon cuts the yields on national savings certificates and the central bank the 6-and 9-percent withdraws the artificial caps on deposit and lending rates. These steps will confirm that the government is trying to avail IMF credit to fight the growing economic crisis.

The ongoing economic crisis largely originated from inefficient macroeconomic management coupled with irregularities and a lack of good governance in the financial sector. By hiking fuel oil prices, the government has indirectly acknowledged the harsh reality. However, for in  the last couple of years, there has been more stress on attaining higher economic growth than on enhancing management efficiency and good governance. That's why all witnessed a big spending spree. It also encouraged the consumption boom. An outcome of this spending is an increase in private cars and motorcycles. At the same time, due attention and investment were lacking  to develop decent and reliable public transport to improve people's mobility.

The lack of good governance is reflected in the rise in rent-seeking activities. The energy sector is a sad example. In the last 12 years, the government paid Tk 2.33 trillion to purchase power and electricity from the rental, quick rental and independent power producers. Around 37 per cent or Tk 865 billion of the total payment was made for the capacity charge of the plants no matter whether they supplied electricity or not.

Similarly, costs of various development projects increased, creating pressure on the national exchequer. To finance the budget deficit, the government has to rely more on domestic and external borrowings. The tax burden on citizens has also increased. If additional efforts had been there to keep the cost of various projects at a moderate level, it would have been possible to reduce the total spending burden. So, there might have been no sharp rise in fuel-oil prices which has multiple adverse effects on production in agriculture and manufacturing sectors.

Before raising the oil price, the price of urea fertiliser was also increased. The dual price hike will hurt farm production and threaten the country's food security. People have already started paying additional transport fares and carrying goods has become costlier. Fortunately, the finance minister has acknowledged that pricier oil will likely fire up inflation further. The current inflation rate is around 7.50 per cent, and the latest oil-price hike will push it up further. People of the country are going to face a tougher time ahead.

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