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The Financial Express

Proposal for oil price hike raises concern

| Updated: October 24, 2017 04:43:16


Proposal for oil price hike raises concern

The country's energy regulator —Bangladesh Energy Regulatory Commission (BERC) -- is reported to have been scrutinising proposals to hike power tariffs submitted by the state-owned power distribution companies.
When the people are still bearing the brunt of the chain reactions to the recent spate of compressed natural gas (CNG) price hikes, there is a fresh report that the government is going to increase fuel prices further soon.
Nobody knows whether price adjustment is imminent or it might take a long time. In such a dilemma, many say, positive impact on the economy due to plummeting global oil prices might not be felt.
The distribution companies had submitted the power hike proposal long ago. Although global oil price is at its lowest level now, they are pressing for its rise. Finance Minister AMA Muhith remained upbeat on lowering the oil prices moderately. On many occasions, he did mention that the fuel price needs to be lowered.
In fact, the government does not seem to have a clearly defined policy on fuel price adjustments. The finance minister said earlier that the government was working on a fuel price policy that could lead to revisions in prices in line with the international market. In many countries, oil prices are adjusted periodically in line with the global trend.
The government refrained from adjusting domestic fuel price in line with the continued fall in the international market to give the Bangladesh Petroleum Corporation (BPC) a chance to recover its past losses and make some profits. In this context, the finance minister claimed that the losses incurred by the BPC have fully been recovered now.
In order to give the economy a push in the short term, analysts are of the opinion that there should be reduction in fuel prices to let people have the benefit of falling prices in the international market.
According to the projection of a think tank, a 10 per cent reduction in fuel prices is expected to help the country's gross domestic product (GDP) grow by 0.3 per cent, and increase export by 0.4 per cent and household consumption by 0.6 per cent. And inflation is set to decline by 0.2 per cent as well.
The falling oil prices will boost public coffer and enhance reserve, as the government has to spend billions of dollars as oil import bill every year. This means falling oil prices are expected to end up in substantial foreign exchange savings.
In fact, the falling oil price has opened up many opportunities for Bangladesh. Infrastructure may be built to keep a substantial oil reserve as a contingency measure for managing any future crisis. To deal with the shortage of storage facility, the country may consider storing oil in offshore reservoirs.
Many say falling oil price is a boon for Bangladesh as it could help reduce the cost of living by cutting transport costs and bringing down inflation. Lower oil prices also pass through directly into lower fuel costs and retail electricity prices. But since the government is the lone oil importer, consumer benefit depends on lowering petroleum prices in the domestic market.
While Bangladesh is in the process of rationalising oil prices through phasing out subsidies and hiking its prices commensurate with the global price, a subdued global petroleum market would imply lesser subsidy requirement. Savings from lower subsidies could otherwise be used for infrastructure development and social protection.
A depressed fuel price also provides leverage for the government to keep domestic fuel prices low which in turn gives some respite to consumers, particularly the low and fixed income groups who can then spend their savings for other purposes. Falling petroleum prices tame domestic inflation since a significant amount is spent on petroleum products by consumers in Bangladesh.
At a press conference last week, State Minister for Power and Energy Nasrul Hamid said the electricity tariff could come to a 'rational' level within the next four to five years when the mid-term and long-term power plants become operational.
Prime Minister Sheikh Hasina launched eight power plants last week having a total generation capacity of 1,325 megawatts (MW), two electricity sub-stations and transmission lines across the country. The government has a target to increase the country's overall electricity generation to 40,000 MW by 2030.
Large coal-fired power plants of Matarbari, Payra and Rampal are currently under construction to generate around 4,000 MW of electricity. More large power plants, including some liquefied natural gas (LNG) fired plants and liquefied petroleum gas (LPG)-fired plants, will also be built.
Analysts say the government subsidy should be reduced for the sake of healthy management of the public sector. In that case, two things have to be taken into consideration - reducing the amount of subsidy and finding scopes for slashing spending in unproductive sectors. But the government does not seem interested in minimising spending in the unproductive sectors.
Country's exporters expressed their concern over losing competitiveness if the fuel price goes up again in the local market against the continuous fall of prices of most of the exported goods in the competitive global market. It may even fail to achieve the export target while losing export orders of few major items.
As the country has shortage of power and gas, the export-oriented industries depend on their captive power generation using diesel as the main fuel for uninterrupted production. The increased cost of diesel will have a telling effect on the sector.
But if power generation does not increase despite the subsidy, the macroeconomic balance has to be made sustainable through price adjustment. The amount of subsidy is increasing due to the launching of the quick rental power plants. Alongside the quick rental power plants, the government can take initiative for establishing big power plants under public-private partnership.
  In fact, there is no disagreement on adjustments of domestic oil prices from time to time in conformity with the rise in global prices. When the international prices of fuel oils are on the decline, local prices should be adjusted downward. The local consumers must not pay artificially higher prices for fuel oils.
The people in other countries get the benefit of the falling prices. But the situation is different in this country. Here, the authorities apparently do the reverse - they raise the domestic oil prices when the global market is overheated for any reason. But they are less interested to lower the prices when the same come down in the global market.
If fuel oil prices are increased as proposed, the common people will obviously be hit hard. It is set to have chain-reactions. An increase in the transportation cost will then result in hike in the prices of commodities.
All said and done, any rise in fuel oil prices, before ensuring uninterrupted gas and power supply, would affect many sectors of the economy related to production.                   
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