"Should’ve been done in phases", say experts on fuel price hike
The record fuel price hike yesterday would put Bangladesh in a favourable position as the country enters into negotiations next month with the International Monetary Fund for financial assistance to ease the pressure on the precarious balance of payment and foreign currency reserves.
Withdrawing energy subsidy and introducing a fuel pricing mechanism in line with the global market were recommended by the IMF staff mission that visited Bangladesh last month.
This is expected to be one of the conditions that would be tagged by the Washington-based multilateral lender for the loan.
"Without this, macroeconomic stability would be difficult to achieve. Bangladesh has demonstrated to the IMF, the World Bank and other international bodies that it is serious about restoring macroeconomic balance. This is a serious statement," said Ahsan H Mansur, executive director of the Policy Research Institute.
With one of the lowest tax-GDP ratio in the world, fast depleting foreign exchange reserves, widening balance of payment deficit and escalating inflation at home and abroad, Bangladesh's economy is not on the best footing.
And the future outlook is not rosy, either. Both exports and remittance, the two pillars of the economy, are experiencing headwinds.
Since last year, fuel prices have been on an upward trend and the government has been footing a huge subsidy bill to prevent passing on the burden to the consumers.
But the subsidy expenditure was becoming unreasonable in the face of limited fiscal space and the IMF mission too recommended cutting back on it to contain the budget deficit to 5.1 percent of GDP, which would still be above the recommended ceiling of 5 percent.
"This has more to do with buying some fiscal space," said Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue.
The demand for fuel is inelastic, so a price hike -- and the accompanying cutback in subsidy -- will fill up the state coffer, he said.
It would, undoubtedly, further fuel inflation, which remains well above fiscal 2021-22's targeted 5.6 percent.
The government could have withdrawn the duties and taxes on fuel imports or gone for the price hike in stages to not pile on the misery on the common people, who are already grappling with a cost of living crisis, Rahman said.
Had the government increased the prices earlier, the impact on the ordinary people would not have been so exacting, said Zahid Hussain, a former lead economist of the World Bank's Dhaka office.
The government last hiked the price of diesel -- by 23 percent -- in November last year.
Since then, the price of diesel has spiralled in the global market. While the fossil fuel is now trading at a six-month low, the price is still 67 percent higher than what it was in November last year, Hussain said.
"But there was no adjustment in the domestic market in that time frame. Untargeted subsidy like the one for fuel prices is arguably increasing inequality in Bangladesh. What we are witnessing is the cumulative pressure," he added.
Were it done earlier and in a planned manner, then the higher price of fuel would have been more tolerable, said Mansur, also a former economist of the IMF.
"If it was done in a planned manner, this massive hike would not have happened and at this moment, when the other countries are slashing their fuel price. But we got a big hit. We never do anything in a planned manner. It was the same in the case of the exchange rate."
The forward expectations of fuel are on the decline in the global market, according to Mansur.
"From now, the government should link the price of fuel with the global market. Then the price fluctuations would be acceptable and there would not be any politicisation of the fuel price. The linkage is very important," he said.
Hussain cited the case in India, where the fuel prices are linked.
"Even after the hike, the government is saying that it would be racking up losses. But in India, where the price is the same, the sellers are not counting losses. It is because they have cracked a beneficial pricing formula -- India has daily price adjustments."
Hussain went on to urge the government to come up with a fuel pricing formula without delay.
"There would be transparency then. People would have gotten the assurance that the fuel price would come down when it drops in the global market," he added.
Nasrul Hamid, the state minister for power, energy and mineral resources, assured that the price would come down when it drops in the global market.
The 42.5 percent increase in the price of diesel brought it on par with that in India, with whom Bangladesh shares a 4,100-kilometre border.
"If we have a difference of Tk 50, Tk 80 with India, then a huge amount of diesel is likely to go through the border," Hamid told The Daily Star yesterday.
Earlier on July 18, the government decided to suspend electricity generation in power plants run by diesel, which accounts for the majority of fuel imports, as well as a raft of energy-saving measures.
"I said I will not use diesel for electricity generation -- I cut off a thousand megawatts. Still, the demand for diesel has not decreased."
As much as 90 percent of diesel brought into Bangladesh is used by the transport sector and for irrigation, he said.
"We are saving in our sector, but not in the transport sector. In the last one month I have repeatedly said that you should be watchful in your fuel consumption. Use the car a little less, cut down on electricity use, reduce gas consumption. But no one listened."
Before going ahead with the hike, the ministry considered slashing the excise duty and taxes -- which go up to 37 percent -- on fuel imports. But that option was ruled out as the tax collected goes to the state coffer and is used for other purposes.
In the end, the government banked on basic economics to bring down the consumption of fuel, which comprises 30-35 percent of Bangladesh's imports.
"I am raising the price because I want to save myself from bankruptcy. I have to import fuel and I have to supply," Hamid added.