When fuel prices are on the decline in the global market, the Bangladesh government has increased fuel prices effective from August 6. The country's policymakers have increased the prices of various types of fuel by 42-52 percent. Diesel and kerosine prices have been raised by Tk 34 – from Tk 80 to Tk 114 per litre. The price of octane has been raised from Tk 89 to Tk 135 per litre, while petrol's price has increased from Tk 86 to Tk 130.

This is the second time that the government has increased fuel prices in just about nine months. On November 3, 2021, the government increased the prices of diesel and kerosene by 23 percent.

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Government’s decision to hike fuel prices will hurt every section of society

Common people forced to bear BPC's loss

Mismanagement, system loss and a weak supply chain of the Bangladesh Petroleum Corporation (BPC) have become a perennial problem. The government argued that the BPC lost Tk 8,014.54 crore during February-July 2022 due to high import prices, and that at this rate, the company would become penniless soon. They also argued that due to the lower prices in Bangladesh, fuel was being smuggled out to India, but now Bangladesh's fuel prices had been fixed at par with that in India, which would fix the problem. But these are not new issues. Both are primarily governance-related problems, for which the government is responsible. The common people should not be penalised for these by having to bear the burden of high fuel prices – especially during these difficult times.

Before and during the Covid pandemic, BPC's profits increased by a higher amount as global fuel prices were low for about eight years. According to the Economic Review 2022 of the finance ministry, the BPC earned a net profit of Tk 48,122 crore between FY2014-15 and FY2021-22 (up to May 23, 2022). Fuel prices are administered by the government and not determined by the demand and supply in the market. So, consumers in Bangladesh do not benefit from low fuel prices in the international market. Only once in 2016, fuel prices were reduced by the government by a small amount.

Moreover, as always, fuel prices have been set from the top without any consultation with stakeholders such as transport owners, representatives from the agriculture sector, industrial sector, small traders, experts, and consumer rights associations. Also, the Bangladesh Energy Regulatory Commission (BERC) seems to have no role in price determination.

Fuel price hike seems planned for IMF loan

In view of its falling foreign exchange reserves, Bangladesh is looking for funds to maintain its foreign exchange reserves and meet its import needs. The finance ministry has been planning to get a loan of USD 4.5 billion from the International Monetary Fund (IMF). But IMF loans do not come without strings. The IMF wants countries to withdraw price control, formulate budgets in line with the fiscal frameworks, increase tax-GDP ratio, spend more on social sectors, carry out structural reforms in the banking sector, improve the fiscal system, develop social protection, etc. One of the objectives of these conditionalities is to make sure that the borrowing countries can repay their loans. 

While these conditionalities are meant to be good for a country, everything may not work out in the same manner as countries are in different phases of development and have different priorities. But it all depends on how a country negotiates the conditionalities, and how efficiently a country uses the loans. Bangladesh should have the ability to negotiate with the IMF with solid arguments for the betterment of its people and economy.

Fuel subsidy is an economically inefficient measure 

Subsidy is an inefficient means to help people and businesses in a country, which encourages misuse of resources. Fuel subsidy has become unsustainable in Bangladesh. The budget for FY2022-23 indicated that the share of subsidy was almost two percent of the GDP. A major part of this is for fuel, while the rest is for the agriculture sector.

Fuel prices should have been adjusted gradually 

The people of the country are already struggling to make their ends meet due to ongoing inflationary pressure; by raising fuel prices by such a large margin, the government is pushing them into an even worse situation. They are now struggling to survive with reckless price hikes of all commodities – imported and locally produced. The soaring prices of daily essentials such as vegetables, rice, flour, and edible oil are unbearable for low and fixed-income households. Protein sources such as fish, chicken, beef and mutton are beyond their means. Officially, the inflation rate reached 7.56 percent in July 2022 in Bangladesh, which is the highest in the last nine years. But the prices of several essential items have increased by even 50 percent during the last one year, as per the price records of the Trading Corporation of Bangladesh (TCB).

Several people have been forced to use up their savings in the face of high prices. Ironically, they are losing out on their savings, too. The Bangladesh Bank has imposed a cap on lending and deposit rates at nine percent and six percent, respectively. So, savers are ultimately losing out, since the deposit rate is lower than the inflation rate.

The increased fuel prices will not only affect the low- and middle-income families, but will also affect many sectors of the economy, which will have multiplier effects. For example, high irrigation costs will eventually lead to higher prices of agricultural commodities. Many farmers may be discouraged to produce more, which is bound to increase reliance on food imports. Consumers will have to bear higher transportation costs of agricultural goods. The industrial sector will have to bear the rising cost of production and would become less competitive globally. This could impact export income, which in turn may impact the trade balance. Thus, sectors such as road and water transport, power generation, industry, agriculture, and businesses which are dependent on fuel will be affected. The impact of high fuel prices will be felt in many ways, including increased fares in all types of transport, house and office rents, and education and health expenses. In the end, it will affect the welfare of a large population with limited income.

And the rate of such increase is often higher than the fuel price hike. One may recall that bus and launch fares were increased by about 27 percent and 35 percent, respectively, after the fuel price hike in November last year. This time is no different. Already, bus fares have increased across the country; others will follow suit. Besides, we also have to consider market manipulations, which are common in Bangladesh, as is creating panic and artificial crisis by hoarding, which raises prices unreasonably. 

Low, middle-income families need govt support 

Ironically, the ultimate victim of any crisis are always the common people.

On an immediate basis, the government must provide support to poor and limited-income households across the country. The budget allocation for social safety net in FY2022-23 is even lower than the previous year. The allocation, which is already insufficient, also includes the pension of government employees. The government must create fiscal space by increasing domestic revenue generation and strictly following austerity measures. This is an opportune moment to stop wastage and curtail corruption. For better targeting of the population for support, institutional mechanisms should be strengthened. The number and quantity of items should be increased under the open market sales (OMS). Ration cards should be made available for a larger number of people. Small businesses should be provided stimulus to run their businesses. 

In the medium term, the power and energy sector in Bangladesh should correct its policies and invest in primary fuel in the country. Experts have been recommending new gas exploration initiatives and efficient management of the sector to meet the demand and maintain a reasonable price. The authorities have opted for importing the expensive liquefied natural gas (LNG) from the international market, despite a better probability of success in gas exploration at home. Foreign investment in the sector has been largely resisted by interest groups. The capacity charge payments to quick rental power plants are causing huge financial losses for the government. Unless the government brings discipline through producing primary energy and bringing energy efficiency, the crisis in the sector will continue.

Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author's own.