Fuel price adjustment: Somoy gele sadhan hobena

WHAT Fakir Lalon Shah once sang, "Somoy gele sadhan habena," is also applicable to the economic decisions of our everyday life.  We cannot accomplish the goal if we do not act promptly before time elapses.  And the same is true for adjusting the fuel price which has been cascading down since the middle of 2011 to reach an 11-year historic low recently.  The global petroleum price has plummeted to as low as $36 from $116 per barrel in April 2011. Predictions suggest further decline. However, Bangladesh failed to adjust the fuel price accordingly. You don't need to be an economist to understand that our economy has been incurring more losses than profit each day that the country passes without any reduction in fuel prices.  

Since the Bangladesh Petroleum Corporation (BPC) is making almost 35 percent profit per litre of petrol, some could justify the stubbornly high price of petrol, close to Tk 100, as an excellent vehicle of quick revenue earning. But that is damaging our production from the supply side. This argument is equivalent to sending your child to a factory – a decision that rewards you financially right now, but damages the future of your child earning a potentially higher income in the long run.  Let the buyers and sellers enjoy reduced fuel prices and expand both consumption and production which will enable the government to scoop up higher revenue in the future.  This argument of supply and demand side economics was intelligibly used in the US in the early 1980s, resulting in the American economy enjoying a long post-war boom.      

The first and second oil shock of the 1970s that created stagflation had actually left a great lesson for the world: do not forget to take advantage of fuel prices when they are low. It is just like making hay when the sun shines. Accordingly, no country ignored adjusting the fuel price domestically, because it is a golden opportunity to reduce both inflation and production costs and thus stimulate consumption and output growth.  

Unfortunately, Bangladesh is the only exception but there's no convincing reason for that.  The fiscal deficit in Bangladesh remains within 4 percent of GDP.  It is hard to comment on BPC's accounts which, in the past, were kept in the dark for the public.  Based on newspapers reports, however, we see that BPC has entered an era of net profits after paying off previous deficits.  Isn't it high time for fuel prices to be adjusted?  If we do not act promptly, the price for BPC's imprudent stubbornness would be too painful for the nation in the long run. We already seem to have missed the train, anyway.     

Reducing fuel price is not only an economic necessity, but is also part of policy consistency that warrants the removal of any monopoly under the state's pampering.  Deregulation promotes competition, which in turn gives the optimal price to customers by reducing inefficiency and corruption. 

After embarking on liberalisation in the early 1990s, India soon realised that petroleum prices should also be deregulated for the greater interest of the public, and also for reflecting policy consistency in the market economy.  By 1997, the Indian government dismantled the administered price mechanism for fuel. Unsurprisingly, their economy reaped the benefits.  In the recent past, India adjusted fuel prices by 22 times to constantly reflect the global market, so that domestic producers and farmers get the maximum benefits of lower input cost. Although we started liberalisation at the same time as India, dismantling the administered fuel price still remains a dream only because some policymakers still resist it, but they fail to provide any economic reasoning for that. Our irrigation is 70 percent dependent on fuel.  

Pakistan adopted a monthly fuel price adjustment and also ensured lower tariff in electricity bills for its people. Not only did the Sri Lankan government reduce oil prices, it also committed to providing a fuel price formula to its citizens so that pricing remains completely transparent. In contrast, the monopolistic BPC did not even allow any international audit in the past. The finance minister questioned its integrity many times. Recently, an economist branded BPC as a non-transparent and corrupt regulatory body. The finance minister ensured fuel price adjustment at least twice in the recent past, but ordinary people still are unaware about what prevents this price fall from happening. 

Aren't we causing more harm than good to our economy when our neighbours have been outsmarting us by delivering fuel to their farmers, producers and consumers at prices much lower than ours?  Let us not think that policymakers and economists of India, Pakistan, and Sri Lanka are all fools. The current fuel prices may not appear high to some policymakers in Bangladesh, but the penalty for not taking the advantage of the lowest oil price is definitely high for the nation.  

Over the last one year, since December 2014, Bangladesh's 12-month average inflation fell by 11 percent and came down to 6.2 percent in November 2015. However, India's inflation fell by 28 percent and came down to 4.8 percent, Pakistan's inflation dropped by 62 percent to reach below 3 percent.  Inflation in Sri Lanka slid below 1 percent after dropping by 74 percent over the same period.  The evidence clearly proves that Bangladesh would have been in a better shape with lower inflation had we adjusted the fuel price in a consistent pattern, aligned with the international market prices.  Lower inflation enables lower interest rates, which stimulate growth after increasing investments. At the end, higher consumption and higher output foster better fiscal capacity, justifying fuel price reduction on a priority basis.  

The writer is chief economist of Bangladesh Bank.