The government – despite a downward trend in the global market rates – raised fuel oil prices at a time when the public are already feeling the pinch of high inflation caused by the Russia-Ukraine war, and this move will rub salt on wound by pushing living costs to a new height.
Economists believe that the fuel price hikes might have been introduced to meet International Monetary Fund’s (IMF) conditions to avail the $4.5 billion fund, reduce the pressure of government subsidies and save foreign exchange to some extent.
This move will impact every aspect of the public’s day-to-day lives, not to mention the businesses and industries. People, who commute a lot due to their employment or commercial activities, will have to pay more for transportation, as the bus fares have already gone up.
Impact on people’s lives
Zahid Hussain, the former lead economist of World Bank Dhaka office, told The Business Post, “There will be a major impact on inflation as the diesel price hike is highly contagious. So, transport fares, agri and industrial production costs will increase.
“The trade costs will increase overall, and productivity will be disrupted.”
Prof Mustafizur Rahman, distinguished fellow of Centre for Policy Dialogue (CPD), said, “People are already under the pressure of inflation, and the abnormal increase in fuel prices will put the public in double trouble.
“Our previous experience shows that the price of everything – starting from the transportation fare – will increase in an unreasonable manner. The costs of production will increase and competitiveness will decrease. Investments will also be hampered.”
He continued, “The government has raised prices to meet the subsidy pressure. But had the revenue gone up in proportion to the GDP, there would not have been a need for this drastic price adjustment. The tax-to-GDP ratio of Bangladesh is now lower than Nepal or Bhutan.”
Commuters already feeling the heat
Against the backdrop of fuel oil price hike, bus owners and other stakeholders finalised new fares at a meeting with the Bangladesh Road Transport Authority (BRTA) on Saturday evening.
Long-haul bus fares have gone up from Tk 1.8 per km to Tk 2.2. Bus fares in Dhaka and Chattogram cities have been increased from Tk 2.15 per km to 2.5. Bus fares in the adjacent districts of Dhaka have been reduced from Tk 2.5 per km to Tk 2.4.
Bus and minibus minimum fares will remain the same. The price hike will come into effect from Sunday.
What is behind this drastic measure?
Economist Mustafizur Rahman believes that the key reason behind the energy price hike is to reduce pressure on subsidy. The government had allocated over Tk 82,000 crore subsidies in the budget for FY23, and of the figure, Tk 17,000 crore was for the energy sector. Besides, the government also hiked the fuel oil prices as part of the preliminary preparation to avail the IMF loan.
However, Zahid Hussain expressed a different opinion, saying, “Talks with the IMF about the loan have not officially started. I do not think it is a preparation in advance.”
He also recommended reducing the discrimination in the subsidy system. Those who use more fuel are getting more subsidies. In other words, more subsidies are going to the rich, and Bangladesh needs to change this system.
Zahid Hussain added, “The Bangladesh Petroleum Corporation (BPC) says its losses will not go down even after hiking the fuel oil prices so much. This means there is opacity in the price increase. This is a problem, and the government should find out more about it.
“That is why formula-based pricing is needed. Then we can understand how much the price has increased due to exchange rate hikes and increase in international market prices. The IMF always suggests this type of pricing system and it is transparent.”
State Minister for Energy Nasrul Hamid recently assured that the fuel price will go down as soon as the global price returns to normal. In the meantime, the impact of oil price increase has hit the market, and inflation has hit all sectors including transportation, industry and agriculture.
Stakeholders speculate that the government has increased fuel prices on recommendations from the IMF, as Bangladesh is seeking 4.5 billion in loan from the agency following a steady decline in forex reserves.
However, the IMF has not recommended an increase in fuel prices but rather a revision of the pricing system. At the same time, the IMF also recommended reducing the debt of the power sector, finance ministry sources said.
Energy experts have voiced concerns over the possibility that the government might increase the bulk electricity prices in the near future, a move the Bangladesh Power development Board (BPDB) has already proposed to the Bangladesh Energy Regulatory Commission (BERC).
Historic hike in fuel oil prices
In November of that year, the government increased the price of diesel and kerosene by Tk 15 to Tk 80 per litre. Nine months later, the fuel oil price announced by the Energy Division on Friday night was the highest in the country's history.
As per the new prices effective from Sunday, a litre of diesel and Kerosene now cost Tk 114 an increase from Tk 80, octane costs Tk 135 per litre from Tk 89, and petrol costs Tk 130 from Tk 86.
Soon after the energy ministry announced the prices at 10pm, there was a huge reaction across the country. People protested the record price hike on social media. Bangladesh’s petrol pumps temporarily stopped selling fuel oil, causing chaos in many parts of the country.
Fuel oil prices drop in global market
Per barrel Brent crude fell to $93.81 on Thursday, the lowest since Russia invaded Ukraine in February, according to oilprice.com – a global petroleum products news outlet. On Friday, Brent crude price rose again to $94.40 and another crude oil indicator WTI price stood at $88, which rose as high as $121 recently.
Explaining the issue, energy expert Prof M Tamim told The Business Post, “Due concerns over global recession, fuel consumption in America and China is decreasing, and they are increasing reserves.
He pointed out that according to the international forecast oil is likely to drop to $65 per barrel in the next two months, so the BPC's losses would be zero.
“Bangladesh’s latest price hike puts the per barrel rate of diesel at $170, but the rate in the international market is $135. It is illogical, and our economy will not be able to handle this shock,” said professor Tamim.
What reforms does the IMF want?
An IMF delegation recently visited Bangladesh amid the economic crisis, and recommended 33 reforms in various sectors. Most notably, reforms in the fuel oil pricing system and reduction of subsidies, finance division officials say.
They added that in the last 20 years, the price of diesel has been adjusted 17 times in the country, rising 13 times, but dropping only four times. This price of oil is determined by the fixed method, which is announced by the executive order of the government.
If the price suddenly increases in the world market, the government has to provide subsidies, and if the price decreases, the people do not get the benefit. According to the Ministry of Finance, the IMF wants to reform this method.
There are three key methods of determining the oil price at the retail level across the globe, and most of the countries are following the market determined method. Some countries follow the price ceiling system as well.
The strictest method is the fixed price system. Prof Tamim said the price of fuel oil changes constantly in India, there is an opportunity to adjust the price every day in this method of dynamic daily pricing system, and Bangladesh should also go for this method.
Energy Division’s explanation
The Energy Division in a press release on Saturday said the government has increased fuel oil prices over concerns of smuggling activities, and with the aim to reduce BPC losses.
The state minister for power and energy said if the situation becomes normal, the fuel oil prices will be revised accordingly.
The Energy Division also says that BPC has made a loss of around Tk 78 crore on diesel and octane last July. The loss in the previous two months was more than 100 crore. From February to July this year, BPC has made a loss of over Tk 8000 crore.
Apart from this, the energy division mentioned that the increase in the development cost of BPC along with the increase in the USD exchange rate is behind the sudden price hike of fuel oil.
Concerns over power price hike
Energy experts have expressed fresh concerns about the proposed electricity prices after the record increase in fuel prices. Meanwhile, the IMF has also recommended reducing the circular debt in the power sector.
According to Bangladesh Power Development Board (BPDB), the total liability in the power sector is currently Tk 2.5 lakh crore which is increasing every year.
Under the circumstances, the Bangladesh Energy Regulatory Commission (BERC) held a hearing on BPDB's price hike proposal last May. There is a proposal to increase the bulk price of electricity from Tk 5.17 to Tk 8.58 per unit which may be announced this month.
The BPDB said it will incur a loss of Tk 30,000 crore in 2022 due to rising fuel costs, with price hikes proposed to cover the shortfall.
A BERC official told The Business Post on Saturday that there is pressure by the government on this commission to increase prices. But if the government withdraws the entire subsidy on electricity, Bangladesh’s economy will not be able to survive this pressure.
“If the total subsidy of electricity is removed following the proposal of the IMF, the country's economy will collapse, but we are afraid that the government will increase the price here too,” said Prof M Tamim.
