Fuel price has increased eight times over the last 5 years, when the price of octane increased 87 per cent and petrol by 80 per cent per litre. Some argue that since our economy is agro based, and the agricultural sector is highly dependent on the use of diesel for irrigation, any increase in the fuel price may adversely affect the economic development of the country and may trigger the spiraling effect of inflation. On the other hand it has also been argued that abolishment of huge sum spent on fuel subsidies will have a positive impact on the money market and improve the forex reserve.

First of all we need to analyze the basic reasons for the continued increase in the fuel price. To begin with, international oil price has increased almost 175 per cent over the last 2 years. The increase can be attributed due to the following reasons:
1) Increased demand by some of the developed and industrialized countries. Demand for oil in China and US increased by 39 per cent and 19 per cent against the increased global demand by 20 per cent in 2005. 2) Temporary disruption in production capacity due to labour and political unrest in Middle Eastern countries, 3) Natural calamities, 4) Cartels have been successful in controlling the fuel price. During times of falling oil prices, cartels have successfully lowered their production capacity in order to dictate a higher oil price in the international market. Since the major oil producing countries control the effective means of price reductions, it is somehow expected that the fuel price will maintain its upward trend.

In most developed countries, oil prices are usually tied up with the international market. At the least, each country tries its best to align the fuel price with that of the international market, except for Bangladesh where the petroleum products are highly subsidized. Even our neighbouring economies revise the fuel prices on a regular basis. For example: a litre of octane is taka 90 equivalent in India, taka 73.50 equivalent in Pakistan and taka 66.50 equivalent in Srilanka, while this is only taka 45 in Bangladesh. In the similar way a litre of Petrol cost taka 77.50 equivalent in India, taka 65.80 in Pakistan and taka 62 in Srilanka while this is taka 42 in Bangladesh. A litre of diesel cost taka 46.50 in India, taka 43.50 in Pakistan and taka 42.25 in Srilanka, while this is only taka 30 in Bangladesh.

Bangladesh imports US$ 700 million worth of crude oil and US$ 1.3 billion worth of different kinds of refined petroleum products, exerting a strong pressure on the foreign exchange liquidity and reserves as well. Faster depletion of hard earned foreign exchange is causing the local currency to depreciate further against US dollar adding more woes while making payments for such imports.

Financing for oil imports is made under the arrangement between the Islamic Development Bank (IDB) and the government. However, the increased oil price resulted in a bigger import bill this year. The government under different arrangements managed financing for US$ 1.2 billion worth of imports, leaving a deficit of US$ 800 millions, which is being managed out of borrowing from foreign and mostly local banks.

Bangladesh Petroleum Corporation (BPC) is responsible for the import and distribution of oil through 3 distribution companies. BPC is selling the fuel at a subsidized price, which is lower than its imported cost. Moreover most of its major buyers of fuel are not regular in making fuel payments under the credit arrangement between BPC and the buyers. Such situation is exposing BPC to financial shambles and causing it to incur an annual loss of more than BDT 30 billion. Amongst the major buyers of BPC include Biman Bangladesh Airlines, Bangladesh Power Development Board and other governmental bodies.

Ninety per cent of the imported fuel is used by the airlines, transport and industry sector while only 10 per cent of fuel is being used by the agriculture sector. However the demand for fuel by the agricultural sector is relatively consistent. Agriculture sector needs fuel during December to March period for the irrigation. The demand for irrigation fuel is likely to decrease in the coming days with the possible supply of electricity in those areas. With the advent of electricity, agricultural sector will be better equipped with the electric run machineries.

It is quite interesting to note that though only 10 per cent of the total imported fuel is used for the irrigation purpose in the agricultural sector, some economists and politicians uses this pretext for supporting the government’s decision to subsidize all petroleum products. It is also quite unclear as to why subsidization at such large scale is needed in Bangladesh where there is compressed natural gas (CNG) as an alternative source of energy.
The use of CNG has been gaining popularity over the years. The consumption of petroleum products has not increased over time due to the abundance of locally produced natural gas that caters to over 60 per cent of commercial energy needed. In the face of rising oil prices, gas has gradually substituted petroleum products in the domestic and transport sector, and its popularity is ever increasing in almost all sectors.

The government has recently ordered all government vehicles to be converted to run on CNG. Not only smaller vehicles, but long haul vehicles, too, have been running on CNG and the numbers of such vehicles are on the rise. In line with the increased number of gas-run vehicles, the numbers of such gas stations have increased over the years, thus ensuring adequate supply. Many leading banks and leasing companies have already shown their commitment in making available such environment-friendly vehicles, buses and lorries, by means of easy installments and loan facilities. Moreover, many power plants that were running on diesels have gradually substituted those to gas fired ones and the government has also declared a two-day weekend to ensure energy savings.

Since the last fuel price hike in the local market in September 2005, the government has been able to cut down its losses to some extent. Diesel was still being largely subsidized since the consumption of diesel in the agriculture and public transport sector is still a significant portion of the total diesel imports. With the gradual shift in the consumption pattern, we expect to see a lower import bill for oil during the year. It is also contingent upon reduction in smuggling of petroleum products through the borders to the neighboring country, where the price of fuel is much higher. Donor agencies like IMF and World Bank have been pressing hard for oil price re-fixation in the local market in line with the international market. Nevertheless, the government is expected to continue to provide subsidies to the farmers, especially by popular demand and 2006 being a very important year for election.
High oil import bill payments and subsidies have already squeezed BPC’s resources and as a counter measure, the government had to increase its sovereign guarantees to accommodate the opening of letters of credit (L/C) by the nationalized commercial banks (NCBs). BPC already has an outstanding of US$ 750 million with Islamic Development Bank(IDB) and they are reportedly not interested to increase the exposure further.

Instead of spending millions on subsidizing fuel price, the government should take steps to make CNG conversion system more affordable, since it is still at a growing stage and the initial cash outlay is quite significant too. Support to the CNG conversion industry should be provided to encourage more number of people to use CNG as an alternative source of energy in lieu of fuel. CNG is not only less dependent on ever increasing fuel costs, it is also environment friendly. Once the alternative energy source is readily available, the government should no longer subsidize the oil price. However considering the increasing loss due to price hike in the international market and the rampant smuggling of fuel through the borders due to significant price difference, we should seriously consider increasing the price of all types of fuel. If the govt. still wants to continue subsidizing diesel for agricultural sector on political considerations, this should be done as `targeted subsidy’. And the related loss should be passed on to the rich segment of the society in the form of increasing the octane and the petrol price. If we talk of proper distribution of wealth and channeling the subsidy to the target segment of the society, no point in subsidizing the rich people, who can afford to buy fuel at international price as seen in other similar countries.
Dhaka: 18th April 2006

The writer is a banker