Home ›› 14 Aug 2022 ›› Editorial
Price is an instrument of allocative mechanism in resource use. Therefore, an abrupt change of price triggers certain forces resembling the domino effect. An increase in the price of an important commodity with a pervasive impact on the economy could cause havoc and could destabilize the tranquility of society. The spike in different kinds of fuel in Bangladesh is a case in point. Fiat price hikes should follow certain norms; there are certain issues such as the nature of the product, sensitivity in demand due to price changes, the trend in the world prices of imported commodities, and the context. The decision of the regulatory agencies is also crucial. The recent decision on price hike of fuel is contrary to the trend of world prices and thus inflicts a severe financial burden on the common people at a time when common people live on savings.
Bangladesh Petroleum Corporation [BPC] enjoys a monopoly in imports of various fuels including crude and refined petroleum products. The global fuel market now experiencing price volatility for a couple of months owing to supply disruption as a consequence of the prolonged Russia - Ukraine war in the aftermath of Covid-19. The government in the past gave subsidies in keeping the fuel price stable; during the period 2010/11 to 2014/15 subsidies worth Tk. 28,586 crore was disbursed. However, there was no subsidy from FY 16 to the month of February 2022; the lowest subsidy of Tk 600 crore [ $ 75 million] was during FY 15. Now there is an apprehension that the profit earned by the BPC over the past seven years [Tk. 480 billion] may be dissipated in a few months with the current trend in prices. The net profit of Tk. 95.59 billion in the FY 21 plunged to Tk. 13 billion until May 8, 2022, and thus a price hike was imminent to compensate for the growing losses. “We’ve suffered losses of Tk 40 billion from February through to May. You surely can see where our profit slipped to." Indeed, BPC used project funds worth Tk. 150 billion during the last six months.
An increase in price was inevitable but the pertinent questions are on the timing and on the one-shot percentage increase; whether the common people can adjust with their already burdened financial hiccup or the Covid- 19 plagued economy can accommodate in the short run. The extent of the recent price hike of fuel is contrary to the trend of world prices and is an abrupt decision. The average percentage change is over 42.5 percent in the case of diesel and kerosene and over 50 percent for petrol and octane. The crude oil was sold at $ 65 per barrel in December 2021, surged to $ 125 in March, and now settled at about $ 100 per barrel. The government in the past hesitated to downward price adjustment when world market prices registered a fall although the International Monetary Fund recommends such practices as a measure of fiscal prudence. India adjusts the downward price through the automatic price adjustment and it is expected that the government would adjust the price in the case of falling fuel prices. China and India are banking on the fuel supply of Russia and it is expected that this could soothe the fuel price in near future. Indeed, an administered or fiat price undermines the demand and supply in the market and consumers do not benefit from low prices, on the other hand, the upward stickiness causes consumer surplus to fall. An alternative may be to break the monopoly of BPC by opening the private sector in fuel imports like food and LPG import.
The Energy Regulatory Commission monitors the trend of prices and generally follows a democratic norm in suggesting an acceptable level of price in consultation with different stakeholders such as representatives from the agriculture and manufacturing sectors and consumer associations. The ripple effect of the price hike pervades all levels of transportation and commuters are the worst sufferers. Hydrocarbon Unit of the Power and Energy Ministry in the publication of Energy Scenario, 2020-21 manifests that the transport and agriculture sector consumes over 62 percent and 20 percent respectively of the diesel import. The existing precarious inflation may be boosted by at least 3 to 4 percent. Thus instead of a one-shot jump, an incremental approach could be salutatory both on the part of common people and BPC.
It is also important to consider the multiplier effect of such a drastic rise, the multiplier effect is pervasive in the case of fuel when you conceive the interdependent linkage scenario of fuel with important sectors of the economy. The unprecedented inflationary experience and expectation even for the developed world such as the United States, the United Kingdom, and the European Union manifested in the concurrent hike of interest rate unfolds an ominous trend of recession and the trend may creep into the developing world through the transmission mechanism. Indeed, when Walmart buys products from Bangladesh and sees the dwindling profit either Walmart may prefer to buy at a lower price or switch to another competitive bidder. This could have a damaging effect on the RMG sectors, an important avenue of job for thousands of women workers.
The official inflation figure of 8 percent is paltry in consideration of the price of many essential commodities such as fish, vegetables, and fruits. The trend in the bank deposits for the last six months on an average of 14.16 lakh crore taka suggests the precarious job market. The capping of interest rate on the band of 6 to 9 percent is eroding the purchasing power as inflation is higher than the deposit rate. The burden accumulates on common people who are helpless in this economic crisis. However, it is heartening to note that the government is evaluating the impact of the fuel price hike on the low-income group of people to consider appropriate strategies for relief of the fixed-income group.
The writer, is a former Member, Directing Staff, Development and Economics Division, Bangladesh Public Administration Training Center at Savar, Dhaka. He may be contacted at mirobaidurr7@ gmail.com
