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10 per cent cut in the oil price may help increase 0.3 per cent GDP growth: CPD

Published in The Financial Express on Friday, 26 February 2016


Views & Opinion

Lower oil price: Preparing for difficult future

Mushfiqur Rahman

Despite repeated demands from different sections of society, including business chambers, energy sector specialists and consumer association, the government has decided not to reduce now oil price in the domestic market. Prime Minister Sheikh Hasina while speaking in Parliament on February 17, 2016 ruled out the possibility of reducing fuel oil price at present. She informed that the government might consider price cut for fuel oil once the huge debt of Bangladesh Petroleum Corporation (BPC) would be repaid. She said the government had provided huge subsidy when the international market price for diesel was high to enable diesel supply at the domestic market at a cheaper price. This initiative had compelled BPC to take loan of several billion taka from the government. Although BPC has repaid a part of the loan, there is still a considerable amount of unpaid money it needs to repay against VAT and duty to the government exchequer.

Economists have been suggesting that the government should take advantage of the low international oil price and reduce prices in the domestic market. Centre for Policy Dialogue (CPD) predicts that a 10 per cent cut in the oil price may help increase 0.3 per cent GDP (gross domestic product) growth. Not all experts share the opinion that the government needs to reduce prices of all fuel oil items. Rather experts have been advocating mainly for reduction in diesel and furnace oil prices. As per published information, BPC imports diesel at Tk 21 per litre and sells at Tk 68 per litre. Octane is imported at Tk 60/litre and BPC sells it at Tk 99. Jet oil is imported at Tk 21 and is sold at Tk 74 per litre. Domestic price for furnace oil now stands at Tk 60/litre as against its import cost of Tk 16/litre (duty free price). With duty and taxes paid, BPC is importing furnace oil at Tk 36/litre. As the private power producers have been enjoying duty-free import facilities of furnace oil, the furnace oil-based power generation cost has become competitive (about Tk 5.50/kWh). Nearly 70 per cent of furnace oil consumed in the domestic market is imported duty-free. Experts suggest that the price of furnace oil should be made market-based in order to encourage its industrial uses. As the major part of imported diesel oil is being consumed by the transport sector, experts differ whether reduction of diesel price would ensure transport cost reductions for the commoners, or whether such initiative would benefit the transport owners and operators. Unfortunately, there is no effective regulatory instrument that can secure common people’s benefit when the government offers fuel price reduction. Alternatively, experts opine for creating a separate fund from the surplus earnings from fuel oil profits of BPC to subsidise diesel and kerosene when the international prices go up. Increase of fuel oil price in the domestic market has been significantly influenced by the existing high tariff value (assessed value for calculation of customs duty-taxes). As per available information, BPC currently requires to pay duty-taxes based on set tariff value of Tk 35.10 per litre oil irrespective of international price. National Revenue Board (NBR) sources say that the tariff value has been increased to enhance revenue (indirect) earning. Indeed, BPC is a major source of revenue earning for the NBR. In the backdrop of poor direct tax earning, NBR tries to increase revenue earning through indirect tax instruments like duty-tax on imported goods. The government has issued administrative orders for increased fuel oil prices in January 2013 when price of oil in the international market was high. The prices of oil fell substantially since then in the international market. Many experts believe that the international oil market will be stable by early 2017 and the per barrel oil price would be set at above $50 or more. Taking advantage of the very low oil price in the international market Bangladesh needs to develop the much-needed infrastructure to improve efficiency in carrying, storage and distribution of fuel oil. In addition, institutional reforms within BPC and its subsidiary organisations are to be encouraged for improving management efficiency of fuel oil businesses. The writer is a mining engineer and writes on energy and environment issues.