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Bangladesh could not fully utilise the opportunity emerged from lower international oil prices

Published in ICE Business Times on Sunday, 1 May 2016

“Bangladesh could not fully utilise the opportunity emerged from lower international oil prices”

Towfiqul-Islam-Khan-01It has been about two years since the oil prices started to plunge in the international market. The oil industry has experienced its fair share of booms and busts; but the current one is one of the deepest downturns. According to World Bank data, the average price of crude oil went below $30/bbl January 2016 which was more than 70% compared with June 2014 levels. Even during the recession of 2008-09, the lowest average crude oil price was $41/bbl. Nevertheless, as an oil importing country, it was certainly a boon for Bangladesh. Lower oil prices were transmitted in prices of almost all products in the international market; in Bangladesh, inflation has started to decline. Falling international oil prices also provided relief to government budgets. The government has only recently rationalised the prices at the domestic market. Regrettably, Bangladesh could not fully utilised the opportunity emerged from lowering oil prices. In the above context, it was advisable to reduce the administered prices of petroleum products to some extent and hence in a manner that BPC (and the government) and other stakeholders (producers and consumers) are able to share the benefits from lower global petroleum prices.
On 31 March, 2016, the government reduced the price of furnace oil, mostly used by industries and powerplants, by more than 30% to Tk 42 a litre. The prices of diesel, petrol and octane were notadjusted at that time. On 25 April, 2016, the government has cut the prices of octane and petrol by Tk 10 a litre and diesel and kerosene by Tk 3 per litre to pass on to consumers the benefit of low fuel prices on the international market. The late decision was not welcomed. There is no doubt that this decision will bring some positives. CPD undertook a Computable General Equilibrium (CGE) exercise to estimate the economy-wide impacts of a possible decline in fuel prices in the domestic market. The simulation examined the impact of cut in the petroleum price by 10%. The results show that this reduced price will lead to a rise in both GDP (at factor cost) and private investment by about 0.3%. Consumer price level (inflation rate) is expected to come down by 0.2 percentage point. However, government savings (deficit as a share of GDP) may deplete by 0.4 percentage points. Export (and that of RMG), on the other hand, may increase by 0.4%. Households are likely to be benefited with a rise in consumption (by 0.6% on an average), while firm’s income may increase by the same margin. Consumption of households in the rural area is expected to increase more than aforesaid average (by 0.7%). This economy-wide impact assessment implies that there is a case for revising downward the fuel prices. However, it was also suggested that the prices should cut more drastically for furnace oil, diesel and kerosene compared to octane and petrol. Unfortunately, this did not happen. For example, the current diesel price in Bangladesh is still higher than that in India. Hence, while Bangladesh is losing its competitiveness to other countries. Moreover, this reduction in diesel price did not accompany reduction in transport fares. The prices were also reduced at a time when the farmers did not get the benefit from lower cost of irrigation. To a large extent, the recent price cut helped the rich as opposed the poor and the production.
BPC, a state-owned monopoly, imports petroleum products (crude oil and refined products) from the international markets and sells it to the local power generating plants and other consumers (agriculture, industry, communication, domestic and others) at a tariff rate set by the government. Domestic prices of petroleum products have not been adjusted with the declining trend in international prices since January 2013. It may be noted here that, BPC, after incurring loss for fifteen years in a row, earned a profit of Tk 5,268 crore in FY2015. BPC did not take any (subsidy) support from the government during the first half of FY2016 and is unlikely to seek any support during the rest of the fiscal year. At the same, it needs to be taken into cognisance that BPC is operating with a large debt burden a major part of which is with the SCBs and guaranteed by the government. This profit making is an opportunity for BPC to improve its financial health. It may also be true that lower growth of revenue earnings in FY2016 has also made decision making as regards lowering of domestic fuel prices, a difficult choice for the government. Regrettably, as of now, there is no clear reporting on the part of BPC as to the amount of profit being made and the way this profit is being distributed (e.g. repayments of past debt, dividend to government etc.).
There is also a lack of clarity as regards major heads of BPC’s financial accounts such as income, expenditure, income, profit/loss, debt, liability and assets, etc. As has been noted, BPC experienced a major change in its financial account and health between FY2014 and FY2016 because of the windfall gain enjoyed on account of the differences in the petroleum prices between the international (low prices) market and the domestic regulated (high administered prices) market. According to Bangladesh Economic Review 2014, BPC incurred a net loss of Tk 2,489.86 crore till FY2014, it has unpaid debt service liability of Tk 19,71,617.6 crore (as of June 2013) and total due of Tk 14,183.64 crore (till December 2013). However, the financial position of BPC has significantly improved over the following period, thanks to the low price of petroleum in the international market. According to Bangladesh Economic Review 2015, BPC made a net profit of Tk 3,454.7 crore till 22 April 2014; its unpaid debt-service liability has reduced to Tk 22,28,423.9 crore (as of June 2014) and total due fell to Tk 11,152.78 crore (till 31 December 2014). Financial position of BPC has definitely improved further in FY2016 due to the falling fuel price in the global market, with domestic prices remaining the same. Higher transparency of the financial account of BPC would help understand how the windfall gain has changed BPC’s bottom line, how this has been utilised by BPC till date (a part of this profit was perhaps used to adjust accumulated losses and repay earlier debts). Transparency in this regard will help better and more appropriate policy making in the areas of price adjustments and allocating relative benefits to be enjoyed by key stakeholders and sectors (e.g. farmers, transport users, producers, exporters and consumers).
At the same time, electricity and gas tariffs may need to be readjusted to reduce the likely significant fiscal burden due to the adoption of new energy-mix policy. Tariff must not be forced to regulate at the level of minimum average cost pricing; true opportunity cost should be included in the tariff estimation. As was noted earlier, lower fuel prices will have positive impact on private sector investment. There is, thus, a strong case for further reducing fuel prices. As contingent liabilities of power and energy sector have been on the rise, necessary steps need to be taken for proper assessment, monitoring and managing of these liabilities, along with price adjustments. In Bangladesh, oil price cut should be calibrated by taking into cognisance the revisions of gas and electricity prices, overall impact of the price-change mix on major stakeholder groups and government’s subsidy related expenditure and earnings. While adjusting the fuel prices, within the fuel-mix, a differentiated approach will need to be taken as regards petrol and octane (relatively lower reduction in prices). The present world market and the forecasts give an opportunity for bringing reforms in this sector. The strategy of monopoly import of fuels by state agency will also need to be revisited to explore the possibilities of deregulating the import regime.

Towfiqul Islam Khan is a Research Fellow at the Centre for Policy Dialogue (CPD). He can reached at: towfiq.khan@gmail.com. The views of this article do not necessarily reflect the views of the aforesaid organization.


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