Shamsul Huq Zahid
The government's top most worry in recent months has been the soaring inflation. The ongoing spike in oil prices -- Brent North Sea crude traded at $116.15 per barrel last Monday -- following political troubles in Middle East and Western air strikes on Libya must have heightened that worry.
The oil prices in the international market are likely to soar further in the event of continuation of the troubles, thus, threatening the process of recovery of the global economy in general and fiscal stability in a country like Bangladesh in particular.
The oil prices, in fact, have emerged as a major dilemma for the government. The administered prices of fuel oils in the domestic market are much lower than the costs of procurement of the same from the international market.
And a large amount of subsidy is being provided by the government annually to fill up the gap created by the mismatch between the two. With the oil prices going up further, the government would have no other option than increasing the volume of its subsidy on account of fuel oils.
The power development board (PDB), according to a report published in this daily last Tuesday, has approached the finance ministry to make available Tk.30 billion as subsidy for the remaining three months of the current fiscal year. A large part of fund sought by the PDB for providing subsidy on account of liquid fuels to be used by the private sector rental power plants. The Bangladesh Petroleum Corporation (BPC), the state agency responsible for the marketing of petroleum products, would be required to import additional 4.5 million tonnes of fuel oils at an estimated cost of $3.0 billion to feed the rental power plants until 2015. The government would have to subsidise a substantial part of that cost.
An International Monetary Fund (IMF) mission that came to Bangladesh recently on a 10-day visit to discuss its $1.0 billion credit in report submitted to the government has taken exception to the rising subsidy burden on account of petroleum, power and fertilizer. It has estimated that if the petroleum prices are not adjusted upward, the volume of subsidy might double to Tk 150 billion in the next financial year. The multilateral lender said the government's fiscal policy is increasingly coming under pressure from the rising subsidy costs.
The mission has also expressed the fear that the government's domestic borrowing requirement might exceed the budget target in the current fiscal due to the rising costs of subsidy.
The IMF is not happy either with the recent hike in power tariff. It felt that the tariff needed further increase.
The government is in a catch-22 situation with fuel oil prices. If it goes for a hike, inflation, which is already well beyond the level projected for the current fiscal, would be hard to control. And if it does not, the fiscal stability would come under serious strain, particularly because of higher consumption of fuel oils by rental power plants and consequent rise in subsidy volume. Higher fiscal deficit may again fuel inflationary pressure.
As far as buying of power from rental power plants is concerned, the government is providing subsidy on two counts. First, it is supplying fuel oils to these plants at subsidized rates. Second, there exists a large gap in the cost of purchase of power from the rental power plants and the rates at which the same being sold to the consumers, the latter being much lower.
So, petroleum prices and power tariff at the consumer level remain a major distortion in the areas of fiscal management on the part of the government. Fiscal prudence demands a hike in power tariff and petroleum prices. But ground realities that include inflationary pressure and the buying capacity of the poor do dictate otherwise.
The IMF wants the government to do be realistic about its actions relating power tariff and fuel oil prices. But, for the government, it is easier said than done. The same was true in the case of previous governments. The situation was rarely found conducive to such hikes. Yet there were upward readjustments that could hardly satisfy the multilateral lenders.
The finance ministry is upbeat about the economy achieving a 6.7 per cent or even 7.0 per cent growth this fiscal. As far as the performance is concerned, the agriculture is expected to do well, unless something extraordinary happens during the ongoing boro season. No clear picture about the performance of the manufacturing and services sector is available. But the export growth until December last points to a better one. The hike in oil prices has the potential to unsettle much of the estimates.
Zahidmar10@gmail.com
The subsidy dilemma
FE Team | Published: March 23, 2011 00:00:00 | Updated: February 01, 2018 00:00:00
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