Oil price fall: Challenges and opportunities for Bangladesh

Ever since global oil price started dipping to the bottom, analysts and experts all around the world have pointed out how it is a boon for world economy. According to Olivier Blanchard, chief economist at the International Monetary Fund (IMF), world economy stands to gain by 0.3 to 0.7 per cent in 2015 compared to a scenario without the drop in oil prices. The reason behind the fall is widely known -- a basic demand-supply story. Europe's prolonged crisis coupled with China's recent slowdown has sapped demand, while the Shale-oil boom, along with rising production in Libya, has created what is popularly known as a "supply glut". The major beneficiaries from the fall in prices are net oil importers such as the United States, China, Japan and India.
From a strictly theoretical point of view, the fall in prices benefit net oil importers in three ways:
l First, imports become cheaper relative to exports, so terms of trade improve.
l Second, lower energy prices translate to lower inflation, reducing interest rates and boosting investments.
l Finally, for governments which provide energy subsidy, this price decline means a cut in budget deficit and less market inefficiency.
Similar to the major beneficiaries, Bangladesh stands to gain through all of these channels since we import around 5.7 million tons of oil annually, comprising the largest share of 11 per cent in our import basket. But in yet another episode of global economic development not reflected in Bangladesh, domestic prices have not been adjusted to international markets. The primary factor has been attributed to Bangladesh Petroleum Corporation (BPC)'s cash crisis and obligation to meet targets set by the National Board of Revenue (NBR), along with overall lack of storage capacity. Yet the benefits from maintaining current price for the sake of BPC is not greater than the multifaceted  gains Bangladesh can get by allowing prices in domestic markets to reflect those in the world markets.
Before reforms aimed at capitalising on the decline in oil price can be considered, policy-makers need to identify whether the crash is transient or we will see a lower and new "normal" in oil prices for some time. Recently, the International Energy Agency (IEA) stated that demand for oil in 2015 will be significantly less than previous forecasts as global economies remain weak and that prices may continue to slide unless the Organisation of the Petroleum Exporting Countries (OPEC) counters the supply surge. Another school of thought speculates that prices might bottom-out soon and that 2015 might see a reversal. However, the consolidated price is expected to be significantly lower than the lofty $100-plus levels seen before. Considering the geopolitical tensions between OPEC and non-OPEC oil producers, the consensus is that prices might settle between $60 and $80 a barrel. Whichever of these predictions come to being, it seems clear that lower prices is the new norm -- at least for some time.
Therefore, Bangladesh can chalk out several strategies to overcome its challenges and reap the rewards of this favourable scenario.
First and foremost, our government can benefit from lower prices by completely eliminating fuel subsidy and reallocating this budget to more productive development expenditures, like infrastructure and education. This should be done both for this and the next budget in the view that oil prices are likely to stay within the range mentioned above for 2015, at least. In doing so, our government will introduce a type of market efficiency seldom seen before. By adjusting prices to world markets (and consequently removing subsidies), the government eliminates the notorious "deadweight loss". Subsidies, by design, are double-edged swords. While they make products more affordable domestically, the main benefits end up going mostly to the richest citizens and crowd out more productive government spending and reduce energy efficiency. IEA chief economist, Fatih Birol, termed it as "a failed policy" (Source: Why Fuel Subsidies in Developing Nations Are an Economic Addiction, Businessweek).
One major argument against price adjustment is BPC's obligation to meet targets set by the National Board of Revenue (NBR). With the opportunity of removing costly and inefficient subsidies at hand, the government needs to collaborate with NBR on reducing revenue targets to ease BPC's obligations.
Another concern with price adjustment is BPC's massive cumulative loss. By selling at old prices, BPC can return to profit after 13 years. But this is a highly suboptimal arrangement for the economy as a whole. For years, BPC has acted in the interest of protecting profitability of the manufacturing sector -- that is the core reason for subsidising BPC, so that they can sell oil at more affordable prices and ensure profitability of the manufacturing sector. Here is a chance to improve profitability of the entire sector by reducing oil prices, and suddenly BPC's interest has shifted to generating its own profitability! As many local experts have pointed out, the general population should not be the scapegoat and BPC's financial crisis should be addressed through longer-term plans with energy-sector specialists and business veterans to guide the enterprise at the management level.
Moreover, if profitability of the industrial sector improves, the government stands to gain from higher corporate tax collection which should offset -- at least partially -- the loss of revenue from reducing BPC's obligations. So the fiscal system is self-correcting and the true benefit from allowing prices to adjust is improving the health of the industrial sector and raising consumer and investor confidence.
Another argument standing in the way of price adjustment is inadequate storage facilities. According to a BPC official, storage capacity for diesel will shoot up to 1.0 million tons from 378,000 at the end of December, 2014 (Source: Fall in global oil prices helps cut govt subsidy, The Financial Express). A further strategy to reduce storage pressure on BPC is to allow the private sector to import oil. Recently, the government has allowed some fuel oil-run private companies to feed their own factories and power plants such as MJL Bangladesh Ltd. This practice should be encouraged and the government should allow more private sector companies to import oil -- but only after careful screening of company fundamentals and management efficiency and integrity. This policy, by design, will increase storage capacity. It would also bring quality service in the energy sector and create benefits at the retail level.  
On a slightly different note, by lowering prices, the manufacturing sector would get some cushion to fully implement higher minimum wage for labour. Reports as recent as December 2014 state that nearly 20 per cent of RMG factories have not implemented the minimum wage structure even a year after the pay hike was made official. Another 40 per cent has done so only partially. Lower oil prices would significantly reduce overhead and operating expenses and allow manufacturing units to reallocate some of these savings to salaries and wages. Essentially, this would channel a transfer of wealth from rich oil exporters abroad to low-income groups in Bangladesh. Should we deny ourselves the opportunity to avail this rare redistribution of income?
Finally, letting international prices feed into the retail level will lower inflationary pressure. This translates into higher disposable income and potential for greater investments. Additionally, with inflation anchored, the central bank can focus solely on protecting the exchange rate. With the business sector looking to get a kick-start in 2015, ensuring stability in exchange rate exudes confidence in the economy -- both in the eyes of domestic producers as well as foreign buyers and investors. This can pave the way for greater domestic and foreign direct investments.
The gains from reducing domestic oil prices far outweigh the benefits of maintaining higher prices. We may be looking at greater manufacturing sector profitability, higher revenue collection for the government, more fiscal efficiency, larger disposable income and possibly a scope for higher wages at the bottom of the pyramid. This is not just about greater real GDP (gross domestic product) growth, but also higher inclusive growth. Adjusting prices is therefore a logical and promising decision which the government should not delay much longer.  

The writer is a graduate student in International Economics at John Hopkins University in Washington D.C.
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