WB suggests introduction of auto fuel price adjustment

The World Bank has suggested Bangladesh readjust domestic petroleum prices proportionate to the global rates-an option that entails deep cuts which the government has so long skirted.     
Domestic consumer rights groups and businesses have long been demanding the lowering of fuel prices as global oil prices hit rock bottom in recent times.    
Officials said the multilateral development-financing agency also called for introduction of carbon tax, which is among the measures related to mitigating global climate change owing to greenhouse gas emissions.
The suggestions came following Finance Minister AMA Muhith's request to the WB for providing a note on the pricing of petroleum products in Bangladesh, they added.
The WB accordingly last week sent a detailed note on the issue.
"Essentially the note argues that the best approach is to let domestic prices follow international prices while using a tax instrument to account for carbon pricing," WB country director Qimiao Fan said in a letter to Mr Muhith.
"This can be done through periodic automatic indexation of domestic petroleum prices to reflect changes in international oil prices and the normal exchange rate. A protracted period of low oil prices such as the one the world is experiencing currently is also ideal to introduce carbon tax," he said.
Mr Fan argued that a carbon tax will be a fiscally prudent measure by protecting revenues when domestic prices are linked with the currently low international prices given a stable nominal exchange rate against the US dollar.
In the face of calls from different quarters, Mr Muhith in mid-February had hinted at holding a cabinet meeting to readjust fuel-oil prices. He had also received a note from the energy ministry which suggested possible cuts in prices.
However, two days after Mr Muhith's media statement, Prime Minister Sheikh Hasina in mid-February statement in parliament said petroleum prices would not see readjustments until Bangladesh Petroleum Corporation (BPC) pays back its loans and clears its debts.
The BPC last time adjusted petroleum prices upward in 2013 when the oil prices per barrel had gone up to US$122 on the global market. Its price started to go down in mid-June last year--and plunged below $27 in mid-February this year to hit a new low.
According to prime minister's statement BPC still owes Tk 150 billion as loan to government exchequer, which the state-owned fuel-oil importer borrowed to subsidise petroleum sale at cut-down prices.
"The current macroeconomic conditions in Bangladesh and the low international oil prices provide a historic opportunity to deregulate domestic oil prices," said Fan to underpin the WB recommendation.
He further pointed out that public resistance to pricing reform is lower when economic growth is relatively high and inflation is low, as is the case now in Bangladesh.
Mr Fan said establishing an automatic pricing formula can help distance the government from the pricing of energy and make it clearer that domestic price changes reflect changes in international prices which are outside the control of the government.
The WB also suggests providing the responsibility of implementing the automatic mechanism to an independent body like Bangladesh Energy Regulatory Commission.
Mr Fan thinks that through introducing carbon tax Bangladesh, as a global leader on protecting the climate, can set the direction of taxation reforms intended to reduce carbon emission.
He also said pricing reforms for petroleum products over the longer term should aim to fully liberalize pricing. "The government can commence implementing a sequence of structural changes over the next two years. These should include de-regulation of crude and products imports and removing entry barriers to allow private oil-marketing companies to operate in the petroleum markets."
Mr Fan noted that Bangladesh recently followed a mixture of ad hoc and active regulation of fuel prices. He said Bangladesh has used subsidies for decades as a policy instrument to promote a wide range of social and economic objectives. The subsidies remained sizeable in recent years of which majority of energy subsidies went to petroleum products. "The increased reliance on liquid fuel generation from rental power producers led to a surge in subsidy."
To substantiate the World Bank suggestion for downward price adjustment in the present context, Mr Fan also pointed out that the government adopted a petroleum product-pricing framework in May 2003 under which domestic petroleum prices were linked with international import parity price (IPP). And, as such, any increase and decrease was to be passed on to users periodically.
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