Worries over swelling POL import bill
Tuesday, 30 October 2007
Moazzem Hossain
THE import bill on account of crude petroleum and petroleum products will record a further surge in fiscal 2007-08 as oil prices continue to soar in the global market. The international oil market remains overheated. Prices thereof have already rocked to all-time highs and are set to rise to US$ 100 a barrel soon, if pressures are not eased sooner than later.
Fears of a supply crunch have led to oil-price surge. Producer cartel -- Organisation of Petroleum Exporting Countries (OPEC) -- has signalled that it is unlikely to boost supply further and political tensions in the Middle East have increased investors' worries that some output could be disrupted. The current fears about such a disruption blight the immediate prospects for the overheated global oil market to calm down for the prices to drop to even last year's average level.
Rising import costs of petroleum, oil and lubricants (POL) will put extra pressures on current account balance and, thus, balance of payments of most low income countries like Bangladesh. In the case of Bangladesh, import payments on account of POL rose by about 39.3 per cent during the three-year period between fiscal 2004-05 and fiscal 2006-07. The POL bill aggregated $2233 million in fiscal 2006-07 against $1602 million in fiscal 2004-05. Before the latest surge in international oil price, it was projected that the POL import bill in fiscal 2007-08 would involve payments of $2611 million, about 17 per cent higher than that of the last year. And now, that projection will have to be raised upward by a substantial amount in view of the latest phenomenal surge in oil prices in the international market.
Notwithstanding the adverse impact of the swelling POL import bill on the Bangladesh's balance-of-payment situation, the government, as the governor of the Bangladesh Bank stated the other day to the newsmen on his return home after attending the joint annual meeting of the International Monetary Fund and the World Bank in Washington, would not increase the prices of fuel oil, gas and electricity "at this time" in view of the overriding need to accelerate economic growth and create employment opportunities. There is no denying the fact that upward adjustments of domestic energy prices, in response to the soaring oil prices in the global market, will adversely impact, through cost-push factors, the growth performance of the Bangladesh economy that has been badly hit by successive floods this year. The inflationary pressures that are already on a high pitch will then further be ignited, setting at naught the counter-moves by the central bank, in tandem with those of the government, to hold the prices of essentials under some control.
It must, however, be noted here also that absorbing the oil price-stocks, in the context of the imperatives for maintenance of macro-economic stability to ensure that current account and fiscal deficits do not go off-track, will itself present a daunting challenge for the government and the central bank, no matter whether domestic energy prices are raised or not. This macro-economic stability is critical for micro-level economic activities to expand, investments to pick up, business confidence to grow and overall growth performance of real sectors to improve for generating more incomes and creating more job opportunities for the unemployed or under-employed workforce. The swelling POL import bill is certain to weaken the government's fiscal position and also its financial ability to make payments thereof from its own resources.
Meanwhile, the authorities concerned have dispelled fears about any immediate oil supply squeeze in view of Bangladesh's having an agreement with the Kuwait Petroleum Corporation (KPC) under "which the oil-rich Gulf nation is obliged to supply oil up to December this year". Reportedly, some multilateral financial institutions have also expressed their readiness to help Bangladesh pay the POL import bill. But arrangements for supplies and funds for imports do not solve all the problems in the country's energy sector. Rather, the real problem here lies in areas of repayments of loans from the government's own resources and also the capacity of the cash-starved parastatal, Bangladesh Petroleum Corporation (BPC), to meet its financial obligations to the financial institutions, particularly the nationalised commercial banks (NCBs), on account of its borrowing to make imports of crude petroleum and petroleum products.
The BPC's liabilities are huge and mounting every month. The government announced through the budget for fiscal 2007-08 that it would take over the accumulated default loans of the corporation to the tune of Taka 75.23 billion by issuing treasury bonds of the equivalent amount. While that announcement is yet to be fully translated into action, the BPC's losses on account of domestic sales of petroleum products at below international procurement costs have continued to rise sharply. Such losses shot up from Taka 1.60 billion in June last to Taka 2.17 billion in July last and Taka 2.40 billion in August last, according to a report published in this paper last Sunday. The exact figure on the BPC's loses in September 2007 has not yet been compiled but tentative estimates suggest that such losses would be unusually high for that month. With oil prices continuing to rise in the international market, the liabilities of this state-owned corporation will further mount up. It may be recalled here that domestic fuel oil prices were last raised in April, 2007. Since then, there has been no adjustment in such prices, though the global oil prices have recorded a marked surge during this period.
On its part, the present caretaker government constituted six months back an eight-member standing committee for fuel oil price fixation to adjust domestic fuel prices in line with those in the international market. But that committee remains still ineffective as far as its intents and purposes are concerned. For all practical purposes, the matter of quasi-fiscal deficit of the BPC -- a thorny issue for fiscal and budgetary management -- is, thus, still left unaddressed on substantive grounds. This deficit is in no way sustainable and the matter thereof, under the given circumstances, will remain unresolved as long as an automatic formula, however unpalatable it may be, for pricing fuel is not introduced. By avoiding domestic fuel price adjustment at this stage, the government will be postponing some hard actions.
The reasons why the government is reluctant to make upward adjustments in domestic fuel or energy prices, are understandable under the prevailing unfavourable circumstances. But it must at the same time be noted here that such postponement is not without costs that the overall national economy will, in any case, have to bear in one way or other. Such costs may not be visible, like the case of changes in administered, domestic prices of fuel and energy, to the lay public. But the quasi-fiscal deficit of the BPC which is already in dire straits will be unavoidable in the process thereof. This deficit will have its implications for budgetary (or, fiscal) resource management and monetary policy operations, both of which have a strong relevance to developments relating to the macro-economic situation.
In another disconcerting development concerning external balances of the Bangladesh economy particularly in the context of the possible adverse impact of the swelling POL import bill on the balance of payments situation, the prospects for a steady growth of remittance receipts in the near term are not as bright as before. The ban that have been enforced by the government of Malaysia on employment of the Bangladeshi workers will mean the loss of an otherwise growing overseas job market. And nobody knows for certain at this stage about how long such restrictions will remain operative there. The restrictions, thereof, even though being for the short term, will have a negative impact on remittance flows. Lately, there are also fears about remittance earnings from the member-countries of the Gulf Cooperation Council (GCC) facing setback in view of the move that has been initiated for endorsement by the Labour Ministers of the GCC in their meeting next month in Riyadh, capital of Saudi Arabia. The move seeks to enforce a six-year residency cap on all expatriates working in the Gulf. At present, there are over 2.0 million Bangladeshis working in the six GCC states -- Saudi Arabia, the UAE, Qatar, Oman, Kuwait and Bahrain -- and the remittances from this Gulf region accounted for 62.54 per cent of Bangladeshis aggregate receipts (remittances) in fiscal 2006-07. Furthermore, the media reported recently some problems with the Bangladeshi workers in the United Arab Emirates(UAE). Such reports appeared before the latest developments in the GCC with regard to the future of the expatriate workforce in the region, appeared in the local media.
It is relevant here to point out that steady growth in remittances, now being higher in annual aggregate amount than the combined flows of foreign direct investment (FDI) and aid disbursement, has helped Bangladesh sustain comfortable external balances. The majority of its out-of-country workers are in oil-exporting countries and, thus, do normally earn and send home more when the oil price rises. This is corroborated by empirical evidence -- the evidence that the Asian Development Bank mentioned in its last publication on Bangladesh Quarterly Economic Update in June 2007. This evidence further shows how the increase in foreign financing, through increased receipts of remittances, has earlier enabled Bangladesh to cushion consumption and investment against permanent increases in the international oil price.
In this backdrop, the latest developments concerning prospects for jobs of Bangladeshi workers in Malaysia and the UAE, amid new uncertainty now about flows of remittances from the Gulf region, do provide a serious cause for concern. If countries like Bangladesh experience any major jolt to their remittance receipts under such circumstances particularly at a time when oil prices in the international market are hitting record highs nearing $100 per barrel, then the resultant disruptions to their economies will be too severe to absorb.
THE import bill on account of crude petroleum and petroleum products will record a further surge in fiscal 2007-08 as oil prices continue to soar in the global market. The international oil market remains overheated. Prices thereof have already rocked to all-time highs and are set to rise to US$ 100 a barrel soon, if pressures are not eased sooner than later.
Fears of a supply crunch have led to oil-price surge. Producer cartel -- Organisation of Petroleum Exporting Countries (OPEC) -- has signalled that it is unlikely to boost supply further and political tensions in the Middle East have increased investors' worries that some output could be disrupted. The current fears about such a disruption blight the immediate prospects for the overheated global oil market to calm down for the prices to drop to even last year's average level.
Rising import costs of petroleum, oil and lubricants (POL) will put extra pressures on current account balance and, thus, balance of payments of most low income countries like Bangladesh. In the case of Bangladesh, import payments on account of POL rose by about 39.3 per cent during the three-year period between fiscal 2004-05 and fiscal 2006-07. The POL bill aggregated $2233 million in fiscal 2006-07 against $1602 million in fiscal 2004-05. Before the latest surge in international oil price, it was projected that the POL import bill in fiscal 2007-08 would involve payments of $2611 million, about 17 per cent higher than that of the last year. And now, that projection will have to be raised upward by a substantial amount in view of the latest phenomenal surge in oil prices in the international market.
Notwithstanding the adverse impact of the swelling POL import bill on the Bangladesh's balance-of-payment situation, the government, as the governor of the Bangladesh Bank stated the other day to the newsmen on his return home after attending the joint annual meeting of the International Monetary Fund and the World Bank in Washington, would not increase the prices of fuel oil, gas and electricity "at this time" in view of the overriding need to accelerate economic growth and create employment opportunities. There is no denying the fact that upward adjustments of domestic energy prices, in response to the soaring oil prices in the global market, will adversely impact, through cost-push factors, the growth performance of the Bangladesh economy that has been badly hit by successive floods this year. The inflationary pressures that are already on a high pitch will then further be ignited, setting at naught the counter-moves by the central bank, in tandem with those of the government, to hold the prices of essentials under some control.
It must, however, be noted here also that absorbing the oil price-stocks, in the context of the imperatives for maintenance of macro-economic stability to ensure that current account and fiscal deficits do not go off-track, will itself present a daunting challenge for the government and the central bank, no matter whether domestic energy prices are raised or not. This macro-economic stability is critical for micro-level economic activities to expand, investments to pick up, business confidence to grow and overall growth performance of real sectors to improve for generating more incomes and creating more job opportunities for the unemployed or under-employed workforce. The swelling POL import bill is certain to weaken the government's fiscal position and also its financial ability to make payments thereof from its own resources.
Meanwhile, the authorities concerned have dispelled fears about any immediate oil supply squeeze in view of Bangladesh's having an agreement with the Kuwait Petroleum Corporation (KPC) under "which the oil-rich Gulf nation is obliged to supply oil up to December this year". Reportedly, some multilateral financial institutions have also expressed their readiness to help Bangladesh pay the POL import bill. But arrangements for supplies and funds for imports do not solve all the problems in the country's energy sector. Rather, the real problem here lies in areas of repayments of loans from the government's own resources and also the capacity of the cash-starved parastatal, Bangladesh Petroleum Corporation (BPC), to meet its financial obligations to the financial institutions, particularly the nationalised commercial banks (NCBs), on account of its borrowing to make imports of crude petroleum and petroleum products.
The BPC's liabilities are huge and mounting every month. The government announced through the budget for fiscal 2007-08 that it would take over the accumulated default loans of the corporation to the tune of Taka 75.23 billion by issuing treasury bonds of the equivalent amount. While that announcement is yet to be fully translated into action, the BPC's losses on account of domestic sales of petroleum products at below international procurement costs have continued to rise sharply. Such losses shot up from Taka 1.60 billion in June last to Taka 2.17 billion in July last and Taka 2.40 billion in August last, according to a report published in this paper last Sunday. The exact figure on the BPC's loses in September 2007 has not yet been compiled but tentative estimates suggest that such losses would be unusually high for that month. With oil prices continuing to rise in the international market, the liabilities of this state-owned corporation will further mount up. It may be recalled here that domestic fuel oil prices were last raised in April, 2007. Since then, there has been no adjustment in such prices, though the global oil prices have recorded a marked surge during this period.
On its part, the present caretaker government constituted six months back an eight-member standing committee for fuel oil price fixation to adjust domestic fuel prices in line with those in the international market. But that committee remains still ineffective as far as its intents and purposes are concerned. For all practical purposes, the matter of quasi-fiscal deficit of the BPC -- a thorny issue for fiscal and budgetary management -- is, thus, still left unaddressed on substantive grounds. This deficit is in no way sustainable and the matter thereof, under the given circumstances, will remain unresolved as long as an automatic formula, however unpalatable it may be, for pricing fuel is not introduced. By avoiding domestic fuel price adjustment at this stage, the government will be postponing some hard actions.
The reasons why the government is reluctant to make upward adjustments in domestic fuel or energy prices, are understandable under the prevailing unfavourable circumstances. But it must at the same time be noted here that such postponement is not without costs that the overall national economy will, in any case, have to bear in one way or other. Such costs may not be visible, like the case of changes in administered, domestic prices of fuel and energy, to the lay public. But the quasi-fiscal deficit of the BPC which is already in dire straits will be unavoidable in the process thereof. This deficit will have its implications for budgetary (or, fiscal) resource management and monetary policy operations, both of which have a strong relevance to developments relating to the macro-economic situation.
In another disconcerting development concerning external balances of the Bangladesh economy particularly in the context of the possible adverse impact of the swelling POL import bill on the balance of payments situation, the prospects for a steady growth of remittance receipts in the near term are not as bright as before. The ban that have been enforced by the government of Malaysia on employment of the Bangladeshi workers will mean the loss of an otherwise growing overseas job market. And nobody knows for certain at this stage about how long such restrictions will remain operative there. The restrictions, thereof, even though being for the short term, will have a negative impact on remittance flows. Lately, there are also fears about remittance earnings from the member-countries of the Gulf Cooperation Council (GCC) facing setback in view of the move that has been initiated for endorsement by the Labour Ministers of the GCC in their meeting next month in Riyadh, capital of Saudi Arabia. The move seeks to enforce a six-year residency cap on all expatriates working in the Gulf. At present, there are over 2.0 million Bangladeshis working in the six GCC states -- Saudi Arabia, the UAE, Qatar, Oman, Kuwait and Bahrain -- and the remittances from this Gulf region accounted for 62.54 per cent of Bangladeshis aggregate receipts (remittances) in fiscal 2006-07. Furthermore, the media reported recently some problems with the Bangladeshi workers in the United Arab Emirates(UAE). Such reports appeared before the latest developments in the GCC with regard to the future of the expatriate workforce in the region, appeared in the local media.
It is relevant here to point out that steady growth in remittances, now being higher in annual aggregate amount than the combined flows of foreign direct investment (FDI) and aid disbursement, has helped Bangladesh sustain comfortable external balances. The majority of its out-of-country workers are in oil-exporting countries and, thus, do normally earn and send home more when the oil price rises. This is corroborated by empirical evidence -- the evidence that the Asian Development Bank mentioned in its last publication on Bangladesh Quarterly Economic Update in June 2007. This evidence further shows how the increase in foreign financing, through increased receipts of remittances, has earlier enabled Bangladesh to cushion consumption and investment against permanent increases in the international oil price.
In this backdrop, the latest developments concerning prospects for jobs of Bangladeshi workers in Malaysia and the UAE, amid new uncertainty now about flows of remittances from the Gulf region, do provide a serious cause for concern. If countries like Bangladesh experience any major jolt to their remittance receipts under such circumstances particularly at a time when oil prices in the international market are hitting record highs nearing $100 per barrel, then the resultant disruptions to their economies will be too severe to absorb.