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Difficulties faced by a poor economy
Qazi Azad
6/24/2006
THE government of Bangladesh sells through the state-owned Bangladesh Petroleum Corporation (BPC) diesel and kerosene -- which account for about 85 per cent of the petroleum products imported on a regular basis -- at prices much below the procurement costs. There is strong pressure against enhancement of prices of these products to the levels of procurement costs. The government also agrees that if the prices of these two fuel oils--used extensively by public transports, industry boilers and generators and irrigation pumps and for domestic lighting by poor people--are raised to avoid losses in this particular business, there will be multifarious adverse effects.
The government also sells electricity at a price that is below the combined cost of power generation and transmission. The power tariff is also markedly low compared to the rates at which the Bangladesh Power Development Board (PDB) purchases electricity from the independent power producers to sell it to domestic consumers.
The government as well sells gas, which is sucked out from domestic wells, at prices much below the rate they buy it from foreign oil and gas explorers. An official of the Bangladesh Chemical Industries Corporation (BCIC) in a recent seminar said the government does not allow them to raise the price of urea fertiliser from the existing rate of Tk 6000 per ton although in the event of production shortfall in the state-owned plants, they buy the same fertiliser from the Karnaphuli Urea Fertiliser Company (KUFCO) -- a local joint venture company -- at Tk 20,000 per ton for selling it to farmers at a reduced price. In other words, the government forces the relevant state-owned corporation to sell fertilisers produced in its plants at prices lower than that in the world market and below the cost of production for the benefit of farmers and to give a boost to local agriculture by giving some incentive to farmers in the form of availability of fertiliser at reduced prices.
However, economists and bankers at a post-budget discussion held in Dhaka the other day said the huge losses incurred by the state-owned enterprises, specially by the Biman Bangladesh Airlines and the Bangladesh Petroleum Corporation (BPC) will have an adverse impact on the economy. They said if the government continues to borrow from banks to bear such losses, a liquidity crisis would overtake the financial market.
Dr. Akbar Ali Khan -- a former Finance Secretary who pleaded for adopting a comprehensive energy policy that would seek to reduce dependence on oil import -- said the BPC had suffered a loss on about Tk 100 billion in the last couple of years. He said the total loss incurred by the Biman due largely to mismanagement stood at Tk 10 billion. He also said the government's dependence on bank borrowing to cover the losses of the state-owned enterprises will force banks to raise their interest rates, both on deposits and loans.
The former finance secretary regretted that neither the trade promotion bodies nor the political parties went beyond the short-term issues in their budget criticisms to address the various mid-term and long-term issues. As it appeared from reports in newspapers, Dr. Khan himself did not also go beyond the short-term issues other than speaking in favour of adoption of a comprehensive energy policy that would put stress on lessening dependence on oil import. If the experts and bankers, who met in the particular discussion, would have mentioned what medium-term and long-term measures could be taken under the present difficult economic situation without hurting neither consumers nor producers, it would have been really helpful for the nation. Perhaps, they did not do so recognising that there are no easy solutions to our current problems.
In fact, there are enough reasons to justify further enhancement of the prices of oil, gas, power and fertilisers. If the government goes for it to recover the procurement costs of oil and gas and the costs of production of power and fertilisers to turn the corporations concerned profitable or more profitable, as the case would be in case of the Petro-Bangla, what would be its consequences? Will our industries that have low value addition capacity, be able to absorb the combined shock of significant increase in oil, gas and power prices? How many of them will survive such increases? A detailed study should be done to draw reliable conclusions for use in framing a workable strategy in this regard.
If the prices of diesel and fertiliser are enhanced to make the BPC commercially viable and the BCIC more profitable, how will farmers react? The costs of production of all agricultural outputs including food grains will significantly increase on such enhancement. How will then consumers with limited purchasing power feed themselves? How will they react? Egypt once withdrew subsidy on bread at the advice of the World Bank. When riot broke out in the country in protest, its government of the time hurriedly restored it.
The price of beef in our country has recorded 50 per cent increase between the last Ramadan and now. The prices of all popular varieties of pulse have gone up by about 100 per cent. The prices of different categories of rice are still exorbitant compared to the purchasing power of majority buyers -- though not in respect of the cost of production. The retail price of wheat is already up by about 30 per cent. If the prices of diesel, power and fertiliser are increased now, prices of all daily essentials will go further up to make violent public protests inevitable.
However, the government should have sought to create the bases for firm medium-term and long-term measures by taking wiser short-term steps in view of its options having been drastically reduced by the high oil import bill. The proposed Annual Development Programme (ADP) of the next fiscal year should have been kept smaller in order to reduce the need of the government for depending on bank borrowing. It would have ensured that more money would be available with banks for lending to the private sector for investment -- the real engine of growth under the current economic dispensation.
The ADP should have made more allocation for the power sector recognising that without a marked improvement in power supply and provisioning for meeting augmented power need of at least next few years, neither local nor foreign entrepreneurs will be greatly enthused about investing in the industrial sector. Adequate power supply -- enough to avoid load-shedding -- could have also enabled the existing industries to make capacity utilisation, which would have brought down the cost of production and also the market prices of their products to reduce the economic pressure on consumers. The competitiveness, thus, gained could make the existing profitable industries more profitable and the losing ones less losers or profitable. It would have laid the foundation for taking firm medium-term and long-term measures to ensure better economic growth in the succeeding years. Improved performance of the national economy in the next fiscal could have eased the economic pressure and created the basis for some ambitions programmes in the fiscal year after the next one.
As the oil price hike has exposed the vulnerability of the economy, local energy experts should be consulted to find out the workability of various suggestions, advanced by different quarters, on reducing the dependence on imported oil. China has raised its oil reserve to five million tonnes and is working to raise it further. India is working to secure reliability of oil supply. May be, it is also raising a reserve. On the other hand, when we are being warned that our gas reserve will be exhausted within a few years, we are talking about reducing dependence on oil import. We need to know for sure how far it is possible. Any step without a clear idea in this regard may eventually land us in great trouble.
Meanwhile, the government should try hard for reducing system losses in power and gas sectors in a determined bid to augment its revenue income in order to reduce its need for depending much on bank borrowing. Individuals can eat up neither electricity nor gas, which means that the revenue being lost in the so-called system loss is actually going to the pockets of some unscrupulous people. A prudent monetary policy that will not witness a simultaneous spree in government spending and private sector spending now will have to be followed to keep inflation under control to create and retain a favourable public mood for unhindered productivity. Otherwise, we will be sailing through storms at a turbulent and uncertain time.
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