All rounder News - Oil import cost doubles

Dhaka, Nov 23 — Decline in food and capital imports has helped little to ease the pressure on foreign reserves because of rising fuel demand, which has suddenly doubled.

According to Bangladesh Petroleum Corporation (BPC), fuel demand for rental power plants has seen its imports almost double over the last year.

BPC chairman Abu Bakar Siddique told bdnews24.com that the demand for Bangladesh had been estimated at about 7 million tonnes of fuel in the current fiscal. "That would cost Tk 480-500 billion."

The petroleum corporation imported fuel worth about Tk 285 billion in the last 2010-2011 fiscal that ended in June. The year before that Bangladesh's fuel imports cost about Tk 165.66 billion.

The BPC chief said that every litre of fuel costs about Tk 73 with transportation, import tariff and VAT factored in.

But the current price causes a loss of about Tk 15 per litre. So even after raising the fuel prices, the government will have to spend about Tk 110 billion subsidising fuel.

As a result, the foreign exchange reserve is under pressure and the government has had to borrow 10 times more than it did in the first four months of the last fiscal between July and November. In fact the first four months have seen the government reach its projected bank borrowing figures for the entire year.

Higher fuel prices in the local market and higher government borrowing from the banks are fuelling inflation and at the same time drying up funds for private investment.

Economists hold that this high fuel expenditure is wreaking havoc on an otherwise stable economy which seems to be performing well considering, revenue, export and remittance. They say, the government has not been able to stabilise the economy despite increasing fuel prices in quick succession.

Dhaka University's Economics professor M A Taslim told bdnews24.com the government's economic management is rather weak. The finance minister had indicated that the government would have to spend about Tk 200 billion in subsidies in the entire year. "But at the end of just four-and-a-half months, it appears that the government would have to spend over Tk 480 billion for that purpose."

"Perhaps the finance minister had no idea that the subsidies would rise so fast and that the government would have to borrow so much. But the economy as a whole seems to be riddled with this lack of coordination."

Taslim fears that the situation could worsen if the economy keeps moving in the same manner.

He explained that the government had struck deals with the power plant companies that they would get fuel at a certain fixed price. "So now the government is compelled to subsidise fuel because it is legally bound to do so."

Mustafizur Rahman, the executive director of the Dhaka-based research organisation Centre for Policy Dialogue, said the government cannot balance the economy despite raising the fuel prices several times. The rise in fuel prices have seen other prices rising, too. "On the other hand, higher bank borrowing is depriving the private investors, which in turn is affecting the entire economy."

A former finance advisor, AB Mirza Azizul Islam, also agreed that the main reason behind the current economic situation was the government's 'wrong' decision on rental power plants.

"True that power generation has increased but at the same time the government has to bend over backwards just to pay for all the fuel. In my opinion, it was a wrong decision to agree to supply fuel to the power plants for lower than market prices. Now the government is paying for that mistake."

The finance minister, Abul Maal Abdul Muhith, also acknowledged the higher fuel demand. He also admitted to the high bank borrowing, but he said these don't worry him much.

He told bdnews24.com, "I am not at all worried over bank borrowings. It has increased in the beginning of the year, but by the end, it will be alright and not exceed the projected figure of Tk 190 billion."

According to the minister, the economy was faced with certain challenges at the moment, including those of subsidies and balance of payments.

Claiming that the government was in full control of economy, the minister said, "The economy is doing fine."

Prime minister Sheikh Hasina also expressed similar opinion at a recent public function.

According to government, statistics of the first four months of the current fiscal year show that food import has decreased by 70 percent compared to the same period the previous year.

Letters of credit for capital machinery also went down by 40.25 percent. Last year it had more than doubled over the year before that.

The first four months of the fiscal has seen LCs worth $1.67 billion (almost Tk 130 billion) – a rise of more than 120 percent over the same period of the previous year.

According to the state-owned petroleum corporation, in charge of fuel trade, the 2009-10 fiscal saw nearly 3.77-million tonne fuel imports worth about Tk 165.67 billion. The next year saw an increase in fuel demand, with imports rising to Tk 282.4 billion.

Commenting on the government raising fuel prices three times in about a span of six months, the finance minister said, "No other recourse left for the government."

Muhith said there was enough rice stocked up and the government would not have to import rice the next year. But wheat may have to be imported. On the other hand, there are indications that international oil prices may decrease. "That will certainly be a relief."