On the night of 20 September, the government increased the price of all types of fuel oil by Tk 20. This is the second price hike during the current government's tenure. This move comes at a time when there is high inflation in the country.
At the same time, the increase in fuel prices occurred when the government is committed to some major expenses and has issued related government office orders. Especially due to the salary increase for government officials and employees, there is a fear of inflation in the market. When the high cost of fuel is added, inflation could rise in both food and non-food sectors. Combined, this could push consumer-level inflation into double digits in the coming months.
Therefore, this is a major concern for consumers. There can be several explanations for why the government made such a decision at this time.
The government has taken several positive initiatives to address various ongoing issues in the energy sector. Priority is being given to renewable energy instead of imported fuel. Various benefits, including tax exemptions, have been provided in the renewable energy sector.
Additionally, institutions related to the energy sector, like BPC and PDB, are currently in a loss-making situation. If these entities cannot come out of their losses, it becomes difficult for them to conduct normal activities, such as obtaining loans from abroad or opening LCs. Investors also lack confidence in making new investments because of doubts about whether these entities can pay their dues properly.
In light of these considerations, an initiative was needed to help these entities recover. Therefore, reducing the massive government subsidies, cutting losses, and increasing fuel prices could be factors for consideration. The government claims that there is a loss of Tk 89 per liter of fuel. With the price increase, even though the loss is reduced by Tk 20, a significant loss still remains.
The big question is, how acceptable is the loss calculation provided by BPC? There are several errors in the price determination process and accounting in the energy sector. There is a need for revision and refinement in this price determination process.
Similarly, government institutions should not be run for excessive profit, nor should they fall into excessive losses. Therefore, these entities should operate within a structure of no profit, no loss, or moderate profit. However, after becoming corporate entities, many have not adhered to this philosophy. As a result, when there was an opportunity to lower prices for consumers, they didn’t; instead, they continued to profit. Now, when losses occur, the burden of those losses is again being passed onto consumers. They are not taking into account their inefficiencies or weaknesses in decision-making processes.
Therefore, a transparent audit of BPC’s profit and loss accounts is necessary. If this audit process is completed by an international body, we would understand BPC’s financial position. It would also create a firm basis for future income-expenditure structures and price determination.
Simultaneously, the current fuel price determination process deviates significantly from what was previously issued by BERC. It was supposed to be recalibrated every two months in line with the market. However, after the Middle East war, they suddenly suspended this process. As a result, when the government suddenly increases fuel prices through administrative orders, the burden falls on the consumer at once. Thus, it would be better to revert to the previous price determination process, and there should be a system for public hearings to fix the cost structure and management.
Now, the question is, could the government have taken any initiative alongside increasing fuel prices to offer some relief to consumers? For example, relief could have come from a reduction in the high taxes and duties at the import stage of fuel. About Tk 34 to 38 per liter is collected as duty at the import stage. It seems the government is not interested in such adjustments due to fears of reduced revenue collection. Subsidies are decreasing on one hand while taxes remain the same, resulting in a dual burden of fuel price increases for consumers.
The question is, is this increase in fuel prices part of discussions with the IMF, or is it an attempt to balance increased government expenditure? The IMF has advised reducing fuel subsidies and not taking ambitious decisions on government spending suddenly.
However, it seems that implementing the first phase of the new salary scale requires about Tk 378.75 billion, where the budget allocation is only Tk 46 billion. The remaining funds could be sourced from bank loans, bonds, or savings from increased fuel prices. Imposing additional inflationary pressures on the general public due to an increase in government employees' salaries would be highly inequitable.
The government claims they need funds for social security programmes and are considering fuel price alignment as a means of ensuring those funds. It seems there is a deliberate lack of information here because the government has allocated adequate budget provisions, including Tk 145 billion for the family card and Tk 16.2 billion for the farmer's card.
Government employees' pensions and gratuities are included in the social security programmes, which total about Tk 140 billion. Consequently, there is a concern that the government could use Tk 100 billion saved from the fuel price increase in this sector.
We advocate for rationalising fuel subsidies, even moving towards market-based pricing. However, it should be part of the broader expenditure contraction or management strategy of the government. It should not be used merely as a means to meet the increased government expenditures.
In addition to increasing salaries in the public sector, initiatives are needed to control expenses and cut costs in other areas. In the context of about Tk 1050 billion of additional government expenditure, reviewing surplus and vacant positions, merging unnecessary departments, freezing non-essential hiring, and cost-cutting initiatives through digitalisation could be undertaken. Thus, forming a productivity commission quickly is necessary.
Unfortunately, no specific cost-cutting initiatives have been observed yet. Therefore, the fuel price hike initiative should remain confined to energy management and not be used as a means to cover extra expenditure or mismanagement in other sectors.
#Khondaker Golam Moazzem is research director, Center for Policy Dialogue (CPD)
*Opinions expressed here are the author's own.
#This article, originally published in Prothom Alo print and online editions, has been rewritten in English by Rabiul Islam.