The recent increase in fuel oil prices will not remain confined to filling stations. Its impact will gradually spread across almost all sectors of the economy. Inflation has been high for several years. The purchasing power of common people is under pressure, while private investment remains weak. It is in precisely such a situation that fuel oil prices have been increased. Therefore, the concern is not merely the higher price of fuel; rather, the bigger question is how much pressure its indirect effects will put on the overall price level through the transport, food, agriculture, industry and services sectors. More importantly, there appears to be no clear government strategy to deal with this new inflationary pressure.
Diesel is the most important fuel in Bangladesh’s economy. It is used at various stages of transport, agriculture, industry and power generation. Therefore, when diesel prices rise, the cost of transporting goods increases first. The cost of operating buses and trucks rises, so does the cost of irrigation, as well as the cost of running generators and various types of machinery. Businesses generally do not bear all of these additional costs themselves. Over time, a large portion of them is passed on to consumers through higher product prices.
The risk is even greater in the case of food inflation. Transport, irrigation and supply costs are involved at almost every stage, from agricultural production to marketing. As a result, when fuel prices rise, pressure is created on several sources of costs at the same time. If traders, transport owners and workers believe that prices may rise further in the future, the problem could become more complicated. They then start adjusting product prices and wages in advance. This increases the risk of inflation becoming prolonged, making it more difficult to control later.
Its social impact is equally important. Relatively wealthy families may directly use more fuel, but low-income families often face greater losses indirectly. This is because a large share of their income is spent on food, transport and essential goods. A slight increase in bus fares, a rise in the prices of rice or vegetables, or higher cooking costs can create significant pressure on their monthly budgets. Low-income working people in cities, farming families dependent on diesel-powered irrigation systems and workers in the informal sector are at the greatest risk. It is seen that the incomes of the vast majority of these people do not increase at the same rate as inflation. As a result, the fuel price hike ultimately reduces the real income of these groups of people.
It is also true that if oil prices rise significantly in the international market, the government cannot continue providing subsidies indefinitely or completely shield consumers from this pressure. Large subsidies put pressure on the government’s financial situation. The liabilities of Bangladesh Petroleum Corporation increase, while the scope for spending on important sectors such as health, education, social protection and infrastructure may decrease. Therefore, price adjustment may be necessary.
But the issue should not be reduced to only two alternatives—either providing subsidies or raising prices. The inefficiencies within the energy sector also need to be discussed with equal importance. The sector faces institutional weaknesses, inefficiencies in procurement and distribution systems, limited transparency, and pressure from various types of taxes and duties on fuel. Yet when prices are increased, these issues receive comparatively less discussion. If retail prices are regularly increased without efforts to reduce the sector’s own costs and inefficiencies, the burden of those inefficiencies is effectively passed on to consumers.
The issue of taxes on fuel oil also needs to be reconsidered. If international prices rise while the country continues to maintain a high tax burden, consumers face a double pressure. The government certainly needs revenue. The question is how rational the current tax structure on fuel is when the country has been experiencing high inflation for several consecutive years. This is particularly important for products such as diesel, whose prices are linked to the costs of almost all types of goods and services. In this situation, tax policy cannot be considered solely from the perspective of revenue collection; its overall economic impact must also be taken into account.
The timing of this price increase is also not favourable for the economy. On the one hand, borrowing costs are high and business financing is difficult; on the other hand, domestic demand is also weak. In such a situation, higher fuel and transport costs will create new pressure on businesses’ profits. Large businesses may be able to cope to some extent, but small and medium-sized enterprises have less capacity to do so. Many businesses may postpone investment, reduce production or delay plans to create new jobs. Export-oriented businesses are also not free from its impact. If fuel oil prices rise, transport and production costs within the country will increase, which could put pressure on their competitiveness.
Therefore, the policy response should not be limited to raising prices. First, a transparent and credible method of fuel pricing is needed. The goal is to distinguish temporary price increases in the international market from permanent cost pressures within the country. Second, the structure of taxes and duties on fuel needs to be reviewed. Third, there needs to be an open review of where inefficiencies exist in the operations, procurement methods and distribution system of Bangladesh Petroleum Corporation.
At the same time, the nature of support also needs to change. Instead of keeping fuel cheap indiscriminately for everyone, targeted support for low-income families, agriculture and essential public transport could be relatively more effective. This would reduce pressure on government expenditure while also providing some protection to the most vulnerable groups.
Ultimately, fuel price adjustment is not merely a matter of calculation; it is also a question of distribution. It may be necessary to reduce some of the government’s financial pressure, but it is equally important to consider who bears the cost of reducing that pressure. Without institutional reforms, a review of the tax structure and measures to protect vulnerable groups, simply pursuing price increases may make the government’s calculations somewhat easier. But the cost may have to be paid in many ways, such as higher inflation, reduced purchasing power, greater inequality and, above all, weaker economic growth.
*Selim Raihan is a professor at the Department of Economics at the University of Dhaka and Executive Director of the research organisation South Asian Network on Economic Modeling (SANEM).