Muhith revives plan for fuel price cuts

The finance ministry has revived a plan to cut prices of petroleum products, especially heavily used diesel and kerosene, to pass on the benefits of the lower global oil prices to domestic consumers.

It sent the proposal for price cuts to the energy ministry last week for opinion. After getting the feedback from the energy ministry, Finance Minister AMA Muhith will discuss the matter with Prime Minister Sheikh Hasina.

“Whether the fuel price will be lowered or not will be decided by the prime minister,” said a finance ministry official, adding that the extent of price cuts will also be determined by her.

The finance ministry has proposed cutting prices of four products -- diesel, kerosene, petroleum and octane -- by 5 percent to 8 percent.

Bangladesh cut the prices of petroleum products for the first time in about eight years in April 2016 -- octane and petrol by Tk 10 a litre and diesel and kerosene by Tk 3 -- to pass on the benefits of low global prices to local consumers.

The prices of diesel and kerosene are now Tk 65, octane Tk 89 and petrol Tk 86 a litre.

Further rounds of price cuts have been promised by the energy ministry since then, but the plan did not get through. And eight months later, in December last year, Muhith revisited the topic, saying that the government would announce the price cuts in January by taking into account the base price of $60 per barrel.

For price cuts in April, Bangladesh took into account the base price of $80 per barrel on the global market.

The energy ministry is now reluctant to proceed with the cuts as the prices have already started to increase in international markets.

On February 2, State Minister for Power and Energy Nasrul Hamid told his colleagues in parliament that there was no possibility of reducing the fuel prices further although oil prices were dropping on the international market.

International oil prices are projected to average $55 a barrel in 2017, according to the World Bank's latest forecast. 

This would constitute an increase of 29 percent from the 2016 average oil price, largely reflecting partial compliance, in line with historical precedent, to the recent agreement between OPEC and non-OPEC producers.  The market is expected to tighten in 2017, particularly in the second half of the year, which would help reduce the large stock overhang, said Zahid Hussain, lead economist of the WB's Dhaka office.

Prices are projected to increase to $60 a barrel in 2018 assuming a balanced market and no additional OPEC supply restraint. 

“These increases notwithstanding, prices will still remain well below historic high levels when the domestic oil price in Bangladesh was set,” Hussain added. 

State-owned Bangladesh Petroleum Corporation, the country's lone importer and seller of petroleum products, has been making profits of Tk 7 to Tk 16 per litre on diesel, kerosene, petroleum and octane. 

As per the profit/loss figure on December 29 last year, the profit was Tk 6.46 on diesel, Tk 15.56 on kerosene, Tk 9.38 on petrol and Tk 10.54 on octane per litre.

Some of the politically sensitive reforms, like oil sector reform, are best done from a position of strength, Hussain said.

“Bangladesh economy is growing and the macroeconomy is stable. In this overall positive environment, low international oil prices present a historic opportunity to reduce economically costly and environmentally damaging pricing and regulatory policies.”

The domestic prices of oil products in Bangladesh today are above the international price by a significant margin and reforms may decrease oil prices immediately. 

However, the reform does not necessarily mean to reduce prices but to link domestic prices to international price movements and to break the state monopoly.

The window for reform may be limited, given uncertainties about the long-term outlook for international oil prices, Hussain added.

If the fuel prices are cut, the transport, power and agriculture sectors will be benefitted and investment will also go up, according to an analysis of the finance ministry.

A 10-percent cut in petroleum price will lead to a rise in both the gross domestic product and private investment by about 0.3 percent, according to the Centre for Policy Dialogue, a think-tank.

Inflation will come down by 0.2 percentage points, it said earlier in January. Export, on the other hand, may increase 0.4 percent.

Households are likely to be benefitted, with a 0.6 percent rise in consumption on average, while firms' income may increase by the same margin.

The consumption of households in rural areas is expected to increase 0.7 percent.