The country, reeling from last year's devastating floods, is facing a daunting task of managing its external balance hit by soaring international prices of oil. Energy officials said the annual oil bill could jump by 50 per cent to more than US$ 1.2 billion this calendar year. The situation, according to analysts, has put the government in a dilemma -- between taking the unpopular step to reduce the subsidy on oil to minimise losses, and bearing the burden itself to lessen the impact on the consumers. The latest Asian Development Bank (ADB) outlook said an abrupt increase in the international oil prices will create pressure on balance of payments of Bangladesh. It, however, said the impact of flood damage together with steeper oil bill is expected to largely offset by flood rehabilitation expenditures mainly financed by donors and increased workers' remittances. Bangladesh's current foreign exchange reserves are now little over $ 3.0 billion, which is equivalent to about three months of imports. The country also expects a boost in the workers' remittances, which may hit a record $3.5 billion level this year. Oil prices surged to US$58.20 a barrel on Monday, a record level after several consecutive months of rising prices, and after some three weeks of prices having around US$55 a barrel. According to OPEC's current president, Kuwaiti Oil Minister Sheikh Ahmad al-Fahd al-Sabah, the oil cartel will consider measures to reduce oil prices this week. Such measures would include authorising a production increase of 500,000 barrels a day -- a measure that is unlikely to have a major impact on oil prices. The OPEC's decision in mid-March to increase oil production by the same amount had failed to lead to a significant decrease in oil prices. The oil cartel's production in February had been around 27.7 million barrels per day prior to that increase. Al-Sabah also raised the possibility that the OPEC's daily production could be further increased to 30 million barrels at its policy review meeting scheduled for June 15. The 10-member oil cartel plays a role in curbing prices, but it no longer plays the dominating role it did in the 1970s. Currently, OPEC has a much lower share in the international oil market, at around 40 per cent. Energy ministry sources said Bangladesh is not entirely exposed to the threat of the rising international prices as the country stopped buying of crude and refined petroleum products from spot market this year. International oil prices have risen by 47 per cent over the past few months. The country has entered into long term bilateral contracts with Saudi Arabia and Kuwait for supply of crude and refined oil. The country imports roughly 1.3 million tonnes of crude and 2.5 million tonnes of refined products annually. The sources said despite having the bilateral deals, the country still faces the heat of the upward swing of oil prices with changing fob (freight on board) prices. Only premium, which includes freight, commission and insurance coverage accounting for only 15-20 per cent of the total cost, is negotiated and reviewed half yearly. Bangladesh has already made a deal with Kuwait Petroleum Corporation for a period of 2005-07 for supplying the entire quantity of Bangladesh's refined oil requirement. Bangladesh is making part payment of its hefty oil bill with $600 million fund being offered by the Islamic Development Bank (IDB) under its export financing scheme, import trade financing and 'mudarabah' syndicated financing. But the country will have to repay the IDB loan by one year An analyst, however, said although the country does not face an immediate danger from the international oil price hike in the short-term. But a question bothering them is as to how the country that raised the fuel prices a few months ago -- which has lifted irrigation and transportation costs higher and affected industrial production -- will tackle the situation. According to estimates of the central bank, the balance of payments impact of higher oil prices is to the tune of $300 million- $400 million, on an assumed oil price of $40-45 per barrel. A mitigating factor in the energy outlook is that locally produced natural gas is being substituted for petroleum products, particularly in the transport sector. Despite an increase in workers' remittances, a widening trade deficit is expected to push the current account to deficit of $600 million (1.0% per cent of GDP) during 2004-05. The energy ministry officials said the situation will be a high-rope-walk for the government. It may also think of revising the local oil prices. And then again it will not be that easy to deal with such a sensitive issue, considering the hardship of the people and also the approaching national elections.
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