Tuesday, May 09, 2006














FE Specials

FE Education

Focus on Real Estate

FE Information Technology



Special on Logistics

Saturday Feature

Asia/South Asia





57th Republic Day of India






Site Search



The ADB warning for oil price adjustment
Qazi Azad

          Some symptoms characterising the break-up of joint families are agonisingly apparent in the polity of Bangladesh. The government is always left alone even to resolve serious problems that affect the country and require national consensus for resolving them. The attitude is: it is nobody's business rather than those seated in power to handle any crisis, however grave it is.
The sitting government may be guilty on many counts. But it is not at least guilty for the present unusual international oil price hike. The abnormal rise in world market prices of oil, which has pushed up the import cost of fuel oil of different grades, has already threatened the economy with various adverse consequences.
But neither the civil society nor the think tanks nor the major political parties have yet come up with detailed advice on how to deal with this difficult problem. They have not articulated their opinion on whether the domestic oil prices should be adjusted with that in the world market and, if not, how to deal with the consequential economic backlashes. The government, on the other hand, has adopted the usual political approach -- not doing anything that may annoy the people when a general election is round the corner.
If some people are guilty for the oil price hike in the world market, they are US President George Bush and the British Prime Minister Tony Blair. The Israeli leadership, which provoked the USA to invade Iraq, has a share in the guilt.
Now they are confronting Iran, another major oil producer. The charge against the country is that it is clandestinely trying to cobble up nuclear bombs. Iran signed in 1970 the Nuclear Non-proliferation Treaty (NPT), which permits any signatory country to have its nuclear programme for generating power under the supervision of the International Atomic Energy Agency (IAEA). Iran has its nuclear programme under the supervision of the IAEA. It has not enriched uranium to the weapon-grade. Yet Tehran is being accused of seeking to make the nuclear bomb and threatened with unspecified punitive actions, military assault not excluded. It is as if neither the compliance to the NPT nor the IAEA supervision is credible. So why should not they demand that both the NPT and the IAEA be scrapped.
The global tension is obviously having new stimuli to keep on rising. If Iran is attacked, oil prices will definitely climb to newer heights--may be, to $100 a barrel or more. In the event of any punitive action against their country, angry Iranians may clandestinely join hands with the belligerent Iraqis in retaliation. That will loose hell in the current Middle East. But the poor countries will be affected much more than those who are responsible for the aggravating tension if the oil prices go further up as a result of heightened crisis.
Robert S. McNamara, who was US Defence Secretary prior to moving to the World Bank, quoted from a speech of Lester Pearson, delivered in 1970 in the Columbia University, in one of his own speeches, made as the bank president, compiled as a book - One Hundred Countries Two Billion People - The Dimension of Development. The portion of Pearson's speech, quoted by McNamara, says, "a planet cannot, any more than a country, survive half- slave, half-free, half-engulfed in misery, half-careening along towards the supposed joys of unlimited consumption". Robert McNamara said in the book, " In that direction lies disaster, yet it is our direction today unless we are prepared to change - to do so in time". Is it the same World Bank, which we call World Bank now?
Can the World Bank President Paul Wolfowitz, who was US Deputy Defence Secretary prior to taking up his new post and is said to be one of the architects of Iraq invasion, tell his former boss about Lester Pearson's remark and advise him to control his temper for sparing the world's poor from the risk of being run down?
When the oil prices started climbing steeply sending stark signals that poor economies have increasingly difficult days ahead, we, in this paper, suggested that our domestic prices of fuel oil should be gradually adjusted with that of the international prices to minimise the inherent risks of business not being conducted like business.
We also said that any single-step adjustment of domestic prices in conformity with the world prices would abruptly raise the cost of production of local industries steeply and make local products non-competitive both in the local and the world market. It may also give a new impetus to inflation. We said that a gradual adjustment in phases would enable the local industries to minimise the impact of oil price hike by raising productivity and managerial efficiency. We voice the same opinion now.
It is true that the continuing sale of oil at prices much below the procurement prices has already posed a grave threat to our economy. The Bangladesh Petroleum Corporation (BPC) is in a difficult position on having to pay a high oil import bill while continuing to sell different grades of oil at lower prices. As its traditional financiers, the state-owned nationalised commercial banks themselves are now dire straits with a huge amount of outstanding loans, stuck up with the corporation. The BPC has now taken loan from a foreign bank to finance oil import.
The Asian Development Bank (ADB), meanwhile, said, the retail fuel prices in Bangladesh must be adjusted to avoid serious macroeconomic consequences arising from continuing upward movement in international oil prices. Higher oil international oil prices contributed to rising fuel subsidies that have further burdened the nationalised commercial banks and crowded out much needed public investment, the bank said.
The ADB pointed out that world oil prices rose by 90 per cent between May 2004 and September 2005. But the government enhanced the domestic oil prices by only a small margin, ranging from 16 to 35 per cent for different grades of oil at that time. The bank has estimated that the oil subsidy given during the period alone was over $520 million, about 0.8 per cent of the gross domestic product (GDP).
Giving justifications for its suggestion for raising the domestic oil prices, the ADB in its Quarterly Economic Update, March 2006, said, local retail prices of diesel and super gasoline (octane) were only 65 per cent and 63 per cent respectively of prices of the same items in India.
Compared with the Republic of Korea, the prices in this country are only 39 per cent and 46 per cent. In February, the local diesel price was $.045 a litre while it was $0.52 in Pakistan, $0.62 in Nepal, $0.65 in Singapore, $0.69 in India, $1.67 in Hong Kong and $1.45 in South Korea. In case of Octane, the local price per litre in the same month was $0.67 while it was $0.94 in Pakistan, $0.91 in Nepal, $0.94 in Singapore, $1.06 in India, $1.67 in Hong Kong and $1.45 in South Korea.
The ADB also pointed out that the world market prices of oil have gone further up after February, which, it said, implies that there has been an increase in consumption subsidy and in the financial burden of the BPC. The bank's statistics give enough hints why one should believe that there are some elements of truth in the allegations of rampant cross-border smuggling of fuel oils. In fact, the law enforcers seized a huge volume of fuel oil the other day at Abhoynagar in Jessore, which was, they said, stocked illegally for smuggling.
Iran's President Mahmoud Ahmedi Nejad, who has publicly supported the oil price hike, recently suggested that oil should be supplied to the poor countries at reduced prices. Bangladesh should pursue the Organisation of Petroleum Exporting Countries (OPEC) through Iran for supplying oil at reduced prices.
Until there is an arrangement for supplying oil to the poor countries at reduced prices, we must consider the inevitable adverse effect of continuing high margin of subsidy on the essential item in the domestic market on our national economy. The actual budget deficit is likely to increase in the next fiscal year with the high oil prices having telling effects on the exchange rate of taka and both domestic consumption and import shrinking as a matter of consequence. There may be less earning as the value added tax and from custom duties -- two major heads of revenue earning. The government may have to depend more on bank borrowing to meet the increased spending on oil import and under the revenue head.
The increase in expatriate workers remittances will not alter the situation, as these do not contribute to government's revenue earning although they add to foreign exchange accumulation. Banks buy the remitted foreign currencies and pay against them in local currency to their recipients. With limited scope of augmenting revenue income, it will increase money circulation requiring the government to float bonds to check money circulation and inflation.
Obviously, the ADB's observation that increased subsidy on oil will crowd out public investment reflects the reality.
The government had to slow down the implementation of the current year's Annual Development Plan(ADP) because of fund crisis, created basically by the higher import prices of oil. For the same reason, next year's ADP should be crisp and small. Whichever political party or parties will form the next government in 2007 will have to deal with the same problems, now arising from the swelling oil import bill. So it's better for everyone to speak out on how to deal with these problems now.


  More Headline
The ADB warning for oil price adjustment
Bangladesh Bank can do more for financial stability
The digital sector can make poor nations prosper

Print this page | Mail this page | Save this page | Make this page my home page

About us  |  Contact us  |  Editor's panel  |  Career opportunity | Web Mail





Copy right @ financialexpress.com