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Dhaka Tribune

CPD urges fuel price reduction by Tk10 per litre

Power sector subsidies also should be rationalized by reducing the burden of capacity payments provided to independent power producers and quick rental power plants, they said

Update : 27 May 2023, 11:14 PM

The Centre for Policy Dialogue (CPD) asked why there is no change in fuel price in Bangladesh even though prices have come down in the international market. The think tank said fuel prices can be reduced by Tk10 per litre even if current prices are considered. 

The think tank also suggested reducing power sector subsidies by reducing the burden of capacity payments provided to independent power producers (IPPs) and quick rental power plants.

The CPD on Saturday held a discussion titled “State of the Bangladesh Economy in FY2022-23” at its office in the capital.

Fahmida Khatun, executive director of CPD, delivered the keynote presentation. 

In her presentation, she said: “BPC is likely to make profits of about Tk5 per litre from selling a litre of diesel and about Tk13 per litre from selling a litre of octane with the current level of prices. So there is scope to reduce petroleum prices between Tk5-10 per litre.”

She also stated that currently from retail prices of diesel (Tk109/litre) and octane (Tk130/litre), the government collects about 17-18% as CD, VAT, AIT and AT. 

Withdrawal of AT (5%) may not have an impact on retail prices as it is adjusted with VAT.

The presentation also said that the BPC's total profit in the last seven years (FY16-FY22) was about Tk43,804 crore. 

After paying Tk7,727 crore as IT, net profit was Tk36,074 crore.

The CPD's suggestions were that pricing mechanism, tax policy, and profits should be analyzed publicly, objectively and transparently while determining the formula-based price adjustment mechanism. 

“With reduced prices of petroleum products, power sector subsidies demand will also decline,” Khatun also remarked.

Regarding the power sector subsidy, the CPD executive director said that it cannot be phased out overnight. 

It should be rationalized not only by the upward revisions of electricity prices but also by reducing the burden of capacity payments provided to IPPs and quick rentals. Energy mix for power production and the associated deals in the power and energy sector will have to be scrutinized further, she added.

Profit amid price hike

According to Prof Mustafizur Rahman, a distinguished fellow at CPD, the Bangladesh Petroleum Corporation (BPC) has recorded substantial profits over the past seven fiscal years, amounting to approximately Tk33,000 crore. 

It is important to note that the corporation experienced losses only in the previous year. Prof Rahman suggests that considering this single year and heeding the advice of the International Monetary Fund (IMF), it may not be prudent to eliminate the subsidy at this point. 

He further highlights the discrepancy in the government's approach, wherein it takes BPC's profits but imposes the burden of losses on the general public.

This situation raises concerns about the distribution of benefits and responsibilities. Prof Rahman emphasizes that the government seems to retain the incentive of profit, while the people bear the pressure of subsidy. This imbalance can have adverse effects on the population, particularly those who are already burdened by economic challenges.

Khondaker Golam Moazzem, research director of CPD, said: “Yes, there is justification for reducing subsidies. But that price adjustment should not only increase the price on the consumer's side, because there is no justification to impose the burden on the consumer while adjusting the increasing liability of the government as a result of carrying the capacity charge in the private power sector year after year.” 

“The payment of capacity charges in the power sector must be stopped,” he recommended.

State of banking sector

Regarding the banking sector, the CPD underscored the need for proper enforcement of laws and regulations against bank loan defaulters.

In her presentation, Fahmida Khatun also said that continuing borrowing from the Bangladesh Bank will surely create a higher flow of money supply, and hence, create inflationary pressure.”

Citing media reports, the amount of borrowing from the central bank rose to Tk74,393 crore as of April, the CPD said.

The borrowing from the banking regulator may have created gross new money to the tune of Tk383,124 crore, but in comparison with global practices reveal that Bangladesh has surpassed all the thresholds by a considerable margin, the CPD executive director said.

To discourage illicit financial flows and the circulation of illegally earned money, the CPD recommended implementing strict administrative measures and punishments in accordance with existing laws.

Regarding the upcoming FY24 budget, CPD said, the mistakes made while preparing the FY23 budget, particularly setting unrealistic targets for major macroeconomic indicators, should not be repeated in the upcoming budget.

The CPD said the persistent inflation crisis remains a major pressure point for managing the Bangladesh economy in the current context. 

Thus, bringing macroeconomics back to a stable state will be the biggest challenge for the next budget.

CPD recommendations

❑ In view of the emergent scenario and keeping in perspective the upcoming national budget, there is no doubt that the primary task before the policymakers is to restore macroeconomic stability.

❑ Targets to be set for the macroeconomic (and fiscal) framework for FY24 will need to take cognizance of the current realities.

❑ Mistakes while preparing the FY23 budget -- setting the targets for major macroeconomic correlates in an unrealistic manner -- must not be repeated.

❑ While the fiscal and budgetary measures are expected to be the centre of discussions in the coming days, it is critical that the government and the central bank ensure the complementarity between fiscal and monetary policies.

❑ The policy measures must prioritize the interests of the small and medium entrepreneurs and common citizens while withstanding the pressure of the vested interest groups.

❑ Keeping the IMF conditions in perspective and national interests in mind, reform measures should be initiated and expedited.

❑ However, the pacing, sequencing and phasing of these reform measures should be well-planned and transparent.

❑ Proper enforcement of laws and regulations against bank loan defaulters must be ensured.

❑ Instead of incentivizing illicit financial flows and illegally earned money through direct and indirect measures, strict administrative steps and punishment should be imposed as per existing laws.

❑ The Bangladesh economy is at a crossroads and passing through the most difficult time in recent history. This must be recognized and addressed by appropriate policy tools. 

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