Why subsidy? Subsidies are given to lower the cost of necessary goods, which affect a major part of a country's population. For example, subsidies are given to essential food items and fuels. It guarantees the supply of goods, which the government thinks consumers should consume. It helps domestic firms become more competitive in the international market. Subsidy reduces the cost of production. Thus the supply curve for the product shifts vertically downwards by the amount of subsidy provided.
In all countries, governments give subsidies to sectors that are related to welfare of the common man. In fact, all loans from international agencies including the World Bank and the International Monetary Fund (IMF), on the surface, are too aimed at striking welfare and alleviating poverty. But as the government has raised again fuel prices as a sequence to negotiations with the IMF, these very targets will be defeated.
The latest fuel price rise was effected from Thursday (January 03) midnight, to the extent of Tk 5.0 to Tk 7.0 per litre. The prices of diesel and kerosene have been raised by Tk 7.0 per litre while that of octane and petrol were by Tk 5.0 per litre. The new price of diesel and kerosene will be Tk 68 per litre while octane and petrol Tk 99 and Tk 96 per litre respectively. With the latest hike, the present government has raised the fuel prices for the fifth time.
Finance ministry sources said the fuel prices were raised to meet one of the IMF's conditionalities for getting $141 million under the Extended Credit Facility (ECF).
According to the finance ministry, the government is giving Tk 180 billion (18,000 crore) in energy sector and Tk 60 billion (6,000 crore) in power sector as subsidy. The IMF felt that the government increase fuel and power prices, as subsidy is eating up the 'social and development expenditure'.
Bangladesh's demand for diesel and fuel oil is growing sharply as a shortfall of natural gas forced it to turn to costly oil-fired power plants to resolve its crippling electricity shortages.
Over 90 per cent of petroleum products consumed in Bangladesh are diesel and kerosene. The rural people use 30 per cent of the diesel and the major bulk of kerosene. Both these products are used largely in agriculture, for water pumps and transport, and thus act as a major cost factor for the country's food production and supplies.
Economists say, the price hike in diesel will raise the irrigation cost. But it does not always happen so that a cost hike in irrigation brings about an increase in commodity prices. If the commodity price remains unchanged, then this price hike in diesel price will seriously affect the farmers, reducing their income. This would mean a negative impact on the rural economy.
The fuel price hike will affect the inflation. As diesel, kerosene and petrol are mostly used by the poorer segments of the society, hike in its prices will hurt the poor the most.
Mass transport costs will go up with trucks and passenger buses, mostly using diesel. As a result, cost of transportation will rise sharply, raising prices of essentials and fares of passengers they carry.
Economists suggest that the government should take measures to offset the negative impacts of this price hike. But they are baffled as to how to do it in a country of free-for-all.
The government, however, needs to be thanked for not raising furnace oil prices as any hike would have increased production costs and deal a severe blow to the competitiveness of local products in the global
Generally, the paper mills, sugar mills, ceramic, clothes and dyeing factories having no gas connection use furnace oil. Readymade garment and other sectors too use it.
It is really intriguing that the IMF has failed to get the government agree to phase out the expensive quick rental power plants. The IMF says, rental power plants are delivering less but eating up about 80 per cent subsidy.
Again, there has not been any attempt on the part of the authorities to stop the state-owned Bangladesh Petroleum Corporation from incurring an annual loss of more than Tk 1.0 billion (100 crore) in the name of 'system loss' in handling imported fuel oils.
As the country's lone importer and distributor of petroleum products, BPC incurs the loss due to rampant pilferage and corruption at terminals and depots. A nexus of BPC employees and dishonest traders is allegedly involved in a practice of manipulation to pilfer huge quantities of costly imported fuels at the time of handling and distribution. But the BPC authorities did little to stop such loss while the syndicate kept on minting money through stealing the fuel oils from the terminals, depots and at the time of transporting them through river routes.
The cost of power and energy is an important element in the total costs of manufacturing industries in Bangladesh and a higher cost structure for industrial sector adversely affects the price competitiveness. Local manufacturing industries like drugs and pharmaceuticals, steel, cement, paper, chemicals etc., will face problems as their input costs will be pushed up with the increase of energy costs.