Views expressed in this section are of the authors, which may not necessarily be shared by members of ERG. Economic Research Group is committed to promote professional exchanges in the field of economics and development issues. This is the third in the series of writings on contemporary issues, and will hopefully, encourage others to contribute. For query and contribution to this section, please write to info@ergonline.org. The following paper of Professor Enamul Haque and Dr. Sajjad Zohir reached ERG in 23rd April 2007.

Summary

Oil Price Increase:
Assessing impacts and policy recommendations

 AK Enamul Haque & Sajjad Zohir
Economic Research Group

<The paper was prepared with a view to share some findings from a recently completed research under ERG and put together several issues pertaining to pricing of petroleum products in Bangladesh. The section on ‘economy-wide impacts’ draws upon earlier study by Enamul Haque titled ‘Macroeconomic impact of world oil price increase on Bangladesh economy’. Other sections have been prepared by Sajjad Zohir, with assistance from Raisa Afsana, Research Associate, ERG..>

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The supply of petroleum products in Bangladesh is virtually under government monopoly with controls exercised through procurement from external sources, public ownership of refineries, and administered retail prices. No matter which single agency is assigned with a particular task, it is ultimately the government, which either makes money or incurs losses by such monopoly engagement. With increases in international prices of petroleum products, the old retail price regime could no more be supported since there had been net loss incurred by the government since fiscal year 2004-05. For quite some time, the sharp increase in procurement price was prevented from being passed on to the domestic market, allegedly due to political compulsions. The current caretaker government finally raised retail prices of diesel & kerosene to Tk. 40 (from Tk. 33) per liter; and increased the prices of petrol (octane) to Tk. 67 (Tk. 69) from Tk. 55 (Tk. 57) per liter. On an average, the price of petroleum products increased by nearly 20%. The policy of increasing prices was welcomed by the World Bank (and IMF); and a Daily Star report (5th April 2007)[1] quoted a World Bank report suggesting that:

• The inflationary pressure (arising out of initial oil price increase) may be effectively countered with contractionary monetary policies; and
• Low prices of kerosene and diesel mostly benefit the better-off population, and price increase would not affect the poor significantly because spending on kerosene and public transport account for a small share of a poor household’s budget.

There has also been discussion on losses incurred by individual agencies. Since the decisions on prices are made at the ministry levels, any gain or loss (other than those arising due to inefficient operations) out of administered prices may only be considered elements of government’s tax-subsidy policy to a sector. With this perspective, the paper focuses on four inter-related issues. These are:

• Everyone agrees that increase in oil prices will lead to increase in inflation – but no estimate is available on the size of the anticipated change. There are agencies keen on undermining the importance of such increase. This paper draws upon a macro modeling exercise and provides projected inflation figures.
• Assertions such as those by the World Bank tend to undermine possible adverse implications of oil price increase on the poor. This paper presents figures from same HIES data to note that the petroleum products are no less important in poor’s budget. More importantly, the macro modeling exercise allows one to quantify the size of economy-wide impacts on poverty and other economic aggregates – the results are summarized in this paper.
• Will contractionary credit/monetary policy help reduce the inflationary pressure with neutral distributional impacts? The paper provides limited evidence on the subject.
• Once it is recognized that pricing of petroleum products is an issue of fiscal measure, it needs to account for economy-wide impacts of price changes – on growth, inflation and poverty; and simultaneously give due cognizance to prices set by the neighbors in order to avoid cross-border subsidization. Moreover, if there are adverse implications for poverty situation, one needs to look for other policy instruments redress the adversities.

The above-mentioned issues are addressed in this paper to arrive at a set of policy recommendations.