Make Good Use Of BPC Subsidy

Falling oil price salvages BPC subsidy,
Retail store sustains consumer activity.
Oil price ushers good news for irrigation,
No evidence of its role in rice price reduction.
Reviving consumer activity and food security
Calls for distribution of spared BPC subsidy.

All-time-low crude oil price extends the spell of profitability for Bangladesh Petroleum Corporation, country’s biggest corporation. Earlier government had provided the much needed fund to subsidize its operation. Higher oil prices made inroads into BPC’s profitability, as evident from the graph. Prior to 2015, BPC regularly incurred loss. Since 2015, it has been treading along the profit-making path. Thanks to oil price less than $70/barrel.

Meanwhile, govt handed out huge subsidy to BPC between 2009 and 2015. The highest was Tk 13557.83 crore in 2013. Back then crude was selling at US$ 108.41/barrel. Since 2015, amount of subsidy has declined to zero. On average govt provided Tk4512.204 crore of subsidy between 2009 and 2015.

Lower oil price relieved the govt from providing huge subsidy to BPC. In the time of pandemic, this is indeed a good news. Salvaged subsidy money could easily be mobilized to help sectors which are in dire conditions. Instead of making frantic requests to other nations for rescuing ailing economy, govt can make good use of this money.

Shops and supermarkets will incur heavy loss, some unsolicited news report says that it will stand at Tk1200 billion, as pandemic lockdowns stall eid shopping activities across Bangladesh. Ramadan and Eid sales jointly account for quarter/half of supermarkets’ annual sales. At the onset of this pandemic, association of shop and grocery owners made frantic plea to govt to give them monetary support. Most of these shops generate employment and act as catalyst to consumerism. Indefinite lockdown makes a dent in their operational expenditure and consumer activity. Many manufacturing and consumer good companies supply them good in the form of credit. Their money also gets locked into coronavirus confinement measures. BPC subsidy money, at least part of it, could be channeled out to help shop owners to meet their operational expenses. The platform of the shop owners could facilitate the distribution of the compensation among the members. Money at the hand of shop owners, in turn, will help clearing the bill of consumer good supplier. So the ecosystem prevailed in the grocery business prior to pandemic will get back into function.

Another sector that can be benefited from the falling oil price and spared BPC subsidy is the agriculture. The winter crop Boro hinges heavily on irrigation. Irrigation consumes lots of fuel. So the irrigation cost will be lower in the wake of lower oil price. By the same token, production cost of urea will be much lower as its key ingredient methane or natural gas is a substitute of crude oil in energy market. LNG prices will be lower in any fall in crude oil price.

However, it is not quite evident whether crude oil price plays any role in influencing the rice price.

I did a little analysis to see whether crude price and Boro production played any role in shaping the price of rice between 2009 and 2018. Data were picked from Bangladesh Economic Review 2018. Durbin-Watson statistic for 10 observations and 2 explanatory variables reported no autocorrelation (d=1.952). Later logarithmic transformation were carried out and regression ran on transformed variables. Result looked like this:

lnRice_t = -44.377-0.17115lnCrude_t+4.950lnBoro_t

(t=-3.62,p=0.008,se=12.20) (t=-1.63,p=0.147,se=0.105) (t=3.94,p=0.005,se=1.254)
(F=8.208, p=0.0146)
where lnRice_t= log natural of coarse rice price at t,
lnCrude_t= log natural of crude oil price at t,
lnBoro_t = log natural of Boro price at t.

Note that crude oil price coefficient turned out to be not significant and negative sign before it calls into question our typical belief.

Boro coefficient, appeared significant in the result, says that holding everything constant a 1% increase in Boro production led to 4.95% increase in coarse price rise in the given period. Well, rice price certainly does not depend on these two variables , there are other factors too. Production of other varieties, food inflation, calamities etc also play a role in shaping price of rice. Inclusion of these variables may yield a meaningful result.

Nevertheless, there will be no denying that part of the saved BPC should also go to provide cash support to the farmers. For instance, the money can be allotted to purchase paddy from farmers at a higher price as part of government’s ongoing rice purchase program. Or it can be used to provide soft agricultural credit. Like the platform of shop owners, agricultural cooperatives can be formed to steer management of the incentive program.

Falling oil price leaves the government some fund, used to give subsidy and finance development expenditure, to cogitate on where to spend them in the time of pandemic. Agriculture and retail stores vie for getting a hold of it. Both are crucial to revive the ecosystem of consumer activity and ensure food security. Instead of swallowing costly bait of foreign credit , govt should make good use of this salvaged subsidy.