A sudden fuel price hike,
Hurting the rich and poor alike.
Protein bank and rise in deposit rate
In this crisis,few means great. |
In an unprecedented move, government more than doubled the energy prices1. This sudden hike in energy prices caused ordeals to the vernacular lives of ordinary people. Ultimately, the rise in energy prices will drive the prices of everything, causing further woes to the inflation battered middle and lower income groups.
This rise has coincided with the ongoing negotiations with the IMF for a credit of $4.5 billion budget assistance, which government desperately needs to check the record current account deficit. Despite the claim that no string attached with the IMF credit package, many see the rise as part of the negotiations. Concerned ministry claimed the step was a must to put an end to the oil and diesel smuggling as a huge price mismatches prevailed prior to the price hike. In addition, BPC was incurring a record deficit of $2 billion. Experts and NGOs however argued that government could have avoided the price hike by wavering some of the taxes on fuel. In addition, they also demanded information about the saved subsidy to BPC, some estimates put the figure somewhere around Tk 460 billion ,in the last couple of years when oil price was below $70 / barrel. This salvaged subsidy could have used to prevent the hike, they further argued.
Govt is also mulling raising the price of tap water by 25%. Earlier govt raised price of urea to Tk 16 per kilo. This thickens the belief that govt is determined to reduce subsidy expenditure, I think it is good,in a bid to unhook the IMF credit. What I construed from the energy price hike is that government may use the IMF credit to check the budget deficit while it may continue development expenditure as planned ahead of election years to procure loyalty. This may be the reason behind its pass of fuel price hike to the consumers.
There is a perception that the rise in fuel price will further aggravate the inflation problem. Growing price levels and Central Bank's gradualist policy to contain inflation will ultimately reduce the aggregate demand, leading to downward pressures in the price level. The unprecedented rise in fuel price will check the leakages in oil consumption in rental power plants, which enjoy many privileged benefits apart from subsidies in energy sector.
The fire tragedy in BM container depot exposed that goods are being exported to other countries concealing their true identity. Fertilizer and diesel subsidy may end up in wrong hands if the price mismatch between the domestic level and international market is huge.
Rising cost of living calls for an increase in pay hike across the sectors. Govt has already adopted a policy to review public service pay scale in every two years. Last year, govt also raised the minimum salary of the garments workers. But the inflationary pressure rendered useless the pay hike and to some cases conditions of the wage-earners deteriorated. Now here comes the point as government is letting the price fixed by the market then it should also include cost of living clause, which requires that salary reflect cost of living, in the job contracts. But that is not happening.
In the latest Monetary Policy Statement ,government clearly spelled that it would raise the policy rate by 50 point basis. This gradualist policy, small increase in interest rate at measured intervals, is anticipated to cut the money supply. But any government initiative to pay rise will increase money flow of the economy. Public service salary increase declaration will raise the salary level of the private sector. This increase in money supply to the economy is contradictory to the Central Bank's gradualist policy.
But people require urgent attention from the govt to lift them out of this ordeal. Protecting the badly affected groups should get the top most priority. Depreciation of Taka is the incentive to the exporter. At the same time, falling orders due to recession like situation in the West causes worries to them. But the workers vie for the benefits exporters received from the depreciation of Taka. As they are also having a tough time, a small increase in their salary will not be a big deal. At the same time, protein bank, discounted markets could be set up in industrial pockets to offer them discounted goods. Special deposit rates could be offered to lower income and vulnerable groups through commercial and MFS so that they could offset the inflationary pressure. This step is in line with the Central bank’s MPS. For long, Central Bank has barred both the deposit rate and lending rate from rising. Govt should discontinue it. Increasing the deposit rate is tantamount to give inflation-battered ordinary people an incentive, no matter how small it is.
In addition, special transport rebate, protein voucher could be introduced to fixed income groups as long as their salary is not adjusted to the inflation.
There is growing concern that this fuel price hike has seriously undermined the food security program. Leading agricultural economist calls for direct cash subsidy to pump owners as the decision will raise the irrigation cost by TK 13 billion2. Govt could mull diesel rationing to diesel-intensive economic activities. Or govt could offer interest free credit to pump owners through specialized banks, reducing the possibility of misuse of fund.
Another thing that everyone has to be careful about is the unacceptable profiteering from the crisis. Fuel price hike should not be an excuse to hike the prices of goods at every level. In recent years ,law enforcement mechanism has been deteriorated to a great extent. We witnessed how some quarters pocketed windfall gains from volatile markets of rice,onion,soybean oil and e-commerce platforms. I learnt that at soybean oil industry wholesalers refused in unison to give receipt to the retail sellers . It is unthinkable how undocumented transaction was taken place in digital Bangladesh. A favorable political climate prevails here for the operations of these organized groups who would make money through shoddy dealings. Giving bank licenses and edible oil factories to security establishment neither prevent this unethical activities in economy (NPL keeps rising) nor protect the consumer interests.
I think govt should clearly demarcate a line about who should do business and who should not. Regulatory and enforcement bodies should not engage in any kind of moneymaking activities. It just spoils the whole system.
Govt should address the woes of middle and lower income groups caused by recent fuel price hike. Raising salaries of industrial workers and benefits offered in line with the MPS objectives should be given utmost priority. Similarly infrastructure projects that do not yield any revenue should be scrapped. Luckily import spending is slowing down as reflected in data furnished by Bangladesh Bank. Govt should come clean by initiating probe on the soybean oil market debacle and delay in providing quick stat on BPC spending and earnings as the BPC started automated payment system few years ago. Failure to do so will be a boon for leakages in public corporation and jeopardize all the reform work in subsidy and incentives. Government’s stated monetary policy is an obstacle to raising the salary in general. However, as soon as inflationary situation improves it should spare no time to review the salary policy in general.
Notes And References:
- "Bangladesh Announces Fuel Price Jump,Stokes Inflation Fear”,Ruma Paul,Reuters,August 13,2022.
For more read at
https://www.reuters.com/markets/commodities/bangladesh-announces-fuel-prices-jump-stokes-inflation-fears-2022-08-06/
- “Shechey Barti Diesel Khoroch,Khadya Nirapottar Ki Hobey(Extra Diesel Cost On Irrigation,Looming Shadow Over Food Security) “,M A Sattat Mondol,Former VC Bangladesh Agricultural University, Daily Prothom Alo(p-8),August 13,2022.
