Fuel prices to be adjusted to global market from Sept

The government is set to implement a new formula-based price adjustment mechanism for fuel oil prices starting this September, following recommendations from the International Monetary Fund (IMF). 

This step is being taken to comply with the IMF-set conditions for a $4.7 billion loan, which requires the reduction of subsidies. 

Under the new mechanism, fuel oil prices will be adjusted every three months initially, with the possibility of monthly adjustments in the future. 

In addition, the government may raise electricity prices by 5% twice to meet the IMF conditions, officials of the Ministry of Finance have confirmed to The Business Standard. However, there are currently no plans to increase gas prices.

The officials have stated that the government is pledge-bound to start the implementation of the formula-based price adjustment mechanism by December, in order to fulfil the conditions of the IMF. 

However, the government is keen to start implementing the mechanism before the scheduled time, with a trial review of international fuel prices having already taken place based on the formula. 

The mechanism will be fully implemented from September.

Infographic: TBS

A delegation from the IMF is scheduled to visit Dhaka on 25 April this year to review the implementation status of the conditions before releasing the second tranche of the loan.

The IMF team will also review the implementation of the government's commitments for revenue sector reforms, financial sector reforms as well as the government's subsidy control measures. 

If their report is satisfactory, the IMF will release the second instalment of the loan in July.

The third tranche of the IMF loan will be received in December as scheduled. The formula-based price adjustment mechanism must be implemented before the instalment is released.

Bangladesh received $476.2 million in the first tranche of the IMF loan in February this year.

An official of the Finance Division wishing anonymity told The Business Standard that if the IMF's formula is used to determine fuel oil prices in the country in the present international market situation, the price of diesel per litre may decrease slightly but prices of petrol and octane would fall significantly.

In a pre-budget discussion with the finance minister on Thursday, businessmen proposed adjustments in the prices of fuel oils and gas every month.

At the discussion, Metropolitan Chamber of Commerce and Industry President Md Saiful Islam said businessmen had no objections to the government's decision to stop subsidies on fuel oils and gas. 

He, however, requested the government to inform the business community prior hand about the method it will use in determining prices. This would make it easy for businesses to adopt new investment plans, he argued. 

However, finance ministry officials have stated that the time gap in adjusting fuel prices will be gradually reduced, starting with adjustments every three months. However, there has been no decision made regarding when prices will be fixed every month. 

The BPC monopoly

Neighbouring India sets fuel oil prices on a daily basis. Even the fixed rates vary from state to state in the country. 

Again, many developed countries adjust prices immediately with the fluctuation in fuel prices in the international market. In coordination with the international market, prices are determined several times a day in various countries including Japan.

Currently, the government alone determines fuel prices and supply in Bangladesh, with fuel sold at government-fixed prices. This system has resulted in profit or loss for the Bangladesh Petroleum Corporation depending on global fuel prices.

The government has not reduced fuel prices since 2013, even when international prices have dropped. As a result, the government has made a profit of about Tk42,000 crore over the past seven years.

In August of last year, the government increased the prices of petrol and octane by 50% and diesel and kerosene by 36% due to a surge in international market prices caused by the Ukraine-Russia war. 

While hiking the prices, the BPC said that it would break even if the price of a barrel of refined oil was $80 in the international market, but due to the depreciation of the taka against the US dollar, the rate now stands at $97. According to Platts data from April 6th of this year, the price of refined fuel oil per barrel in the international market was $98.

The Energy Division sought Tk19,358 crore in subsidies in the revised budget, but the Finance Division declined to allocate any funds. 

The Centre for Policy Dialogue (CPD) recommended that fuel prices be quickly adjusted to the international market rate, stating that the BPC is currently making a profit, and consumers would benefit if prices were adjusted.

Power price hike imminent

Officials told TBS that the Ministry of Finance has already discussed with the Power Division about raising power tariff in two more phases.

In this month's resource committee meeting presided over by Finance Minister AHM Mustafa Kamal, Power Secretary Md Habibur Rahman said, "It was decided that electricity prices would be raised by 5% each month. But we have not increased the prices in the last two months. Now it appears that the prices need to be increased."

Earlier, electricity prices were hiked thrice by 5% in January and February this year. Even then, the amount of subsidy has increased more than this fiscal year's allocation for the sector.

According to the Finance Division's estimates, Tk17,000 crore has been earmarked for subsidies in the power sector in the current fiscal year's main budget. But, the Power Division has sought an additional allocation of Tk32,500 crore. Finally, an additional allocation of Tk6,000 crore has been made in the revised budget.

Moving toward zero subsidy on fuel oils

According to the MoU signed by the Ministry of Finance with the IMF, the government will implement the policy of zero subsidy on fuel oils. 

At the same time, even if the fuel price increases in the international market, the amount of subsidy on gas and electricity cannot be increased in proportion to GDP.

According to the MoU published by the IMF, all subsidies on three petroleum products are proposed to be phased-out and a periodic formula-based price adjustment mechanism is planned for adoption. Similarly, electricity tariffs are proposed to be gradually adjusted to reduce the subsidy component. In fact, the authorities have already started taking steps in this direction. 

On 12 January this year, the authorities increased the average retail electricity price by 5% and the demand charge for electricity for almost all types of consumers by up to 42%. 

Gas prices for industries, power generation, hotels and restaurants are also being increased with effect from February 2023.

The government will also share the information of bank deposits of the BPC along with three distribution companies -- Meghna Petroleum, Padma Oil Company, and Jamuna Oil Company -- monthly, within six weeks of the end of each month.

While recent price hikes have brought petroleum prices broadly in line with international prices, gas and electricity subsidies are expected to rise to less than 1% of GDP in FY23. Over the three-year programme period till 2026, the introduction of a periodic formula-based fuel price adjustment mechanism will help ensure no structural subsidies for petroleum products.

According to government data, published by the IMF, Bangladesh has ramped up its reform efforts toward transparent market-based pricing of fossil fuels. 

Reflecting elevated global commodity prices, subsidies for gas and electricity are expected to reach about 0.9% of GDP in FY23 compared to 0.4% of GDP in FY21.

To alleviate budget pressures, the government in August 2022 raised prices for petrol and octane by close to 50%, and prices for diesel and kerosene by 36% on top of a 23% increase in November 2021, helping keep domestic fuel prices broadly aligned with international prices. 

Natural gas tariffs were also hiked by 23% on average in June 2022 and bulk electricity tariffs were raised by 20% in November 2022.

These actions are expected to help ease budget pressures for energy subsidies and encourage more efficient fuel consumption going forward. 

In addition, barring further global price shocks, the authorities have committed to not increase these subsidies during the program and explore options to gradually reduce them further.