2007年-世界发展银行全球_Petroleum_Prices_in_Bangladesh___A_Need_for_Regular_and_Appropriate_Adjustments_11页_264kb

Summary of Petroleum Prices in Bangladesh

Core Content

This document discusses the financial and economic challenges faced by Bangladesh due to the under-pricing of diesel and kerosene, highlighting the need for regular and appropriate price adjustments to ensure macroeconomic stability and financial sustainability of the Bangladesh Petroleum Corporation (BPC). It outlines the current state of oil prices, the impact of price adjustments on public finances, and the social implications of raising fuel prices on the poor and farmers.

Main Points

• Current Oil Price Situation:
  Oil prices have doubled in the last three years, rising from around $30 to $58 per barrel. These high prices are expected to persist due to global demand growth and supply risks in the Middle East.

  • Diesel and kerosene prices in Bangladesh are significantly below international levels, while petrol and other products are over-priced.

• Domestic Price Adjustments in SAR Countries:

  • In Bangladesh, diesel and kerosene prices are heavily subsidized, whereas petrol and other products are over-priced.
  • The pass-through coefficient for diesel is 0.43, which is the lowest among SAR countries, indicating inadequate reflection of international price increases.
  • This under-pricing has led to significant financial losses for BPC, with monthly losses exceeding Tk 2 billion.

• Financial Problems of BPC:

  • BPC's trading costs account for about 70% of its total costs, and the corporation has accumulated a massive debt of Tk 127.7 billion as of February 2007.
  • The government has relied on public banks to finance these losses, which has weakened the banking system and posed risks to macroeconomic stability.
  • A formula-based price adjustment mechanism is proposed to ensure that BPC can recover its trading costs and reduce financial strain.

• Options for Price Adjustment:

  • A one-step increase in diesel and kerosene prices from Tk 33 to Tk 41 per liter could help BPC breakeven.
  • Alternatively, a phased increase over six months with Tk 4 per liter increments is suggested, possibly in sync with the 'boro' rice planting season.
  • The document emphasizes the need for a communication campaign to explain the rationale for price increases to the public.

• Macroeconomic Impact of Price Adjustments:

  • Raising petroleum prices may increase inflation, but this can be managed through prudent monetary policy.
  • Delaying price adjustments risks balance of payment issues and exacerbates the financial burden on BPC.
  • Indonesia’s experience shows that abrupt price increases can lead to economic slowdown and inflationary pressures.

• Impact on the Poor and Farmers:

  • Kerosene and diesel are not a major part of the poor’s budget, with only 1.3% and 1.9% of their expenditure, respectively.
  • Even with a 25% increase in diesel prices, the impact on poor households is minimal.
  • Farmers may face some challenges due to higher diesel costs, but the data suggest that the effect is limited.
  • The poor are less affected by fuel subsidies compared to non-poor groups due to monopolistic control and inefficiencies in the distribution system.

Key Information

• Pass-through Coefficient:
  Bangladesh's pass-through coefficient for diesel is 0.43, which is the lowest among SAR countries, indicating poor alignment with international prices.

• BPC's Financial Situation:

  • BPC has incurred significant losses since FY03, with interest costs rising to Tk 4.7 billion in FY06.
  • The corporation’s liabilities have grown from Tk 73.3 billion in FY04 to Tk 138.3 billion in FY06.
  • A one-step price increase of Tk 8 per liter (24%) is recommended to help BPC recover its losses.

• Import Parity Pricing (IPP) Framework:

  • IPP is a formula that sets prices based on international market rates.
  • It is proposed to be applied on a fortnightly basis, with a margin for freight, insurance, and port fees.
  • The current prices of diesel and kerosene are well below IPP, while petrol and other products are above it.

• Social and Economic Implications:

  • The poor and farmers are less affected by the proposed price increases.
  • Subsidies on diesel and kerosene benefit non-poor groups more due to monopolistic practices and distribution inefficiencies.
  • Eliminating subsidies is seen as necessary to avoid long-term fiscal and economic problems.

Recommendations

• Implement a formula-based pricing system to ensure regular and appropriate price adjustments.
• Consider a phased increase in diesel and kerosene prices over six months to minimize public backlash.
• Launch a public communication campaign to justify the price increases and reduce social resistance.
• Provide budgetary support to BPC to recover its accumulated losses of about Tk 120 billion.
• Transition the institutional framework to prepare for a competitive market, including shifting responsibilities from BPC to Eastern Refinery Limited and Oil Marketing Companies.

Conclusion

The document concludes that retaining fuel subsidies is unsustainable and that price adjustments are necessary to address the financial and macroeconomic challenges faced by BPC and the broader economy. While the poor and farmers may be minimally affected, the long-term benefits of aligning prices with international levels outweigh the short-term costs. A competitive market framework should be developed to ensure efficient pricing and reduce the government's financial burden.