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Surging Energy and Food Prices will Accelerate Economic Downtrend in Bangladesh

Dr Anand Kumar is Associate Fellow at Manohar Parrikar Institute for Defence Studies and Analyses. Click here for detailed profile
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  • July 30, 2008

    Rising food and oil prices worldwide have increased the misery of people in Bangladesh who have already been suffering the effects of near double digit inflation. The military backed caretaker government has been forced to increase the prices of oil products by 33 to 67 per cent with effect from July 1, 2008. Diesel and kerosene prices have been hiked by 37.5 per cent to 55 taka a litre (0.26 gallons) and petrol prices by 34 per cent to 87 taka a litre. Earlier, in April 2008, the government had doubled the price of compressed natural gas (CNG), which is widely used in transportation and power generation. The huge increase in fuel prices has created apprehensions about impending political chaos.

    According to M. Tamim, the caretaker government’s Special Assistant for power and energy, the government had no alternative but raise prices to cut subsidies on imported fuel. In a situation of unchanged petroleum prices, the government would have had to provide 170 billion taka (about 2.5 billion US dollars) to the state-run Bangladesh Petroleum Corporation (BPC), the country's major oil importer and distributor, to import oil. Even with the latest price hike, the government will still have to spend 100 billion taka (about 1.47 billion US dollars) in oil subsidies annually.

    The decision to raise the prices of petroleum products was inevitable. But what worries economists is the extent of the increase. They fear that the economy with near-double digit inflation may not be able to absorb the consequent shocks. The average inflation rate in the last fiscal year was 7.2 per cent, whereas it has risen to almost 10 per cent in the current fiscal year. This is bound to increase the misery of the common people and have an adverse impact on the economy.

    The fuel price rise has increased the production and transportation costs of food commodities, resulting in increased food prices. All these will have a chain effect in raising the cost of living. A report by a local think tank, Shamunnay, has stated that the increased price of diesel and kerosene will lead to more inflation and create 400,000 new poor people in the country.

    The hike in fuel prices is also expected to generate greater unemployment by creating difficulties for the all important garment industry. The Garments Manufacturers and Exporters Association feels that the production cost of exportable apparel will go up by at least 15 per cent due to the fuel price rise. They will also have to pay more for transporting their consignments. It is feared that around 2,800 garment factories in the country will be impacted adversely by the price hike. It should be noted that the ready-made garment sector accounts for nearly 76 per cent of the country's total export earnings.

    Considering the large mass of people who depend on diesel and kerosene in rural areas, the government has been providing diesel subsidy. But this subsidy has been going into the pockets mostly of local influential people or musclemen. Moreover, the recent price hike of oil products means that the subsidy being provided would be inadequate.

    A draft survey report of the Bangladesh Bureau of Statistics (BBS) states that the coverage of government safety net programmes has been inadequate to meet the needs of the poor. What is worse, the net benefits of the programmes are also shrinking day by day due to price spiral of essentials. The number of people living below the poverty line has risen sharply in the last few years because of spiralling food prices. A study by the leading Dhaka-based think tank Centre for Policy Dialogue (CPD) indicates that 48.5 per cent of people in Bangladesh do not have enough money to buy basic food items such as rice, compared to 40 per cent in 2005. Moreover, the fast rising population of Bangladesh has ensured that the poverty situation is not likely to ease off significantly. The country is adding three million people every year to its population, which is expected to rise to 205 million by 2025.

    Despite serious economic problems, a crisis so far has not been triggered for several reasons. Bangladesh’s foreign exchange reserve is at an all-time high. The country received around US $50 million recently from the United Nations for participating in peacekeeping missions. The caretaker government is also trying to seek help from international institutions to avert a major crisis. The Islamic Development Bank has agreed to fund Bangladesh’s oil imports up to $ 1.5 billion annually, while the bank will examine the issue of loans at a lower rate though only for the portion to be provided from its own resources. The Asian Development Bank (ADB) and other development partners will provide $ 340 million to help implement social protection measures, particularly on food security, under the 2008-09 budget. The World Bank has also decided to increase its support to help Bangladesh face the challenge of ensuring food security.

    Another factor that has helped to avoid a major crisis and kept the economy afloat is growing remittances. An estimated 50 lakh Bangladeshis are working abroad. Of these, about 30 lakh live in the Middle East and send approximately 70 per cent of total remittances. However, the situation on this front may also change as major labour markets in the Middle East and Malaysia have banned fresh manpower recruitment or have reduced quotas for Bangladesh.

    Growth in overseas employment has provided a major cushion so far to absorb domestic economic shocks. But as that cushion shrinks the country may head towards political chaos unless a smooth political transition is made paving the way for economic growth and increased investor confidence. Dhaka had witnessed violent street protests in April 2008 despite a ban on such activities under emergency rule. Rising food prices may well trigger fresh protests and provide an excuse to the caretaker government to extend emergency rule.