Fuel price hike unlikely before polls despite IMF’s Sep deadline

The government has decided not to raise fuel oil prices this year even if prices continue to rise in the international markets.

Infographic: TBS

The decision, despite the commitment to implement an automated pricing formula as per the agreement with the International Monetary Fund (IMF) starting from September this year, has been taken with the impending general elections in mind, according to officials from the energy ministry.

However, in the event that global market prices declined, the government has a plan to reduce the fuel prices. It would be good for consumers, particularly with the ongoing inflationary pressures, officials said.

Though global oil prices reached a seven-month peak on Friday, the Bangladesh Petroleum Corporation (BPC) seems able to absorb it for now, relieving the government of any immediate pressure for price hike.

Massive fuel price hikes – 42.5% for diesel and 51% for petrol – in August last year helped the BPC earn enough to pay fuel import bills from its own revenue as the government refused to provide any subsidy.

The state-owned oil monopoly has also almost cleared its dues to international oil suppliers overcoming the delays caused by banks' reluctance to process import transactions citing dollar shortage.

One of the conditions of the $4.7 billion loan that Bangladesh is taking from the IMF is that a "periodic formula-based price adjustment mechanism" should be introduced for petroleum products by September. Fuel oil is supposed to be sold to the public or customers according to this formula from March next year.

Earlier in April this year, State Minister for Energy Nasrul Hamid announced that the price of fuel oil will be adjusted every three months according to the international market price starting from 1 September. 

Last May, the visiting mission of the IMF had also been informed by the Energy Division about the plan to adjust the fuel prices periodically from September.

Officials of the Energy Division said the price of fuel oil has been falling in the international market since April this year and the Bangladesh Petroleum Corporation (BPC) was making good profits from all types of fuel oil including diesel, kerosene, petrol, and octane. 

At that time, the country's business community and also a think tank, Centre for Policy Dialogue (CPD), called for price adjustment. The government had signalled that it planned to adjust fuel oil prices according to the IMF's formula from September.

However, since August, the price of refined fuel oil, especially diesel, has been increasing in the international market. Bangladesh meets most of its demand — around seven million tonnes in FY23 — by importing refined fuel oil.

"If the price is adjusted now, diesel is expected to cost approximately Tk15 more per litre compared to the current market rate. It will have a negative impact on agriculture and industries while inflation is likely to rise further," said an official of the energy division, on condition of anonymity.

Therefore, the government took a well-considered decision not to adjust the prices before the elections, he added.

Another senior official of the energy division, wishing not to be named, said the price of diesel is now higher than octane in the international market. So, if adjusted, prices of petrol and octane, which are used by comparatively well-off consumers, will decrease slightly in the domestic market which will benefit upper-class people but cause suffering to lower and middle-income people.

On 5 August in 2022, the Energy and Mineral Resources Division hiked the price of diesel by Tk34 to Tk114, petrol by Tk44 to Tk130 and octane by Tk46 to Tk135. 

It later reduced the price by Tk5 per litre after a cut in fuel tax.

The government was criticised for passing the price burden on people although BPC made profit during previous years and for not avoiding the steep hikes by lowering fuel duties.

BPC Chairman ABM Azad then argued that though the agency made a profit of Tk 42,993 crore, it had paid tax, gave surplus funds to the government and spent on various development projects, having an amount left to meet two months' import bills.

Will there be any impact on IMF loans?

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), a think tank, told TBS, "In the current situation, it is necessary to adjust the price of fuel oil regularly in line with the international market. However, the government may not do it before the elections and will try to convince the IMF that it is a political decision."

He also said determining the price of fuel oil in an international manner, meeting revenue targets, and ensuring adequate foreign currency reserves may not be possible as per the first assessment of the IMF. The government may take time on the pretext of elections so that these factors are considered in the IMF's next assessment.

Status of the automated pricing formula

Officials of the Energy Division said the automated price adjustment formula has already been drafted as per IMF prescription and will be presented during the visit of the IMF mission next October. However, a date for implementing the formula has not yet been finalised.

They also mentioned that the formula will be implemented at a convenient time and discussions have also been held with the IMF.

Reportedly, the formula has been developed by analysing a number of factors: import price of crude oil, shipping cost, refining cost, distribution and marketing cost and tax. 

India's fuel oil price has also been taken into account in making this formula. To stop fuel oil smuggling with the neighbouring country, the price in Bangladesh will be fixed in line with the Indian market price.

Oil price trends

BPC's profit and loss depends on the increase or decrease in the global price of the product as the majority of the total fuel oil is diesel. 

According to data from the US Energy Information Administration, on 28 August, refined diesel was sold in the world market from a minimum of $175 to a maximum of $238 per barrel (including all taxes). Other sources said crude oil was sold at $84.47 per barrel in the international market that day. 

At the beginning of last July, it was about $74 per barrel. That is, the price of crude oil has increased by about $10 per barrel in a span of two months.

Refined oil prices have risen more due to higher crude oil prices and higher refining costs for companies. Bangladesh imports around 80-85% of its refined fuel oil demand.

An official of the Energy Division said before the pandemic, the refining cost of fuel oil was $5-7 per barrel. Currently, refining companies charge about $20.

Is BPC making profits or losses?

The Bangladesh Petroleum Corporation (BPC), the country's only fuel oil supplier, has again suffered losses for the last two months due to rising diesel prices in the international market and the devaluation of taka. The corporation is meeting the losses from its own funds.

However, since 2013, the BPC has made a profit of about Tk42,000 crore. It has given Tk20,000 crore of that profit to the government.

After the Ukraine-Russia war broke out in February last year, the profit of the company started to dwindle as prices spiked in the international market. 

Last year, the company claimed Tk19,000 crore as a subsidy from the finance division. However, the Ministry of Finance is adamant about not giving subsidies on fuel oil. 

As a result, the BPC owed nearly $400 million to international suppliers last year. The company took the initiative to repay the debt from profits it made for a few months in between. The current debt has come down to $30 million.

Officials of the Energy Division said the trend of using renewable energy is increasing around the globe. As a result, refineries across the globe are not seeing new investments. However, the refineries set up earlier have increased the price of refined fuel to recover their investment. That is why the BPC is in trouble.

The Eastern Refinery Ltd, the sole country-owned oil refinery in Bangladesh, has the capacity to refine only 1.5 million tonnes out of 7 million tonnes of fuel oil demand in Bangladesh. The remaining 5.5 million tonnes have to be imported at higher prices.

According to BPC data, 70% of the country's total fuel demand is diesel, 6.50% petrol, 6% octane, 1% kerosene, 8.50% furnace oil and 6.25% jet fuel. The rest is sold as other fuels.