Hike to fuel inflation

Economists have warned that the price hike of fuel will put further pressure on household and businesses, intensify inflation and raise production and transportation costs.

Economist Dr Fahmida Khatun, distinguished fellow at the Centre for Policy Dialogue (CPD), said the latest increase appeared to be another adjustment to an ongoing external energy-price shoc.

She cautioned that increasing all major petroleum prices by the same amount at once was a substantial policy intervention at a time when inflation and
household financial pressures were already high.

“Nevertheless, increasing all major petroleum prices by the same absolute amount at once is a substantial policy intervention, especially when inflation and household financial pressure are already high,” she told the media.

She said the impact would extend beyond people who directly purchase fuel.
“Individuals will face higher expenses for transportation. Even households that do not purchase fuel directly will be affected as transportation costs raise the prices of food and other essentials,” she said.

Poor and lower-middle-income families, she added, would be disproportionately affected because a large share of their income is spent on daily necessities.

The increase is also expected to raise agricultural costs, particularly because diesel is widely used for irrigation, mechanisation and transporting farm produce.

“Diesel-dependent agriculture will face higher irrigation, mechanisation and transportation costs. This could potentially raise food prices, but reduce farmers’ returns,” Fahmida said.

She also warned of higher costs for industries and businesses.
“Industries will incur higher logistics and generator costs, which will weaken profitability and export competitiveness. Small businesses will be especially vulnerable,” she said.

At the macroeconomic level, Fahmida said the increase could intensify inflation, reduce household consumption and weaken economic growth.

Economist Selim Raihan, executive director of the South Asian Network on Economic Modeling (SANEM), also warned that the fuel price increase would create fresh pressure on inflation by raising transportation, production and supply costs.

In a Facebook post on Monday, Selim, also a professor at the University of Dhaka’s Department of Economics, identified the fuel price increase as one of several concerns facing the economy.

He said the government’s strategy for containing the resulting inflationary pressure remained unclear.

Raihan also raised questions about institutional weaknesses in the energy sector and what he described as an excessive tax burden on the sector.

He warned that growing government expenditure and borrowing pressures could create additional economic challenges.

According to Raihan, government spending on areas such as social protection and salary increases is not keeping pace with the growth of government revenue and its sources.

This could widen the revenue deficit and increase the government’s dependence on borrowing to finance the gap, he said.

He added that there was no clear plan visible to address the growing pressure.
Raihan also pointed to stagnation in private investment, saying this could create significant uncertainty over future economic growth and employment.

He attributed the weak investment environment to a combination of economic and non-economic factors, including political uncertainty, uncertainty over government and policy continuity, law and order concerns, administrative complexities and bureaucratic barriers.

He also cited weaknesses in governance and institutions, social instability and labour-related issues as factors discouraging private investment.

“Private investment is not increasing and there are no visible signs of improvement in the situation,” Raihan said.

As a result, he warned, significant uncertainty had emerged over the country’s future economic growth and employment.

Government cites global price shock
The government raised the retail prices of diesel, petrol, octane and kerosene by Tk 20 a litre, with the revised rates taking effect on Monday.

Fahmida, however, said that even if an increase in energy prices was unavoidable, the government should ensure that the additional cost was not passed on excessively to consumers.

“The government should publish the price calculation transparently, prevent excessive fare increases and market manipulation,” she said.

She also recommended targeted support for low-income households, small farmers and public transport users to cushion the impact of the increase.