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Growth to get a knock

Inam Ahmed
However undesirable may it be with whatever extent of effect, it was inevitable. But then the fuel price hike coming on the back of a few other disquieting factors such as high inflation, increased interest rate and an expensive greenback will have a dampening impact on the country's growth prospect for this year.
Yesterday's dollop of oil price hike will only add fuel to the situation, economists feel, as it will hit the four tiers of the consumption chain -producers, importers, exporters and consumers. Although they agree it was very much a needed step, they feel it could have been offset to some extent by a 'comprehensive package'.
Industrialists are more worried about their cost of production and profitability, they are not sure if the increased cost can be passed on to consumers, who are already smarting under inflationary pressure - 7.3 percent on a point-to-point basis for June - despite a recent wage hike. Alternately, they have to cut back on their profit, which for many of them is not high enough to be compromised.
The feel-good perception of exporters, who were buoyant as taka depreciated, has evaporated as higher supply chain cost and costly borrowing will offset the exchange rate gains.
And the combined effect will build up a pressure for wage hike across the table for the industry.
Although the fuel price hike is
now a global happening, it is going to have different impacts on different economies. For the growing and developed economies, the price is factored in because it is totally demand driven with China and America leading the troupe. The price increases because these two countries need more and more fuel to keep their growth wheel revolving. But it will have a drag-down effect on those like Bangladesh who are on the sidelines of the growth scenario.
For the growing economies, high oil prices have so far not dampened productivity as cheap money has supported spending sprees and housing bubbles. But for Bangladesh, there is no such hope right now. "The government had to increase fuel price because of the global market situation and the pressure that is building up on fiscal and external balances," said Dr Debapriya Bhattacharya, executive director of the Centre for Police Dialogue (CPD). "The subsidy given on fuel is a contingent liability of the government which is not immediately reflected on the fiscal balance, rather the nationalised commercial banks have to shoulder the burden. On the other hand, it is not sustainable to import oil at such a high rate and subsidise it as the foreign exchange reserves come under pressure. The price hike will dampen demand to bring fiscal and external balance."
Increased global price has made petroleum one of the significant components in the country's import payment bill. In FY2000, petroleum import bill was $638 million or 7.8 percent of the total import bill, but in FY05, it stood at $1,602 million or 12.2 percent of the total imports, according to a CPD analysis. In the past one year alone, petroleum import grew by 20.6 percent in dollar value.
But, Debapriya said, the flip side of the price hike is that it will lead to increased production cost, eroding competitiveness of the real sector.
As it stands today, the anticipated outcome of the oil price hike will be a cycle of higher price, higher wage, higher inflation and higher interest rate.
Companies are now thinking of a three-way strategy to combat the situation. Some are thinking of increasing their product prices; some apprehend that the market will react negatively to higher price and so think of lowering profit margin, while others are trying to revisit internal process and increase efficiency.
"Our back is against the wall," said Sarwar Ahmed, managing director of Syngenta Bangladesh Ltd, a multinational agro-input company. "The taka devaluation has hit our imports badly, and the oil price hike will make the situation worse. So far, we did not think of increasing product prices, but now we have to rethink."
He thinks a buoyant paddy market will factor in higher product price, but he is not so sure if the farmers will be able to pass the cost on to the final consumers.
Ashfaq-ur-Rahman, managing director of Novartis, a multinational pharmaceutical company, thinks of a different strategy. Although the oil price hike will have direct and indirect impacts on the process, he wants to revisit the input and output process and increase efficiency.
"I don't want to increase product price, but want to improve efficiency," he said. "Also, I will focus on exploring sales opportunities to absorb the shock internally."
Deen Islam, finance director of Monno Ceramics, said his company will have to lower profit margin for exports as unit order price will not increase. Similarly, the garment sector will also have to give up a part of their profits.
Debapriya suggested a few steps, such as structural reforms to bolster productivity growth and looking for alternative energy source. But he feels the whole idea of increasing fuel price hike is
lopsided as it should have come in a comprehensive package.
"Instead of a sudden big increase, it could have been done in phases through routine adjustments," he said. "The shock could have been minimised by cutting unproductive public expenditures and corruption as the savings through these measures could have been used to subsidise fuel. There is no conservation strategy such as extended use of daylight or austerity drive in sight."
Manzur Elahi, president of Bangladesh Employers' Federation, also thinks the oil price hike was inevitable but he said the move should be supplemented by austerity measures that may include two-day weekly holiday and cut in unnecessary public expenditure.
As the economy is evolving now with a number of strains, Dr Mustafizur Rahman, research director of the CPD, feels the growth would be a victim of the situation.
"A confluence of negative features might lead to a situation where it would difficult to achieve growth target for this year," he said. "Time will tell whether the economy would be able to absorb such a big increase in oil prices."