The Asian Development Bank (ADB) has prescribed an immediate oil price hike, if the government wants to avoid serious macroeconomic harms.

"Retail fuel prices must be urgently adjusted to avoid serious macroeconomic consequences arising from continuing upward movement in international oil prices," the bank observed in its Quarterly Economic Update March 2006 released yesterday.

While the world oil prices surge by 90 per cent between May 2004 and September 2005, the Bangladesh government increased the domestic fuel prices in the piddling range of 1635 per cent, the report mentioned. So, despite the price adjustment, the ADB estimates the oil subsidy given in May-04 to Sep-05 at over $520 million or 0.8 per cent of the GDP.

The report said the global price spiral of petroleum products has resulted in rising fuel subsidies, which has further burdened the nationalised commercial banks and crowded out the much-needed public investment.

With a comparative chart of diesel and octane prices in some neighbouring countries and a couple of major Asian economies, the report illustrated "how high the fuel subsidies to consumers are in Bangladesh," as retail prices of fuel are the lowest here.

"In February 2006, retail prices of diesel and super gasoline [octane] in Bangladesh were only 65% and 63% respectively of prices of same items in India. Compared with the Republic of Korea, the prices are only 39% and 46% respectively in Bangladesh," the report observed.

That month diesel price in Bangladesh was $0.45 a litre, Pakistan $0.52, Nepal $0.62, Singapore $0.65, India $0.69, Hong Kong $1.06 and South Korea $1.14.

In case of octane the price per litre in February was $0.67 in Bangladesh, $0.94 in Pakistan, $0.91 in Nepal, $0.94 in Singapore, $1.06 in India, $1.67 in Hong Kong and $1.45 in South Korea.

The ADB also pointed out that "From the February level, fuel prices have further increased in the international market, implying a steady increase in the consumer subsidy and in the financial burden to BPC [Bangladesh Petroleum Corporation]."

Analysing the macro- and microeconomic situations of the country, the ADB forecast a 6.5 per cent GDP growth in the current fiscal year (FY), a 0.9 percentage point rise from 5.6 per cent growth in FY05, "reflecting a steady increase in domestic and external demand".

According to the economic update, private consumption will be the main driver of growth in FY06, bolstered by strong remittance inflows. The GDP growth this year will also be "underpinned by steady expansion in industry and services, aided by a strong recovery in agriculture."

The ADB said Bangladesh needs to address three major behind-the-border barriers to trade. They are a weakness in economic governance, inadequate physical infrastructure, and high cost of trade, which impinge on export competitiveness.

The ADB also emphasised speeding up power sector reforms in order to expanding power generation capacity, eliminating operational inefficiencies, reducing supply cost through enhanced government-private sector participation, and adopting a pricing policy to recover operational costs.