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ADB backs fuel price cut on zero subsidy

Star Business Report
The Asian Development Bank (ADB) has suggested the government consider a reduction in petroleum prices if Bangladesh no longer requires subsidy thanks to a further fall in global oil prices.
The lending agency said it would help cut inflation expectations, which it forecast to remain higher in the fiscal year 2008-09.
It said the accommodative monetary policy, executed by Bangladesh Bank, could trigger higher inflation if the credit expansion is not followed by any quick or substantial supply response.
The Manila-based organisation said Bangladesh's central bank might require an increase in interest rates to 'anchor inflation.'
“If the price of diesel in the international market falls below a level where no subsidy is required, then the government can consider passing on the benefit of lower prices to the consumers," said Mohammad Zahid Hossain, head of programmes, Bangladesh Resident Mission, ADB.
It will also have a positive impact on inflation,” he added.
The ADB official's recommendation came at a press conference organised at its office in Dhaka yesterday marking the release of its 'Asian
Development Outlook 2008 Update'. ADB Country Director for Bangladesh Paul Heytens was present at the programme.
The ADB expects that Bangladesh's economy would grow at 6.5 percent in FY 2008-09 as agriculture and industry could pick up, buoyed by farmers' response to high food prices and improved business confidence.
"Bangladesh economy was remarkably resilient in the last fiscal year due to a lot positive factors such as rebound in exports, consistent remittance growth and improvement in revenue collection," said Heytens.
“We expect the economy to grow at 6.5 percent in FY 2008-09," he said.
The ADB however said some downside risks-- higher oil and commodity prices, political uncertainty in the run up to the promised parliamentary election in December, and natural disasters like cyclone could undermine the outlook.
It said high price of oil is likely to stay despite it has softened recently. The commodity prices such as rice will also continue to remain high, influenced by oil price and tight demand and supply situation, it added.
The ADB said Bangladesh's average inflation would stand at 9.0 percent in FY 2008-09, up from its previous forecast for
8.0 percent, partly because of a 34-50 percent increase in fuel price on the domestic market since July 1.
"Containing inflation would be a challenge given the higher inflation expectation," said Heytens.
The oil fell yesterday to $ 89.8 a barrel in the midday trade on London a§ Lehman Brothers' collapse raised concern that the credit crisis will hurt the economy and undermine fuel demand.
In FY 2008, the import bill for oil rose 54.7 percent to $3.2 billion, although imports by volume declined 12.7 percent to 3.2 million tonnes, according to the ADB.
“If the subsidy level comes to zero, then the government can logically consider reduction in oil prices,” said Zahid, insisting the government on adopting a market-based automatic price adjustment mechanism.
As the government buys refined oil, it will have to wait for the price of refined oil to reach below $100 a barrel on FOB (freight on board) basis. At that level of price, no subsidy will be needed, according to Bangladesh Petroleum Corporation.
At present the price of refined oil like diesel and kerosene stands over $110 with the government paying Tk 12 for a litre of kerosene and Tk 11.5 for a litre of diesel.