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Bangladesh raises fuel prices to cut subsidies

DHAKA - Bangladesh raised fuel prices on Tuesday for the second time in just over a year to offset a soaring subsidy bill but it promised financial support for those hardest hit.

The country joins several of its Asian neighbours in raising domestically controlled fuel prices this year as the soaring value of crude, which hit a record high on Monday, sends government spending on subsidies through the roof.

The rise in fuel prices is likely to stoke inflation, which is currently running at just below 10 percent in Bangladesh.

M. Tamim, special assistant to the head of the interim government, responsible for the ministry of power, energy and mineral resources, outlined the price rises.

He said diesel and kerosene prices had been raised by 37.5 percent, petrol by nearly 34 percent and LPG, or liquefied petroleum gas, by 67 percent.

Furnace oil was increased by 50 percent.

"This is not a comfortable decision for the government, but we don't have any other option as in recent times the state-run Bangladesh Petroleum Corporation (BPC) has incurred huge losses due to the abnormal price hike of oil in international markets," he said.

BPC is Bangladesh's sole oil importer and distributor.

Even with the price rises, BPC is still likely to post a loss of 100 billion taka ($1.5 billion) in the fiscal year to June 2009 at current oil prices, he said.

"If oil prices were not raised the government would have to pay 170 billion taka to BPC to import oil, more than half of our annual development programme budget of 256 billion taka," Tamim told Reuters.

He said the government would substantially raise subsidies for farmers and the poor to help them cope with higher prices.

"The government has already allocated 5.40 billion taka in the current year's budget as subsidy for the farmers for buying diesel," Tamim said.

"All our neighbouring countries like India, Pakistan and Sri Lanka have already increased oil prices twice during the last one and a half years," Tamim said.

Inflation threat

The sharp rise in fuel prices would immediately lead of higher prices of essential goods, said Professor Muzaffar Ahmed, a senior economist and chairman of Transparency International's Bangladesh chapter.

Bangladesh's annual inflation rate rose to 11.6 percent in December, a 17-year high, although it has eased back to just below 10 percent in May.

Its trade deficit for the 10 months through April expanded to nearly $5 billion, compared with a year earlier $3.34 billion. The government expects its fiscal deficit to expand to 5 percent of gross domestic product in the July-June fiscal year that just began, swelling from 4.8 percent a year earlier.

"The increase in oil prices is likely to add fuel to inflation. As we see, it's obvious," said Khandaker Ibrahim Khaled, a former deputy governor of the central bank and a leading economist told Reuters.

Bangladesh last raised domestic prices in April 2007, increasing them by 21 percent on average.

At the time, benchmark U.S. crude oil was trading around $64 a barrel, less than half the record high on Monday of $143.67.

To reduce its reliance on oil, Tamim said diesel-run public transport would be converted to use compressed natural gas (CNG) as soon as possible.

Officials say that Bangladesh has already had some success in switching to CNG. Fuel oil consumption fell by about 12 percent to 3.4 million tonnes in the 2007/2008 fiscal year as vehicles switched to the gas, they said.

At present nearly 150,000 vehicles use natural gas, helping Bangladesh to save nearly 4 billion taka each month, they said.