The government should depoliticize energy pricing by leaving it market determined and regulated by the BERC without political interference
Sketch by Dr Sadiq Ahmed / TBS
Sketch by Dr Sadiq Ahmed / TBS
It was heartwarming to read the Honorable Prime Minister’s explanation to the press about the need for higher diesel prices. It was a politically difficult decision, but the right one from an economic management point of view. Growing fiscal tightening due to poor fiscal compliance, as the Prime Minister rightly noted, makes the continued huge and growing burden of energy subsidies financially unsustainable. It is also important to note that maintaining large subsidies for fossil fuels, including diesel, is inconsistent with Bangladesh’s commitment to reduce its own contribution to greenhouse gas emissions. Even though Bangladesh is a small polluter compared to the United States, China and other big polluters, in the spirit of being a team player, all countries must also get things in order. Their houses.
The need for an adjustment in diesel prices arose as a result of the rise in international prices. More generally, all commodity prices are generally on the rise. The combination of massive fiscal stimulus measures to tackle the economic slowdown induced by Covid-19 and emerging supply constraints in specific areas due to structural issues has created an unprecedented global dilemma of mounting inflationary pressures amid inadequate economic recovery. Bangladesh faces a similar problem of increasing inflationary pressures and the need to boost GDP growth. The situation requires skillful economic management and political courage to tackle some of the bottlenecks created by the perception that these are sacred political cows.
The price of energy is one of those sacred cows and it is an honor for the Prime Minister to tackle it head on. But the government must go further. The 2041 Perspective Plan (PP2041) and the 8th Five-Year Plan underscored the importance of adopting a green growth strategy as an instrument to achieve Upper Middle Income Country (UMIC) status by 2031 and the high income countries (HICs) by 2041. In this green growth strategy, there is no room for any fossil fuel subsidy. Indeed, incentive policies and public investments must all aim to support the supply and use of clean energy and green technologies in agriculture, manufacturing, electricity, transport and construction. By taking this first important and bold step to raise the price of diesel, the government has signaled that it is serious. It should now take the next step of depoliticizing energy pricing by leaving it market-determined and regulated by the Bangladesh Energy Regulatory Commission (BERC) without political interference.
Subsidies are not a viable policy option
One of the main concerns of critics is the impact on inflation. Even before the rise in diesel prices, Bangladesh faced increasing inflationary pressures from rising commodity prices globally. As an importing country, Bangladesh has very little control over the rise in the prices of commodities, including fuel oil. It can reduce many high customs, additional and regulatory taxes to partly compensate for rising commodity prices. More importantly, he will have to
manage its monetary and fiscal policies to avoid excessive demand pressures. One would hope that, as in the past, the rise in commodity prices is in most cases a temporary phenomenon and will disappear. In some cases, they could also induce a reaction from the national supply. But trying to protect the economy from these price increases through price controls and subsidies is not a viable policy option.
A redistributive tax policy is necessary
It is well known that inflation tends to hurt the poor more than the rich. Part of the argument against increasing the price of diesel is based on this. This highlights the government’s poverty reduction strategy and more broadly the government’s inclusive growth strategy. A review of Bangladesh’s development experience shows that alongside many positive outcomes, a major negative outcome is growing income inequality. In addition, various survey results show that Covid-19 has significantly harmed the poor and low-income group. In this environment, the rise in inflation induced by world commodity prices is a worrying development.
What are the political options? Western European countries have tackled income inequality and protecting the standard of living of the poor by relying heavily on a redistributive tax policy whereby high taxes on the rich are used to fund programs for the low income. and the poor. Typical programs that benefit low incomes and the poor include free universal education up to grade 12, free / heavily subsidized health care, and a comprehensive social protection program based on income transfers to the poor and vulnerable. . The percentage of GDP allocated to these programs is huge, ranging from 35% in France to 24% in the UK. Even in Vietnam, a lower middle-income country like Bangladesh, this spending amounts to 13% of GDP. In Bangladesh, by comparison, spending is only 4% of GDP (2% in education, 0.7% in health and 1.3% in non-pension social protection for the civil service). The political gap is huge.
Many reforms are needed to introduce a comprehensive and efficient redistributive tax policy. The most fundamental reform is the need for a complete overhaul of the tax system. The tax-to-GDP ratio fluctuates between 8 and 9% of GDP, which is one of the lowest in the world. Vietnam, for example, generates 18% of its GDP in the form of tax revenue. There is an abundant literature on why taxes are so low in Bangladesh. Solving the tax revenue constraint requires tackling another sacred cow, and perhaps the most fundamental, which involves proper taxation of the rich. With a few exceptions, the rich do not pay their fair share of taxes. The essential elements of the required tax reform are well known and are listed in the 8th Five Year Plan. Implementation requires strong political will.
Sadiq Ahmed is vice president of the Policy Research Institute of Bangladesh.