Ripple effects of fuel price hike: What lies ahead
As Bangladesh faces yet another fuel price hike amidst another ongoing energy crisis and dwindling foreign reserves, TBS spoke to various experts and asked what the challenges ahead may be this time
In 2021-22, when diesel price went up by Tk34 per litre and octane by Tk46 per litre, it sent immediate shockwaves through the economy, triggering a cascade of transport fare hikes of up to 22% for long-haul routes and 16% within cities.
The ripple effect choked ordinary citizens already battling global inflationary pressures worsened by the Russia-Ukraine war, which had disrupted fuel supply chains and driven up import costs. As Bangladesh faces yet another fuel price hike amidst another ongoing energy crisis and dwindling foreign reserves, TBS spoke to various experts and asked what the challenges ahead may be this time.
'New prices do not fully reflect rise in procurement costs'
Zahid Hussain
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Former lead economist, World Bank Dhaka office
Inflationary pressures are already feeding through the system and will continue to do so, largely driven by rising international prices.
The real issue is how this burden is distributed. If domestic prices are not adjusted, the cost does not disappear — someone still has to pay. In such cases, it is ultimately absorbed through the budget, adding to fiscal pressure. It appears that the recent price hike reflects precisely this constraint: the government has reached a point where sustaining such high levels of subsidy is no longer feasible.
However, even prior to the official increase, prices had effectively risen in practice. Anticipatory behaviour — panic buying, supply disruptions, and expectations of shortages — had already imposed costs on consumers. These costs were not always monetary.
This raises the question: Does the latest increase create an additional inflationary shock, or does it merely formalise an existing one? In effect, the government has now acknowledged that fuel is more expensive and adjusted prices accordingly. Arguably, this move could have been implemented earlier. A rules-based pricing mechanism has existed since 2023, but its inconsistent application has undermined policy credibility and politicised what should be a technical decision.
At the same time, the adjustment itself may still be insufficient. The increase in administered prices does not fully reflect the rise in procurement costs, meaning that subsidy pressures will persist — albeit at a somewhat reduced level.
Official claims that there is no crisis are difficult to reconcile with the visible shortages and distribution bottlenecks. While the country may have sufficient aggregate fuel stocks, inefficiencies in supply chain management and pricing distortions have created a perception — and, in many cases, a reality — of scarcity.
'Sound adjustment of transport costs can moderate inflationary impact'
Mustafizur Rahman
Distinguished Fellow, Centre for Policy Dialogue
The government initially tried to absorb the shock without raising prices, drawing on the institutional surplus available to them. However, once it became clear that the situation might be prolonged and that sustained price pressures could place significant strain on the economy, they were ultimately compelled to take this step. That is how I interpret it.
Undoubtedly, this will have a multiplier effect on the economy — an adverse one. The immediate impact will be felt by those purchasing fuel directly, as prices have risen by around 15%, thereby increasing their costs. From there, the effects will cascade downstream. Fuel is widely regarded as a barometer for the prices of other commodities, so the implications extend well beyond the initial increase.
Transport costs will rise, and with them, a range of other expenses. Producers will face higher fuel costs in their operations, which will further compound due to increased transportation expenses. In agriculture, farmers will also see their costs climb, creating knock-on negative effects across the broader economy.
The extent to which this fuels inflation remains to be seen, as it will vary across sectors. Not all sectors rely on fuel to the same degree. However, since transport costs are embedded across virtually all economic activities, the impact will be felt everywhere — albeit to differing extents.
A second key factor will be how effectively the government manages related issues. For instance, ensuring that transport fares do not rise irrationally will be crucial in containing inflationary pressures.
If transport costs are adjusted in a measured and justified manner, the inflationary impact can be moderated.
Strengthening social safety net programmes will also be essential. If these are expanded, particularly to support marginalised groups, the burden can be eased. For example, widening the coverage of family card schemes could help cushion vulnerable households against rising costs.
In the short term, better management can still help ease the pressure. For instance, a 15% increase in fuel prices does not automatically justify a blanket 15% rise in bus fares. Adjustments must be grounded in a rational assessment of how much fuel contributes to total costs.
'RMG's primary concern is local logistics, which will get more expensive'
Mahmud Hasan Khan
President, Bangladesh Garment Manufacturers and Exporters Association
The adjustment itself is justified, but it must be continuous. If prices are increased today in response to a rise in international oil prices, then, logically, when global prices fall — whether after 15 days or a month — there should be a corresponding downward adjustment. As we understand it, this kind of mechanism is meant to be ongoing, with prices reviewed and revised at the beginning of each month.
The expectation, therefore, is that the government will carry out such adjustments regularly — ideally on a monthly basis.
From an export-oriented business perspective, the impact is somewhat nuanced. Naturally, transport costs will rise, along with other domestic expenses. However, as we operate on an FOB (free on board) basis, we are not directly affected by global freight or shipping costs.
Our primary concern lies with local logistics — particularly the cost of transporting goods from Dhaka to Chattogram — which will increase. Local transportation expenses will also go up. That said, the cost of shipping goods internationally is borne by the buyer, so that component does not directly affect us.
Even so, if inflation rises more broadly, it will inevitably affect the entire industry. That is why the adjustment mechanism is so important. If prices are increased now but then reduced in line with international market trends — say, within a month — then the inflationary impact can be contained.
'Current environment appears relatively more stable than 2022'
Asif Khan
President, CFA Society Bangladesh
From an analytical standpoint, I would not characterise this price increase as strongly inflationary. One must consider the reality on the ground: even before the official adjustment, diesel was not consistently available at the administered price across many regions of Bangladesh.
In practice, consumers were already paying higher, informal market rates. To that extent, a significant portion of the inflationary impact had effectively materialised beforehand at the retail level. Prices of goods had already adjusted upwards in response to those higher input costs, so the formal revision does not represent a wholly new shock for many end users.
That said, the concern lies in opportunistic over-adjustment. There is a risk that transport operators and service providers may use the price hike as a pretext to impose disproportionate fare increases. While it is entirely rational for businesses to pass on higher costs — no producer can sustainably sell below cost — any adjustment must be grounded in actual cost structures rather than arbitrary mark-ups.
A second critical dimension is demand behaviour, particularly in terms of price elasticity. Higher prices can play a corrective role by discouraging inefficient or non-essential consumption. Energy conservation — be it through reduced discretionary travel, greater use of public transport, or ride-sharing — tends to respond more to price signals than to administrative appeals. In that sense, some degree of price adjustment is not only inevitable but also economically rational.
From a fiscal perspective, the case for adjustment becomes clearer. Maintaining artificially low prices in the face of sustained high import costs would eventually translate into significant fiscal pressure, which would have to be absorbed through higher borrowing or reallocation of public spending. In that sense, deferring adjustment merely postpones — and potentially amplifies — the burden, often shifting it to future budgets.
However, the current approach would benefit from greater predictability. Rather than relying on ad hoc decisions, fuel pricing should ideally be governed by a transparent, rules-based mechanism linked to international benchmarks.
Finally, it is important to situate the current episode within a broader macroeconomic context. Unlike the 2022 shock, when fuel price hikes coincided with significant exchange rate misalignment and other macroeconomic imbalances, the present environment appears relatively more stable in terms of interest rate policy and exchange rate management. This suggests that while pressures remain, the transmission dynamics may be less acute than before.
'Government risks entering self-reinforcing cycle of adjustment, compensation'
Asif Shahan
Professor, Development Studies, University of Dhaka
There is a clear communication deficit between the government and citizens. When the state does not transparently disclose its actual position, particularly in times of stress, it creates uncertainty and, in some cases, panic. This problem is compounded when policy signals appear contradictory. For instance, assurances that "there is no shortage" sit uneasily alongside administrative restrictions, such as limits on fuel purchases. Such mixed messaging inevitably erodes public trust.
At the end of the day, these are inherently political questions: The credibility of government actions depends on whether citizens find them consistent and believable. Entering such a credibility risk within a short span — say, two months — appears unnecessary, especially when the likelihood of it yielding positive outcomes is limited.
In the immediate term, crisis management is, of course, unavoidable. When faced with a "fire", the government must act quickly to contain the situation. However, this cannot come at the expense of longer-term thinking. The ongoing shifts in the global order — particularly in energy markets — are structural rather than temporary. They demand a forward-looking policy response.
Whether in terms of energy security, pricing mechanisms, or broader macroeconomic management, there is a need for a coherent long-term strategy. At present, that strategic clarity appears to be lacking.
This creates a difficult cycle. On the one hand, the government must impose adjustments that increase cost pressures on the general population. On the other, it must simultaneously expand safety net programmes to mitigate those very pressures. The result is a tightening fiscal bind, where each policy response generates further demands on limited resources.
In that sense, the government risks entering a self-reinforcing cycle of adjustment and compensation, with clear implications not only for fiscal sustainability but also for its broader political equilibrium.
'Sudden price hike raises questions in absence of strong regulatory oversight'
SM Nazer Hossain
Vice-President, Consumers Association of Bangladesh
The abrupt adjustment in fuel prices is likely to trigger increases across a wide range of essential goods and services. In practice, businesses often look for opportunities to raise prices, and this development provides them with a fresh justification to do so.
There has also been sustained pressure from various business groups, including those involved in fuel storage and distribution, to push for higher prices. In that sense, the latest decision can be seen as a response to those demands.
The risk now is that hoarding behaviour may intensify, allowing certain actors to profit from anticipated shortages or further price hikes. Given that fuel costs are deeply embedded in the production and distribution of almost all goods, the impact is likely to be broad-based. Prices of essentials could rise significantly, placing additional strain on ordinary households.
As a result, public hardship is expected to increase, with inflationary pressures spreading across the economy. In this context, the sudden nature of the price hike raises questions about its timing and adequacy, particularly in the absence of strong regulatory oversight to prevent opportunistic price increases.
