Cut fuel taxes to avoid abrupt rise in energy price

The year 2023 has started amid some nagging problems for the world as a whole. Inflation is running very high in the USA, Europe and many other parts of the world. Global growth is slowing down, with major European economies having even negative growth forecasts. Dollar crisis has hit more or less all countries.

Overall, the world is facing major challenges this year. But some good indications are ahead, too. The dollar, which rose to its historic peak due to repeated policy rate hikes by the US Fed, is expected to start falling from the second quarter.   

Asia is somewhat better-placed. Two major economies — China and India — are on the growth track, though at a lower-than-expected rate. East Asian countries are having a tourism recovery. Their economies are quite stable with inflation remaining in check.    

Price volatility and supply disruption of fuel oil and gas are reshaping the global energy scenario. In response to the supply crisis and unabated gas price inflation, Europe is desperate to build safe energy stocks. The continent is looking more seriously to develop renewable energy options and diverting major investments toward that end. In the US too, investment funds are flowing into renewable energy options.

Energy remains a key concern for us in Bangladesh, along with issues like price pressure and dollar shortage. Though two-thirds of our energy needs are still met from domestic resources, the energy security issue has become more crucial now given the growing price volatility and supply uncertainties in the global energy market. We also have no way but to explore renewable resources in a bigger way. There has been much criticism about nuclear power. 

But Europe is now returning to nuclear solutions to the energy crisis. They are coming up with smaller nuclear plants — with units as small as serving hospitals-- marking a shift from conventional large-scale plants. These plants are now being said to be less carbon-emitting than gas-based ones. Even in the US, a number of companies are promoting small-scale nuclear electricity technologies.

Bangladesh also needs to go for such solutions. But these involve long-term action plans.

In the short term, what Bangladesh needs is to make energy available to industries on the priority basis. The ready-made garment industry is the country's key source of foreign currency earnings. To replenish the foreign exchange reserve, we must keep the largest export sector unharmed with uninterrupted gas and electricity supplies. 

Due to transforming geopolitics, China will be facing trade problems with both the USA and Europe, which will offer some prospects for us. We are already having positive export growth both in US and European markets, a trend that indicates orders being shifted from China to countries including Bangladesh and Vietnam. Despite being our major competitor, Vietnam is more focused on exporting electrical and electronics goods than apparels. In apparel exports, Bangladesh enjoys a higher lead than Vietnam in western markets. Even China and India are willing to import more apparels from Bangladesh.

All these point to better prospects for Bangladesh's apparel exports, smooth energy supply must be ensured to make it happen. If the vital export sector gets the desired support, it will help build a sustainable forex reserve, which is a must to continue raw material imports to feed export industries.

One very relevant issue can be pointed out here. Local value addition in the apparel industry dropped to 51% now from nearly 62% a year before. Why?

One of the reasons for such decline was lower production in the local backward linkage industries requiring the export-oriented apparel industry to source more from imports. Factories like spinning and textiles that need to operate 24 hours a day to meet the demand could not run in full-scale in months between July and November because of gas pressure & gas supply could not run captive power during 6pm to 6am so ultimately RMG industries had to import those quantities from overseas to export the goods.

So export-supporting local industries must get required energy supplies to continue their production, which will help reduce imports and increase exports, and ease pressure on the forex reserves.

Apart from ensuring uninterrupted supply of gas and electricity, tariff rates should be kept affordable, so that costs of industries do not overshoot and sales prices go up, putting further pressure on consumer prices. Cost escalation will expose industries to difficulties in loan repayment, which also will add to the banking woes.

It is very much possible to avoid sweeping hikes in energy tariffs. There are management issues in the energy sector which need to be looked into. Another way is to reduce tax as India did to keep energy prices in check, a measure that helped the country to prevent inflation from going beyond control. They do not need to give energy subsidies.

If the tax and VAT are reduced in fuel oils and gas, Bangladesh will no longer need to give subsidies to Bangladesh Petroleum Corporation as well as will also reduce the power sector. For now, this can be the best way to protect people and industries from abrupt increases in energy prices with cascading effects on life and business.

Industries can afford to pay a certain limit of higher price for energy, but going beyond that will make them less competitive for export as well as the domestic market. Energy prices were raised in the past too, but supply was not uninterrupted as promised. 

During the covid-19 pandemic, small and micro businesses were the worst hit — 40% of them went out of business and 80% saw drastic fall in sales. Higher energy prices will put them in fresh trouble. Small and micro industries supply to large and medium industries. If demand from big ones drops, small ones will suffer. Reliable energy at an affordable price is crucial for all industries, small and big, to run viably and keep the workforce employed.

The author is the chairman of Evince Group and president of Bangladesh Chamber of Industries (BCI)