Refined fuel, which contributes to c12% of Bangladesh’s commercial energy requirement, observed a c44% price hike on average: Total energy sources of Bangladesh can be categorized as commercial energy (73% of total), and primary energy or biomass (23% of total). Commercial energy consists of natural gas and LNG (62% of commercial energy), refined and crude petroleum products (21%), coal (11%) and other products (7%).
The refined fuel alone contributes c12% to the country’s commercial energy requirement. Diesel is the most used one (85% of refined fuel), followed by Petrol (7%), Octane (6%), and Kerosene (2%). The prices of Diesel and Kerosene were increased by around 43% and those of Petrol and Octane by slightly more than 51%. Overall, there has been a 44% hike in the price of refined fuel on a weighted average basis.
The increase in fuel price may increase both food and non-food inflation. High commodity prices, 10.2% depreciation of BDT against USD in FY22, and c23% gas price hike in June 2022 have already shifted food and non-food inflation upwards to 8.2% and 6.4% respectively. The increase in fuel price may further increase inflation on top of the current level. This may happen in two ways.
First, the transportation cost has increased in response to fuel price hike since the transportation sector accounts for c43%* of total fuel consumption. The fares have increased by around 22% on the long routes, and from 12% to 30% in different city areas. The increase in transportation costs will increase the cost of production for goods manufactured, which if passed on to the end customers, will increase inflation. Otherwise, the manufacturing companies have to compensate for the rising costs from their profitability, thus resulting in lower margins and earnings.
Second, the price of agricultural products will go up unless subsidized by the government. This is because 60% of the arable lands are irrigated by diesel-run pumps, which constitute c13%* of total fuel consumption in Bangladesh.
Therefore, aggregate demand may decelerate, especially for discretionary products. In a scenario, when both food and non-food inflation may go up, we think that the buyers are likely to prioritize consumer staple products (food, medication) and adjust with their discretionary expenses. As a result, the sectors depending on discretionary expenditure are likely to face headwinds ahead. This impact on demand maybe notable for sectors such as:
Consumer durables- Singer, Walton etc.
Constructions - all cement, steel, ceramic, and other construction sector related companies
Automobiles – IFAD Autos, Runner Automobiles etc.
Lower pressure on balance of payments is a possible silver lining. FoB import in 11M FY22 stood at USD 75.4bn with a current account deficit of USD 17.2bn during the same period. As the below graph suggests, import of food grains, consumer goods and petroleum products had minimum impact on current account deficit, despite high commodity price in the international market.
The top 3 categories of import, in terms of USD bn, include RMG related intermediary goods, other intermediary goods, and capital goods. The import of RMG related goods are usually offset by export proceeds in the subsequent months. Therefore, the demand of intermediary goods and capital goods pressurized the balance of payments most. The intermediary goods mostly include industrial raw materials such as iron and other metals, plastic and rubber articles, clinker, fertilizer, chemicals, etc.
The demand for industrial raw materials and capital goods may be curtailed if the fuel price hike subdues aggregate demand of such products, thus easing pressure on both balance of payments and the exchange rate.
*1. Extrapolated from ‘Energy Scenario of Bangladesh 2019-20” by Energy and Mineral Resource Division.