DHAKA, May 18: The World Bank has recently advised the government of Bangladesh to ‘significantly narrow’ the gap in diesel prices with India, as it believes Bangladesh’s petroleum subsidies benefit Indian traders because of wholesale smuggling.

“A significant part of the quantity Bangladesh Petroleum Corporation (BPC) buys at international prices from India flows right back to India at subsidised prices: thus, a chunk of the fuel subsidies intended for Bangladeshi consumers are in fact enjoyed by Indian importers,” says an World Bank aide-memoire to the finance ministry. The memoire was submitted on May 8 after a visit by the bank’s mission in April.

The mission recommended that this unsustainable situation be corrected by significantly narrowing the gap with prices in India: especially diesel, which sold for about Tk50 per litre in Kolkata, compared with Tk30 in Bangladesh.

Notably, a major portion of the refined diesel used in Bangladesh is imported from India, as Bangladesh can cater to only a sixth of the total demand. Bangladesh subsidise Tk10-12 on every litre of diesel and kerosene.

“This (subsidy) was resulting in annual losses of about Tk 30 billion for Bangladesh Petroleum Corporation, a large part of which had been covered by borrowing from the Nationalised Commercial Banks (NCBs), further exacerbating their financial fragility,” the WB memoire says.

“Further, wholesale smuggling to India, where prices of petroleum products are higher, represents a net loss to the economy. These growing energy sector losses risked jeopardising Bangladesh’s excellent record on macroeconomic stability and sustainability.”

The bank has also suggested increase in the prices of power and gas.

It cautioned that the stability and sustainability of the macro economy would be jeopardised in case energy prices were not adjusted.

The disbursement of $150 million under the DSC-4 loan package is very much linked with the significant price adjustment of energy prices, the bank hinted in the memoire.

It says the poorest could be helped through a compensation mechanism on kerosene price.

“We understand that the Government of Bangladesh is concerned about the social and political ramifications of price increases, especially for kerosene, but these can be contained through a good public information campaign and a well designed compensation mechanism for the poorest, if necessary,” the bank’s country director, Christine I Wallich, wrote to the finance and planning minister, M Saifur Rahman, in a separate letter on the same day.

The International Monetary Fund has also advised the government recently to increase the energy prices.

Meanwhile, the officials in the finance ministry said the price adjustment of energy products was inevitable, which would soon be finalised by Prime Minister Khaleda Zia.

The method for providing compensation to the poor on enhanced kerosene price is being prepared, they said.