oil price implication in bangladesh

7/30/2019 Oil Price Implication in Bangladesh

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SomeMacroeconomicmplicationsfHigher ilPrices orBangladeshbyRizwanul Islam*The paper analyses the impact of the steep rise in oil prices that has takenplace since 1973 on the terms of trade, balance of trade and the capacityto pay for imports out of export receipts of Bangladesh. It shows thatthe countrywould have faced a deteriorating terms of trade even in theabsence of such a rise in oil prices but this phenomenon has madethings much worse for her. Not only her terms of trade deterioratedseverely/ her major exports suffered a setback and the reducedcapacity to pay for imports led to a shrinking of the volume of crucialimports. The additional cost of imports due to higher oil prices was alsoquite substantial in relation to the country's GDP, its growth and exports.

Thus the rise in oil prices seems to have made substantial contributions othe country's impoverishment during the seventies.

I. INTRODUCTIONThere s no domestic upplyof oil in Bangladeshand no reserves foil have yetbeenfound n the country.Obviously,ll the oil comsu-medin Bangladeshmust be imported rom abroad. Hence any changein the internationalil market s bound to have a directeffect n

the economy f Bangladesh. t may,therefore,e useful o analyse theimplicationsor he economy f Bangladesh f theunprecedentedise noilprices hat tookplacesince he atter alf f 1973. It canbeeasily urmisedthatthe most mmediatempact of this pricehikemusthave been onthebalanceof paymentsnd terms f tradeof the country.Apart romthesemacroeconomicmplications,he various sectors of the economymusthave been affectedn varyingdegreesdepending n the extentndnatureof theirdependencen oil. The presentpaper,however,oncen-trates n themacroeconomicmplications nly. Before akingup theseissues n section II, weprovide backgroundo theproblern sectionI.The final ectionpresentsomeconcludingbservations.

The author is an Associate Professor in the Departmentof Economics, Univer-sity of Dhaka. He is currentlyassociated with ARTEP, 'ILO, Bangkok.


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2 The Bangladesh DevelopmenttudiesH. THE BACKGROUNDThe Energy cene nBangladeshThe main sourcesof energy sed in Bangladesh an be broadly ate-gorised s 'commercial'nd 'non-commercial'.he first ategoryncludescoal, oil, naturalgas and hydro-electricower. The main sourcesofnon-commercialr traditional uel are crop residues e. g., rice hull, utesticks,and rice straw) and driedcow-dung.1t maybe interestingo

TABLE ISUPPLY OF ENERGY IN BANGLADESH BY SOURCES. 1973/74

Amount Supplied (PercentageSources (in 1012 BTU) of Total)Commercial Sources

Coal 5.3 (2.0)Oil 36.0 (13.6)Gas 7.1 (2.7)Electricity 16.7 (6.3)

Sub-total 65.1 (24.6)Non-commercial Sources

Cow-dung 50.0 (18.9)Jute sticks 12.0 (4.5)Rice straw 36.0 (13.6)Rice hulls 48.0 (18.1)Bagasse 11.0 (4.1)Firewood 7.0 (2.6)Twigs, leaves 18.0 (6.8)Other wastes 18.0 (6.8)

Sub-total 200.0 (75.4)

Grand Total 265.1 100.0Source: [10].

1 Some of these do have a market in Bangladesh, and hence, cannot be callednon-commercial in a strict sepse.


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Islam : ImplicationsfHigherOil Pricesfor Bangladesh 3note that a large part of all energyconsumed in Bangladesh is stillderived primarily romthese traditional or non-commercial ources. In1973/74, for example, commercial fuel sources accounted for less thanone-fourth f thetotalenergy upply. Table I gives a detailed breakdownof the various sources of energy supply in Bangladesh.

It is clear fromTable I that only 14 per cent of the total recordedenergy consumption n Bangladesh s derived from il. However, n respectof commercialenergy only, oil is the most important ource, contributingmore than 55 per cent of the total supply.An examination f the patternofoil use in Bangladesh reveals interest-ing features.The largestuser of oil is the domestic sector accountingformore than 30 per centof the totaloil consumption.Next in importancecomes the industrialsector, ollowed by thetransport ector see Table II).

TABLE IIUSE OF OIL IN BANGLADESH BY SECTORS, 1973/74

Sectors. j Oil Used (PercentageSectors. (in 10n BTU) I of Total)Agriculture,orestrynd fisheries 1.35 (3.75)Manufacturingnd construction 10.28 (28.56)Transport 8 13 (22.58)Household and othersectors 16.24 (45.11)Total 36.00 100.00Source. [10].However, oil accounts for less than one-thirdof the total consumptionof commercialenergyby the industrial ector. Another nteresting act isthat oil consumption n this sector is dominated by a few largeusers ikeiron and steel, paperand paper products,and ute textiles these ndustriestogether onsume more than 50 per cent of the oil consumed by theentireindustrialsector.2The Rise in Oil Prices

The unprecedented ise in oil prices started in mid-October 1973,when nine out of the ten Arab petroleum exporting countriesagreed to2Data presented in this and the earlier paragraph are taken from [10].


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4 TheBangladesh evelopmenttudiesrestricttheir exports in total and to prohibitaltogetherxportsto certaincountries at the same time, the Gulf membersof the Organization ofPetroleumExportingCountries (OPEC) decided to raise the Gulf postedprices by 70 per cent. They also established link betweenposted pricesand marketprices under which the former would exceed the latter by40 per cent. The immediate mpact of these actions in Bangladesh,as inother oil-importing ountries,was an upward movement n the price ofcrude oil. Trade data indicatethat the pricesof petroleumand petroleumproductsPOL products)n Bangladesh registeredn unprecedentedncreasebetweenthe later half of 1973 and the firsthalf of 1975. For example,the import price of crude petroleumwhich was $ 2.34 per barrel inJanuary1973, rose to $ 8.50 per barrel in September 1974 and reached$ 10.87 by March 1975.3 Table III showsthe movementof importpricesof crude petroleumand petroleumproducts over the period 1969/70 to1978/79.

TABLE IIIMOVEMENT OF IMPORT PRICES OF CRUDE PETROLEUMAND PETROLEUM PRODUCTS IN BANGLADESH1969/70* to 1978/79*

Year Price of Crude Petroleum j Price of Petroleum roductsj (dollars per ton) j (dollars per ton)1969/70 18 251972/73 22 501973/74 60 861974/75 121 1241975/76 89 1261976/77 103 1211977/78 108 1271978/79 124 157Note: * Years refer o fiscal years (July-June).Source: [5], 1975/76 and [6].

It should also be mentioned that the result of the increase in crudeoil prices at source was not confinedto an increase in the import priceof oil and oil products the pricesof other ommoditieswhich re linkedup with those of POL products also went up. Table IV shows the changesin the prices of some important mportedcommodities.3Data taken from [5], 1974/75.


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Islam; Implications f HigherOil Pricesfor Bangladesh 5We see from Table IV that after 1972/73,the import prices of com-modities other than petroleum and petroleum products also registeredsubstantial ncreases.Between 1972/73 and 1975/76,for example, pricesof important mportitems like rice, cotton yarn, fertilizers nd cement

TABLE IVPRICE INDICES OF SOME IMPORTED COMMODITIES IN BANGLADESH1973/74 to 1978/79 (1972/73= 100)

Items | 1973/74| 1974/75 | 1975/76J 1976/77| 1977/78j 1978/79**Rice 136 258 261 194 148 179Wheat 160 171 154 125 101 132Edible oil 135 158 140 110 141 161Oil seeds 216 292 191 177 215 211Crude petroleum 273 550 405 468 491 564Petroleum roducts 172 248 252 242 254 314Rawcotton 196 196 145 206 176 181Cottonyarn 200 260 325 230 173 162Fertilizer 142 271 244 133 171 208Cement 215 370 225 235 240 295Note: The figures re the indices of unit prices.Source : [ 6. p. 25 ].more than doubled or trebled.Aftera temporary lull of 1976/77,pricesstartedrising again in 1978, and the 1978/79 prices of important mportitems like wheat, edible oil, oil seeds, fertilizers and cement either ex-ceeded or reached close to the 1975/76evel. And this price increasehadimportant mplicationsfor the country'stermsof trade, balance of tradeand the capacity to import.We shall now turn to an analysis of theseimpacts.

III. THE MACROECONOMIC IMPLICATIONSThe immediate mpact of the rise in the prices of oil and relatedcommoditieshas been on the external position of the country. In orderto give an indication of the order of magnitudeof such impacts, itmay

be convenient to distinguishtwo separate though related consequencesbroughtabout by these price increases.First, the increase in oil prices can lead to a worseningof thetermsof trade of an oil-importingcountry such as Bangladesh. This may


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6 TheBangladesh evelopmenttudieshappen due to a rise in the import price index which in turn has beencaused by the increased cost of petroleum imports as well as that ofother imports.

But the direct impact of the higher oil price in raising import costsrepresents only part of the consequences. A lower volume of economicactivity in the developed countrieshad led to a reduction n the volumeof exports fromBangladesh. This reduction had an adverse impact onher foreignexchange earnings,and thus on her capacity to import andto supportdomestic investment.4'5Secondly,the rise in oil prices has aggravatedan already acutebalanceof paymentsof the country. The externalfinancingproblemhas resultedmainly fromthe needto increase the flow ofreceiptsof foreign xchangein order to meet higher total import bills. It is, thereforenecessarytoanalyse the nature and magnitudeof the balance of payments problemand examine whethertherehas been any difficultyn maintainingtheflow of importsneeded to maintain the productionlevel of sectorswhichdepend primarilyon imported nputs.Impact of Higher Oil Prices on Terms of TradeThe above discussion indicated hat higheroil prices must have affectedthe import price ndices of Bangladesh. And it is possible that n the wakeof worldwide inflationthat followed the rise in oil prices, heexportpricesof Bangladeshhave also gone up to someextent.Thus the mmediatempactofhigheroil prices must have been on the termsof trade ofthecountry.We shall examine the nature and magnitudeofthese effects y analysingthe movementof termsof trade. For this purpose, we have selected heperiod 1972/73to 1978/79. The earlier year has been selected as thebase year, because the prices of oil and oil products startedrising onlytowards the end of 1973. Necessarydata were obtained fromthe Plan-ning Commission and the BangladeshBureau of Statistics. The methodo-logy used is described in theappendix.

4This adverse effect could, of course, be compensated by an additional inflowof capital. But there is no evidence to show that a sufficient inflow of capitalhas actually taken place.

5The secondary repercussions of this reduction in exports must have been ondomestic production and hence on employment. Some illustrations of such secon-dary repercussions can be found in [8].


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Islam: ImplicationsfHigherOil PricesforBangladesh 7Now, it is possible to isolate the impact of higheroil prices by cal-culating twosetsof mport rice indices one by includingand the otherbyexcludingthe mports foil and oil products and comparing hem. Such acomparison, however,would not reveal the true picture,because theout-rightexclusion of oil and oil productswould preventthem fromplayingany role in the importprice index although they have an importantweightin the importbill. One way of allowing these products a placein the import price index and yet isolating the impact of their increasedprices could be to calculate an import price index assuming that their

prices in all years were the same as that ofthe base year. Accordingly,three sets of commoditytermsof trade have been calculated. They aredistinguished romeach other s follows (i) thefirst et includes petro-leum products at currentprices (ii) the second set includes POL pro-ducts but assumes that the prices in all subsequentyears were the sameas that in 1972/73 and (iii) the third set excludes POL products alto-gether. These three sets are presented n Table V.The comparisonbetween these three sets indicates the impactof rising

oil prices on the terms of trade of the country. A comparison betweensets 1 and 2, for example, indicates that even with constant prices ofPOL products,the countrywould have faceda substantialdecline in herterms of trade. But it is clear fromTable V that increases in the priceof POL products have furtheraggravatedthe situation.6 Moreover, itmust also be mentionedthat in this analysis we have not been able toisolate the termsof trade effect f other price increases caused by therise in oil prices. If this latter impact could be isolated, the real effectof increased oil prices on the terms of trade of Bangladesh could beshown more clearly. It is probable, however, that the true impact isgreaterthan that indicated by the difference etweentwo sets of termsof trade presented n Table V.

In order to determine he extent o which the countryhas been madepoorer by the increased cost of petroleum imports, we have tried to6One might point out that the terms of trade improved after 1975/76 despitethe fact that oil prices continued to increase. This clearly is due to the decliningtrend in the prices of many of the imports which started in 1975/76 and became

more prominent in the two subsequent years. The trend might as well have beenset by the temporaryfall in oil prices during the same year. Itmay also be noted,however, that the import price index went up again in 1978/79 when the oilprices registered a big increase over the previous year and the prices of most ofthe other imports followed suit (see Tables IV and V).


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8 TheBangladeshevelopmenttudiesTABLE VTERMS OF TRADE FOR BANGLADESH (1972/73-100)

v ExportPrice Import rice Commodity ermsYear Index Index of Trade

Set 11973/74 105 164 641974/75 127 226 561975/76 178 332 541976/77 213 304 701977/78 221 269 821978/79 274 327 84Sat 21973/74 105 157 671974/75 127 206 621975/76 178 300 591976/77 213 266 801977/78 221 229 961978/79 274 279 98Set 31973/74 105 160 661974/75 127 213 601975/76 178 313 571976/77 213 277 771977/78 221 238 931978/79 274 291 94

Source : Calculated fromdata providedby (i) ForeignTrade Wing, BangladeshBureau of Statistics (ii) World Bank ResidentMission in Bangladeshand (iii) PlanningCommission,Governmentf Bangladesh.


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Islam : ImplicationsfHigherOil PricesforBangladesh 9quantify ome of the macroeconomic implications. Table VI summarizesthe results. First we have calculated the additional cost of petroleumimports fortheyears after 1972/73)whichhas been solely due to increasedprices. This additional cost can be expressedas a percentage f nationalincome. In 1974/75,for example, this additional cost was more than 2per cent of the national income. It maybe mentionedhere that the rateof increase of national income during this year was only 2 per cent.7Thus we see that the increased cost of petroleum mportshas more thaneaten up the increase in national income during that year. During thenext two years, the additionalcost of petroleum mportsas a percentageof national income increased further.

If we add the additional cost of other importsdue to price rise, theimplicationsare seen to be even more serious. It is of course true thatnot all this additional cost can be ascribed to higheroil prices, butthereis no doubt that the post- 973 global inflation was caused to a largeextentby oil price increases. And hence, row 6 of Table VI (whichTABLE VI

SOME MACROECONOMIC IMPLICATIONS OF HIGHER OILPRICES FOR BANGLADESH, 1973/74 TO 1976/77(value in thousandUS dollars)

1973/74 1974/75 1975/76 1976/77Items over over over over1972/73 1972/73 1972/73 1972/731. Additional ost of oil importsdue to price increase 39.716 122.719 104.904 121,8802. Additional ostof othermports*due to price ncreases 108,661 427,807 411,069 181,4813. Additional arningsfrom x-ports*due to price increases 14,135 77.347 160.421 190.1434. GDP at market rices 6,237.000 6.036.875 3.836.207 3.700,0005. (1) as % of (4) 0.64 2.03 2.73 3.296. (1) + (2) as % of (4) 3.53 9.12 13.45 8.127. (3) - (1) - (2) -134.242 -473,179 -355,551 -113.2178. Actual exports 371.763 382.675 380.469 412,2009. (1) as % of (8) 10.7 32.1 27.6 29.610. (1) + (2) as % of (8) 59.3 143.9 135.6 73.6Note : * The appendixcontains a list of the imports nd exports includedhere.Source : Calculated fromdata providedby sources mentioned nderTable V.

7lt might lso be interesting o note hat during1974/75. national ncomepercapita also declined comparedtothat of 1973/74. In constantprices of 1972/73.per capita income in 1973/74 and 1974/75 were Taka 650 and 645 respectively.See [6. p. 187J.


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10 TheBangladeshDevelopmenttudiesexpressesthe additional cost of all importstaken togetheras percentageof national income) can be taken as a rough measure of the extenttowhich the countryhas been made poorer by higheroil prices.

It is true, however,that the prices of exportsfrom Bangladesh havealso registered ome increase during this period, and the resulting gainmust have offset he loss to some extent. But the net resultwas consi-derable deficitsas indicated in row 7 of Table VI.Impacts on the Capacity to Importand the External BalanceHow the country's capacity to pay for imports from exports alonewas affected y the rise in oil prices can be seen from a comparisonofthe value of exportsand the additional cost of oil imports. Row 9 ofTable VI reveals that the additional cost of petroleum mportsdue tothe price rise alone in 1974/75was about 32 per cent of total exportsthat year. This indicates that only if Bangladesh had increased exportsby this amount she could have maintainedher capacity to pay for otherimportsout of export receipts but this did not happen.

Moreover, it is well-known hat the recession n developedcountriesfollowingthe rise in oil prices led to a reduction n the volumeof exportsfrommany LDCs.8 That Bangladesh is no exception to this can be seenfromTable VII where we show the movementof the volume of exportsof the major commoditiessince 1972/73. It is seen thatexports of almosteverycommoditywent down in 1974/75. The onlymajor exceptionswerehides and skins which had already reached a low in 1973/74. Afterthetroughof 1974/75,the next two years were somewhatbetter with theexportsof raw jute and tea rising. But the volume of both the exportsdeclined again in 1977/78. In fact, the volumeof raw jute exportscouldnever reach the levels of 1972/73 and 1973/74. The exportsof jutemanufacturingnd hides and skins fluctuated ven after 1974/75,with helevels of the latter in 1977/78 and 1978/79being lower than that of1974/75.

8lt may be pointed out that this is onlytrueso faras the LDCs exports to OCsare concerned. And here it may be pertinentto ask : What proportion ofBangladesh's exports goes to the DCs ? An examination of the destination ofBangladesh's export reveals that a major portion of it goes to the DCs. In1976/77 for example, 78 per cent of the total value of her exports went tocountries in North America, Europe (including East Europe and U.S.S.R.).Australia and New Zealand, (Data from 17]).


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Islam : Implicationsf HigherOil Prices for Bangladesh 11The result has been a reduction n her capacity to pay for importsand a deteriorationn her externalbalance situation see Table VIII). Itshould be mentionedherethatthe decline n the trade deficit after 1914/15(as Table VIII shows) is more apparent than real, and has been causedby the devalutionof 197S. The Taka value of the deficit n fact showsa continuous upward trendwith the exception of 1976/77.It must be noted here that the commodity erms of trade used inour earlier analysis does not allow for shifts in the foreign offercurve.

But we have just seen that after 1973/74exportsfromBangladeshcameunder pressure froman inward shift n the foreignoffer curve. Theconsequencesof such a shift can be analysed by using the income termsof trade which measuresa country's mport capacity in termsof exportsalone. The income terms f trade as a measure f import capacity shouldnot, however,be confused with total import capacity, which depends onforeignaid and loans, net factor earnings,etc.TABLE VII

EXPORTS FROM BANGLADESH. 1972/73 to 1978/71Commodities Unit 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79Kaw jute '000' tons 464 461 307 407 454 306 361JutemaiHjfg. 000' tons' 433 438 379 439 392 522 457Tea '000' lbs.58,245 48.800 44.300 51,500 64.452 55,807 54.836Fish cwt. n.a. 136.971 64,214 75,461 69.998 n.a. n.a.Hidesandskms 000' tons 11 7 11 13 11 9 10Note : n.a. denotes not available.Burees: [5], 1976/77 and [3:4].

In order to examine the extentto which the country's capacity toimporthas been affected y the rise in prices, especially of oil and oilproducts, we have calculated three sets of income terms of trade(see Table IX). The difference etweenthese three sets is the same as inthe case of commoditytermsof trade (Table V). A comparison betweenthe commodityand income termsof trade reveals that the deteriorationin the latterhas been much more severe upto 1976/77. This indicates


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12 The BangladeshDevelopment tudiesTable VIIIBALANCE OF TRADE OF BANGLADESH, 1972/73 to 1978/79

(value in thousand US dollars)Year Surplus/Deficit1972/73 + 55.8751973/74 - 554.6241974/75 - 963.2501975/76 - 631.1031976/77 - 472.4511977/78 -712.1291978/79 -780.322

Note : Official xchange rates used forthe conversionof value figures reUp to 1974/75: $1 - Tk. 8.001975/76: $1 - Tk. 14.50After 1975/76: $1 = Tk. 15.50Source: [2. p. 311].that the decline in export volumes coupled with an already deterioratingcommodity ermsof trade severely mpaired the country's capacity o payfor imports. A comparisonbetweensets 1 and 2 in Table IX showsthe impact of higheroil prices. It is clear from this table that had theprices of POL productsremained constant,the decline in income termsof trade would have been less sharps.9 If we could show how far theshiftof the demand curve in the exportmarket was due to rising oilprices,we could demonstrate their impact on the country'scapacity toimportmore fully. The conclusion is inescapable,however,that thedeclinein the volume of exportshas severely ffectedBangladesh's capacity ofpay for the greatly increased importbill (which was again caused largelybyhigheroil prices and related price increases).This in turn,can have serious implicationsfor the flow of importsinto the country. In order to examine the nature and magnitude f suchimports,we have calculated the index of the volumeof imports for someimportant onsumer nd intermediate oods. Table X presentshese indices.9After 976/77 the income termsof trade started mproving s had the com-modity ermsof trade-the improvementn the formerbeing more marked. ButTable IX showsthat therecoverywould have been morepronounced n the absenceof thesteeprise n theoil prices.


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Islam : ImplicationsfHigher Oil Prices for Bangladesh 13Data presentedhere indicate that n almostall cases except POL products,the flow of imports was adversely ffected although in varying degreesinvariousyears. The case of capital goods could not be examined becauseof the lack of data on the quantityof such goods imported.

TABLE IXINCOME TERMS OF TRADE OF BANGLADESH (1972/73 100)

Year | Set 1 | Set 2 | Set 31973/74 60 63 621974/75 46 51 491975/76 58 64 491976/77 68 78 751977/78 89 105 1011978/79 95 111 107Source: Our calculations.

TABLE XINDEX OF THE VOLUME OF IMPORTS INTO BANGLADESH (1972/73= 100)Commodities 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79Foodgrains 57 87 51 28 58 42Rice 23 67 102 51 77 15Wheat 63 90 43 25 55 46Crude petroleum 47 112 115 141 158 142Petroleum roducts 562 345 311 219 248 293Raw cotton 44 63 57 63 48 66Cottonyarn 173 18 8 45 90 50Fertilizer 61 96 149 19 174 265Cement 36 103 69 66 123 139Source: Calculated from 11. p.87].

In the aggregatea change in the total volume of importscan bedetectedby comparingthe total importvalue index with the import riceindex if the volume of imports remains constant as import prices


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14 The Bangladesh Development tudiesincrease, the two indices will change in the same proportion. If theformer ndex changes less than the latter,a decline in the volume ofimportsis indicated. Table XI shows that the index of importvalueswas much lower than the import price index throughout he periodunderinvestigation. We may, therefore,onclude that the volume of importsdeclined after1972/73."

TABLE XIINDEX OF IMPORT VALUE AND IMPORT PRICE (1972/73=100)

vear I Indexof the Valueof I ImportPricevear I Total Imports ( Index1973/74 127 1641974/75 193 2261975/76 174 3321976/77 119 3041977/78 185 2691978/79 220 327Source : Index of importvalue has been calculated from data provided bytheWorldBank. Reportmentioned t the bottomof Table X. Importprice index staken fromTabJe V.

It is possible to argue that increased domestic productionmay havereduced import requirements f the countryand that the above-discussedfall in import volume may simplyreflect uch reduced requirement. Butthe decline in the volume of importsoccurred even in the areas wherethe countrydepends entirely n imports. Imports of raw cotton, forexample, declined substantially fter 1972/73,while there was no increasein the importsof cotton yarn to offset his decline. In fact, there wasa sharp fall in the importsof yarn as well after 1973/74. In somecases( e. g., foodgrainsand fertilizers domesticproductionncreased to replaceimportsto some extent,but the reductionin die total volume of importscannot be ascribed to reduced importrequirements. Generally speaking,this was due to the country'sshrinking apacity to pay.

10This conclusion is subject to the qualificationthat the weights used inthe two indices are somewhatdifferent,ndthismighthave caused some differencein the movement f the two indices in Table XI.


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Islam : Implications f Higher Oil Prices for Bangladesh 15Importsof capital goods and intermediate oods ( including raw ma-terials were cut most drastically. In fact, there is evidence that after1972/73, the manufacturing ndustries of Bangladesh suffered romanacute shortageof raw materials.11Consequently, he rates of operation findustriesdeclined considerably.12

IV. SUMMARY AND CONCLUSIONSIn this paper we tried to examine the impact of the steep rise in oilprices that has taken place since 1973 on the terms of trade, balanceoftrade and the capacity to pay for imports out of export receiptsofBangladesh.We have also attempted o see the additional costs the country hadto incur because of higheroil prices in relation to her gross domesticproductsand exports. The resultspresented n the paper indicate hatthecountrywouldhave faceda deterioratingerms f tradeeven in theabsenseofsuch a rise in oil prices, but this phenomenon has made things much

worse for her. Not only her terms of trade deteriorated severely, hermajor exports suffered setback and the reduced capacity to pay forimports ed to a shrinking f the volume of crucial imports. The addi-tional cost of importsdue to higheroil prices was also quite substantialin relation to the country'sGDP, its growth,and exports. Thus the risein oil prices seemsto have made substantial contributions o the country'simpoverishmenturing the seventies.One may,ofcourse, rguethat for Bangladesh increasesin the prices of

other commodities like foodgrains,fertilizers,machinery, tc.) were muchmore importantthantherise n thepriceofoil. But we have arguedthatthepost- 973 global inflationwas caused toa large extentby the increase nthe price of oil. Thus althoughthe rise in the price of oil was not theonly shock inflicted n the economy of Bangladesh the 'total' effect ofthis shockwas quite farreaching and severe. This should not, therefore,be dismissed as a second-orderproblem for Bangladesh.How can theadverse consequences of the increase in oil pricesbe mini-mized? One waywould be to reduce imports and since Bangladeshdoesnot have any domestic supply of oil the only way to do it would be to

"See [7].12See [9].


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16 The Bangladesh evelopmenttudiesreduce the consumptionofoil. The major users ofoil in Bangladesh arethe household, the transport and the manufacturing ectors and thenecessaryeconomyin oil consumptionhas to be achieved mainlyn thesesectors. Fuel for cooking and lightingare the importantuses of oil inthe household sector and more economical alternatives n these usesneed to be found.13 In the transport ector, simultaneously with thesearch for alternativefuel, ttemptshould be made to achieve economyin the use of oil.14 In the manufacturingector also careful nvestigationshould be made into the presentpatternof using oil and thepossibilitiesof substitution.Clearly, a lot more need to be known before one can make usefulpolicy recommendations. t mightbe useful to examine how the differentsectors using oil adjusted to the changed circumstances. Even in case noconscious adjustmentwas made, an analysis of the impact of thepheno-menon on the coststructure f theusing sectors ould be quite interesting.The economics of using alternatives n various sectors need to be care-fully worked out. Finally, the role of pricing and other policies nachi-eving substitution nd economyin the use of oil should be explored.These can be subject mattersfor future research in the area.

13Here one should avoid the danger of naively suggesting a substitution ofoil by natural gas which is available domestically, for the latter can have manymore profitable uses and the economics of oil-gas substitution should be carefullyworked out for the household sector.14One way, for example, of doing the latter would be to develop and encou-rage the use of mass transport rather than private transport.

REFERENCES1. Bangladesh Bureau of Statistics,MonthlyStatistical Bulletinof Bang-ladesh, March 1978.2. StatisticalPocketbookof Bangladesh,1979.3. , Statistical Yearbook,1980.4. Foreign TradeWing, Bangladesh Bureau ofStatistics,AdvanceRelease,

(Various issues).5. Government f Bangladesh, Ministryof Finance, Economic Survey,(Various years).6. , Planning Commission,EconomicReview, 1978/79.


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Islam : Implications f HigherOil Prices for Bangladesh 177. Islam, Rizwanul, "Reasons for Idle Capital : The Case of Bangla-desh Manufacturing",n The BangladeshDevelopment tudies,VoiVi,No. 1.8. , Some Economic mplications f Higher Oil Prices TheCase of Bangladesh,WEP ResearchWorking Paper, LO, Geneva, 1979.9. , "Public Enterprise Policy in Bangladesh", in P. K. Basuand A. Nove (eds.), Public Enterprise olicy in the Asian and PacificRegion,APDAC, Kualalampur, 1979.10. Montreal Engineering and others, Bangladesh Energy Study (mainreport), 1976.11. World Bank,Current conomicPositionand ShorMermOutlook* 98&


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AppendixDATA AND METHODOLOGY FOR CALCULATINGTERMS OF TRADE

Sourcesof Data and CommodityoverageIt shouldbe notedatthe outsetthatwe have used unitvalue indicesas pricendicesfor othexportsnd imports.This s of coursea commonpractice ecause fthe obviousdifficultynvolvedn obtaining ricefiguresfor ndividualmportedtems.The periodwhich asbeen coverednthe present tudys from1972/73to 1978/79. he mostseriousproblemwas posed by the difficultiesnobtainingdetailed and reliable trade statisticsfor this period andthis is especially rueof imports.The ForeignTrade Wing f theBureau

of Statistics f the Governmentf Bangladeshwhich s in charge ofcompiling ata in this area facedmanyproblemsn doing so after heLiberation f the country.Hence,we had to look for alternativeourcesfor mport ata. PlanningCommission f the Governmentf Bangladeshand theWorld Bank ResidentMission in Dhaka were able to provideus withnecessary ata forthe major importitems.We did our owncalculations f the import rice ndiceson the basis of these tems.Relevantdataonexportswere available nthevarious ssues fAdvance

Release suppliedby the ForeignTradeWing of the BureauofStatistics.We calculated he unitvalue of exports y usingthis data.Unfortunately,one fthe sourcesmentionedbove,provide completecoverage f all importsand exportson the basis of StandardTradeClassification.o, we had to do our calculations n the basis of themajor temsof exports nd imports.The importprice ndexis based onthe followingommodities (i) rice (ii) wheat (iii)^edibleoils (iv) oilseeds (v) raw cotton (vi) cottonyarn (vii) fertilizers(viii) cement(ix) crudepetroleumand (x) petroleumroducts.The items mentionedabove constitutever 60per entof the total imports f Bangladesh. heitemsncludedn the exportpricendex re (i) rawute (ii) jutemanu-factures(iii) hidesand skins (iv) leather and (v) tea. These togetheraccountfornearly 5 per centof the totalexports f Bangladesh.


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Islam : Implicationsf Higher Oil Prices for Bangladesh 19MethodologyIn this study, we calculated both the commodityterms of trade andthe income termsoftrade. The formula for the commodityterms ftrade( Tn ) is given by

rmwhere

Px_

export price index, andP = importprice index.A decline in T would obviously mean an adverse movement n thecountry'stermsof trade.Now the question is, how do we calculate Px and Pm ? The firstproblemarises from the various ways of calculating these indices (forexample, Laspeyre's, Paasche's or Fisher's Ideal index). And it is difficultto establish the superiority f either of the first two indices over theother. The choice betweenthe firsttwo would of course depend on thetype of question we are asking. While the Laspeyre index is a base yearweighted ndex, the Paasche index uses currentyear quantities as weights.Unless there are significanttructural hanges, the two indices should befairlyclose to one another. Moreover, for the presentstudy it seemedmore appropriateto investigatehow the prices of a given bundleofgoodsmoved compared to the base year. That is why,we have used the Las-peyre's price index. The relevant index for imports and exports arerespectively

p _ Pml qmo 100m n n*mo Mmopx=LJ_.iooPxo **xo

where p and p for the i-th commodityare calculated as111 X

where V* is the value of import r export of the i-th ommoditynd q. is


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20 The Bangladesh evelopmenttudiesthe volume of export or import of the i-th commodity.The income termsof trade ( T ) has been calculated as :

T = - - O .100y p xmwhere Q is the index of the volume of exports. Here the index of thevalue of exports s deflatedby the importprice index. The resultingndexthus clearly becomes measureof importcapacity. It shows thepurchasingpower of exports. From the formulaof income termsof trade, it can beseen that movements f the commoditytermsof trade and income termsof trade can take place quite independently f each other. The incometerms of trade may decline despite a rise in the commodity terms oftrade ifthe fall n exportvolume more than offsets he rise in the pricesof exportsrelative to imports.

oil price implication in bangladesh

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