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    Impact of Energy Price Adjustments on Bangladesh Economy: A Macro-Econometric Modeling Approach

    Hossain, Monzur; Rahman, Mohammad Mahbubur; Rahman, Md. Atiqur | May 2018
    Abstract
    The domestic price of energy products including electricity, oil and natural gas has long been administered in Bangladesh. The government provides subsidy to all these energy products in various forms. The government of Bangladesh incurs a large amount of expenditures in the form of subsidies every year for the energy sector. Against the backdrop of an overwhelming burden of subsidies, the Bangladesh government has intensified its reforms of energy prices in recent times in order to bring fiscal discipline. This study thus, aims to assess the impact of energy price adjustments under a macro-econometric modeling framework. Though this is a model of the macro-economy of Bangladesh, it has been extended to link up the macroeconomic consequences of the changes in the government energy expenditures. The effect of energy price changes on macroeconomic outcomes has been predicted with alternative scenarios of deregulations of domestic energy prices, particularly to the outcomes for growth, inflation, fiscal balances and external balances. The prediction has been done for the period 2015-16 to 2020-21 in line with Seventh Five Year Plan period (2015-2019) and Perspective Plan, 2021. Within sample (1985-2011) predictive accuracy (or validity) of the model is checked by the mean percentage error (MPE) and the root mean square percentage error (RMSPE). We run stochastic simulations to know the out of sample (2012-2021) performance of the model. Under these simulations, the bootstrap method is used to give random shocks into individual endogenous variables but for out of sample period. Random shocks are generated from individual residuals of variables for within sample period. 1000 stochastic simulations/replications are run through bootstrapping. 100 quintiles are computed to compare the magnitudes out of sample forecasts, because within the sample uncertainty captured by residuals, it makes variations out of sample forecasts. Overall, the out of sample performance of the model seems quite good. The model initially analyses macroeconomic data for the period 1980-2011. The sample validation and out of sample prediction imply that the model fit was good and it can be used for policy simulations through assumed shocks. Considering the current gap between subsidised and government’s buying price of energy, reasonable alternative scenarios of price shocks were derived and subsequently applied. The simulated results are drawn for the period 2015-2021 making it consistent with the Seventh Five Year Plan and the Perspective Plan. The results suggest that any upward revision of energy prices will be slightly inflationary and as a result the real GDP growth rate will fall slightly during the predicted period. A note of caution in explaining the result is that it is based on the assumption that other variables will remain as usual. The GDP growth and inflationary situation might improve if changes in other macroeconomic indicators take place along with energy price adjustments.
    Citation
    Hossain, Monzur; Rahman, Mohammad Mahbubur; Rahman, Md. Atiqur. 2018. Impact of Energy Price Adjustments on Bangladesh Economy: A Macro-Econometric Modeling Approach. © Bangladesh Institute of Development Studies. http://hdl.handle.net/11540/9486.
    Keywords
    Macroeconomic
    Macroeconomic Analysis
    Macroeconomic Framework
    Macroeconomic Models
    Macroeconomic Performance
    Macroeconomic Planning
    Macroeconomic Policies
    Macroeconomic Reform
    Macroeconomic Stabilization|Household Energy Consumption
    Industrial Energy Consumption
    Results-Based Monitoring And Evaluation
    Evaluation Techniques
    Evaluation Studies
    Evaluation Methods
    Commercial Energy
    Social condition
    Economic dependence
    Economic assistance
    International monetary relations
    International monetary relations
    International trade
    National accounting
    Market
    Domestic Energy
    Energy Demand
    Energy Prices
    Energy Pricing Policy
    Energy Supply
    Primary Energy Supply
    Development Indicators
    Social Participation
    Low Income Groups
    Income Generation
    Newly Industrializing Countries
    Exchange
    Comparative economics
    Index number
    Monetary policy
    Value analysis
    Adjustment cost
    Transaction cost
    Conditionality
    International relations
    Cumulative effects assessment
    Grievance procedures
    Participatory monitoring and evaluation
    Power resource
    Electric power
    Energy development
    Renewable energy resource
    Energy assistance
    Energy tax credit
    Electric power consumption
    Cost effectiveness
    Supply and demand
    Prices
    Energy resource
    Energy consumption
    Price Indexes
    Infrastructure
    Show allCollapse
    Citable URI
    http://hdl.handle.net/11540/9486
    Metadata
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    REF_15_2_Full.pdf (3.039Mb)
    Author
    Hossain, Monzur
    Rahman, Mohammad Mahbubur
    Rahman, Md. Atiqur
    Theme
    Economics
    Energy
    Labor Migration

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    Copyright 2016-2020 Asian Development Bank Institute, except as explicitly marked otherwise