Business & Finance News

Wednesday, August 11, 2004

Compiled by SDNP

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ECB policymakers  keep cool as oil heats inflation

The Bangladesh Observer

FRANKFURT, Aug 10:–European Central Bank policymakers are taking record-high oil prices in their stride, signalling the surge will prompt no early credit tightening as long as broader wage and price pressures stay subdued, reports Reuters.

ECB Vice President Lucas Papademos in an interview published on Sunday was the third euro zone central banker in the past two weeks to stress that the inflation prospects remain favourable despite the more than 30 percent surge in oil prices this year.

"Taking account of the likely influence of all the determinants of price developments, we believe that annual inflation will average below 2.0 percent in both 2005 and 2006," Papademos told Italy's Il Sole 24 Ore newspaper.

Strong global demand, underpinned by the United States and China, plus worries about supply disruption in key oil producers the Middle East, Russia and Venezuela, have conspired to push crude prices to 21- year highs this month, despite rising output.

Surging oil prices pushed euro zone inflation to an annual 2.5 percent in May and held it at 2.4 percent in June and July, and inflation is expected to stay above the ECB's two percent ceiling for some months into 2005.

But ECB confidence that prices will retreat next year allows it to avoid tightening credit for now, though it is warning trade unions not to try to compensate for higher oil prices by demanding more pay. So far this strategy is working.

The ECB can take heart from recent deals at Siemens, DaimlerChrysler and Bosch that extend working hours for no extra pay. After these surprise pacts were struck, ECB Governing Council member Guy Quaden said: "So far we do not see any second- round effects from the rise in oil prices."

Hence the oil price rise seems much more bark than bite.

For one thing, the euro zone ecoonomy is not as vulnerable tooil price rises as it was in the crisis years of the 1970s.

Papademos noted that the current rise in oil prices has lasted 67 months and has already exerted much of its impact on inflation and growth, in contrast to the sharp rise that occurred over just two months in the 1973- 1974 oil crisis.

Other factors are also shielding the euro zone. The euro is holding above $1.22, dampening the cost of oil, which is priced in dollars. And much more of the price at the pump in the euro zone reflects taxes rather than crude prices.

A rise of $10 per barrel now knocks about 0.4 percent off growth in developed countries in the first year, said Paul Andersen, head of macroeconomic monitoring at the Bank for International Settlements in Basel.

This is partly because the euro zone, like other developed economies, uses crude oil much more efficiently than it did in the 1970s, said Fatih Birol, chief analyst at the International Energy Agency in Paris.

They look to sources other than oil for much of their energy production, chemicals are produced more efficiently and cars burn 20-25 percent less gasoline to drive 100 kilometres than they did 30 years ago.

On the other hand, the heavy fixed investment in cars, jets and other forms of transport will keep developed economies dependent on oil for years to come.

"That is a rigidity," Birol said. "We will be needing a lot of oil and consuming a lot of oil in the future."

At least the euro zone does have an excellent public transportation infrastructure, making it less dependent on costly auto travel than the United States, helping cushion the economic impact of higher oil.

U.S. light crude traded as high as $44.75 a barrel on Monday, just shy of Friday's record of $44.77, the highest price since the New York Mercantile Exchange launched oil futures in 1983.

That's way above the ECB's June staff projections that had assumed oil prices would fall to $31.8 per barrel in 2005 from $34.6 in 2004. The mid- point of the ECB's forecast range for inflation next year is 1.7 percent.

James Nixon, an economist at Barclays Capital in London, said he expects the ECB to revise up its inflation forecasts in projections due for publication in September. He forecasts oil at about $43 per barrel in the second half of this year.

"We are in an environment where if there were any further shocks to demand or supply, there is a definite risk that the oil price could spike higher," he said.

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Businesses want special flood insurance scheme from govt.

Business leaders yesterday urged the government to launch a special flood insurance scheme for industries through the state-owned insurance company to help them cope with the recurrence of flooding.

As flood is a perennial problem in the country they said the government and the businesses should look for permanent ways to minimise losses caused by the natural calamity to industrial sector.

Sadharan Bima Corporation, the general insurance company under the Ministry of Commerce, may introduce scheme to provide insurance coverage especially to the factories vulnerable to flood damages, they said.

The suggestion came at a discussion on 'Post-flood Rehabilitation of the Business Enterprises' organised by Dhaka Chamber of Commerce and Industry (DCCI) in Dhaka. Commerce Minister Altaf Hossain Choudhury attended the meeting.

"With the record of high magnitude floods in 1954, 1955, 1974, 1987, 1988, 1998 and this year, we can say that Bangladesh is a highly flood risk country. So, business community needs permanent precautionary measures to manage the risk," DCCI President Fazle RM Hasan told the meeting.

He called for forming an inter-ministerial taskforce to assess the flood-related damages and help the affected industries especially the small and medium enterprises (SMEs), which do not have required strength to recuperate their losses.

The DCCI chief also urged the government to relieve duty on raw materials and machinery of flood-hit industries, extend time limit for loan payment, waive interest for three months and relieve demurrage charge for stranded goods at ports.

Sabur Khan, DCCI director and former president of Bangladesh Computer Samity, said every industry should take flood as a risk factor and get insurance coverage for it. "The government can initiate flood insurance scheme so that other companies can follow."

Monzur Ahmed, another director of DCCI, said it is high time the businesses took long-term measures to face the recurring floods. "Flood insurance scheme may mitigate losses to industries," he said.

Addressing the meeting, the commerce minister said the government will hold an inter-ministerial meeting and take up action plan to rehabilitate flood-hit industries.

"The total loss is estimated at Tk 35,000 crore to Tk 40,000 crore due to this year's devastating flood. This is a big blow to the economy at a time when we are exposed to challenges of the post-MFA (Multi-fibre arrangement)," Altaf said.

"But the government and industry people will work together and surely overcome the challenges," he said referring to his meetings with leading chambers and trade bodies for taking their inputs for undertaking an appropriate action plan.

MA Momen, former director of the chamber, said the government should chalk out special rehabilitation programme for flood-hit SMEs. "The big industries may survive the flood loss but many SMEs may face closure as they run with small working capital."

Syed Tawfique Ali, former senior vice-president of DCCI, said the government may think of constructing protection dam around industrial area to save them from floods.

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