Originally posted in The Business Standard on 12 October 2023
Cutting subsidies won’t address the woes of the energy sector
Experts point out that turning subsidies into the scapegoat masks the much larger problem of “bad policies” in the energy sector that play an outsized role in hiking costs in the sector.
Leading up to the second instalment of the $4.7 billion loan from the International Monetary Fund (IMF) due in November, a visiting IMF mission led by Rahul Anand recently inquired about Bangladesh government’s plans to reduce energy and fertiliser subsidies.
According to news reports, the Bangladesh representatives informed the IMF mission that the government does not have any plans to reduce subsidies on fertilisers at present. But the subsidies in the energy sector will be reduced gradually. Reducing subsidies in the energy sector means increasing energy tariffs, which in turn means consumers will have to bear the ultimate burden.
Despite repeated calls by the funding organisation to stop subsidising loss-making agencies, the government has so far kept increasing the subsidies in these sectors citing various reasons. Although the government has often blamed the Russian-Ukraine War for inflated energy prices, and thus the need for subsidies, experts point out that turning subsidies into the scapegoat masks the much larger problem of “bad policies” in the energy sector that play an outsized role in hiking costs in the sector.
Reducing subsidies and as a result, increasing tariffs, are things that can be implemented easily, because the end consumers are soft targets, observes Consumers Association of Bangladesh (CAB) President Ghulam Rahman.
“Any price hike creates suffering for the people, and turmoil in the economy. The funder should instead investigate the root causes,” Rahman said, adding that the IMF, by recommending to cut subsidies, is only addressing the tip of an iceberg. “At the same time, the bottom [government’s bad policies] remains neglected.”
And what are these bad policies?
The government has so far paid over Tk1 trillion as capacity charges to 82 independent power plants and 32 rental power plants in the past 14 years (as of 30 June 2023). The power plants received the money without operating their plants. Much of the subsidies go into making these capacity payments.
Experts have also for long been criticising the government’s decision to raise the country’s power generation capacity to 23,500 megawatt, when domestic demand is less than 15,000 megawatts.
The Bangladesh Power Development Board (BPDB) has been increasing power generation capacity without any proper forecast of demand. By 2025, overcapacity will reach 50%, which means BPDB will have to pay even more in capacity charges.
To reduce fiscal pressure, power tariffs have been increased three times by 5% each time this year, following the approval of the IMF loan. Despite such repeated price hikes, the government has so far failed to pull back from subsidisation. The 2023-24 budget estimates Tk1,109.87 billion in subsidies to the energy sector. In the 2009-10 fiscal year, subsidies to the sector were Tk9.847 billion.
Apart from subsidies to the power sector, the use of electricity and diesel in irrigation, in the agriculture sector, are also subsidised. According to the agriculture minister, subsidies for fertilisers and electricity was Tk149.41 billion and Tk2.26 billion respectively in the 2021-22 fiscal year. In the 2009-10 fiscal year, Tk40.09 billion and Tk810.4 million were spent on subsidising fertiliser and electricity, respectively.
Governments usually provide subsidies for commodities like food and energy so that consumers don’t feel the heat of a volatile international market.
The government allocated a total of Tk160 billion as agriculture subsidy in the budget for fiscal 2023. However, in the revised budget, the allocation was ramped up to Tk260 billion as the fertiliser price in the international market remained volatile. Meanwhile, the government increased the prices of all types of fertilisers by Tk5 per kg to save some Tk70 billion.
Dr Khondaker Golam Moazzem, research director at Centre for Policy Dialogue (CPD), does not think increasing retail tariffs to reduce subsidies is a feasible solution.
“Take the energy sector. The forex crisis caused by import of energy at a high price cannot be addressed by increasing energy tariffs. It will increase the flow of revenue somewhat, but will have no positive impact on our forex reserve,” he said.
The newly inked power purchase agreements have been done on a ‘No electricity – No pay’ policy.
“I would request the government to revise and renegotiate the old deals with the power plants. Otherwise, the root cause will not be addressed,” Moazzem said.
Bangladesh University of Engineering and Technology’s (BUET) Dean of Engineering Professor Ijaz Hossain said that what IMF has recommended could be implemented easily if the government did not pay the capacity charges.
“Unfortunately, in election year, that is unlikely to happen,” he said.