Energy subsidy demand surging but funds made available trifle

Originally posted in The Business Standard on 09 January 2022

The government looks to go for upward adjustments to prices of gas used in industries and power plants with the state subsidy burden going more than three times higher than the budgetary allocation amid a global price spike.

To offset any inflationary pressure from such gas price readjustment, three stimulus packages have been suggested for low-income people, farmers and selected export sectors.

The issues were discussed in several high-level meetings of the Prime Minister’s Office, finance and energy ministries in the last two months.

জ্বালানি ভর্তুকি বাড়ায় সংকটে সরকার - Energy subsidy demand surging but funds made available trifle


The subsidies for gas, electricity and fertilisers will stand at Tk70,000 crore in FY22, while the amount allocated in this budget is only Tk21,600 crore.

For example, the Energy Division has got only Tk1,000 crore in subsidy against its demand for Tk10,000 crore to meet LNG import bills.

LNG prices in the spot market have skyrocketed to around $30 per MMBtu (Metric Million British Thermal Unit) from only $4 per MMBtu in October 2020.

Again last November, it sent a letter to the Finance Division, seeking an allocation of Tk9,331 crore to continue LNG imports, but it has not got any penny. The import of a single LNG cargo costs Tk1,600 crore.

With the government finding it hard to subsidise rising energy costs, Petrobangla Chairman Nazmul Ahsan in a recent monthly coordination meeting suggested raising gas prices in industrial and power sectors to meet the fund crisis in LNG imports.

Power generation consumed 46% of natural gas, while captive power accounted for 15%, industries 16% and fertiliser factories 5% in 2019-20.

The energy sector has got only half of its allocated subsidy amounting to Tk4,000 crore.

In this situation, Energy and Mineral Resources Division Senior Secretary Md Anisur Rahman insisted on discussing with the Finance Division about arranging funds for continuation of LNG cargo imports.

In the current fiscal year, a subsidy of Tk35,000 crore will be needed for the power sector, Tk10,000 crore for LNG and Tk25,000 crore for fertilisers, while the subsidies for electricity, fertilisers and LNG amounted to Tk8,500 crore, Tk9,100 crore and Tk 4,000 crore respectively in the budget, according to the Finance Division officials.

They think hiking gas and power prices is the only window available for any cutting of subsidy pressure.

But the government is not going to hike fertiliser prices even if the subsidy triples, to keep agriculture production normal and ensure food security in the country in the pandemic time.

Prime Minister Sheikh Hasina herself has rejected the proposal to increase the fertiliser prices, said Agriculture Minister Muhammad Abdur Razzaque.

Moreover, the price of urea in India is Rs7-8 per kg, while it is Tk16 per kg in Bangladesh. In this situation, if the urea price increases in the country, there is a danger of fertiliser smuggling from India.

On November 25, a high-level coordination meeting, chaired by the Prime Minister’s Energy Adviser Tawfiq-e-Elahi Chowdhury, decided in principle to hike power and gas prices.

LNG prices in the spot market increased to over $36 per MMBtu year-on-year in October 2021 from only $4 per MMBtu. The price stood at $29.5 per MMBtu as of 12 December last year, said an energy division official.

Last year, 2,740mmcf of gas was extracted from the country’s gas fields, which has now come down to 2,450mmcf. LNG supply to the national grid was also 600mmcf per day. But the daily demand for gas consumption stands at 4,000mmcf.

The government now cannot import gas as per demand because of high LNG prices in the spot market, the official added.

Three stimulus packages planned to offset effects of possible energy price hike

The finance ministry is also mulling designing three separate stimulus packages to offset cascading effects of the possible energy price hike on the economy, said finance ministry officials.

The Finance Division has already started working on formulating a package for farmers who rely on diesel for irrigation and another for job creation programme in 60 upazilas with a poverty rate of over 30%.

In addition, a new stimulus scheme will be announced for export-oriented industries, but it is yet to be decided who will be brought under it because there already exist such economic bailout packages for both big and small industries, according to sources familiar with the proceedings.

Besides, the ministry will allocate funding for launching an open market sales (OMS) programme across the country for a limited period if inflation surpasses the 6.5% mark, further squeezing wallets of the ultra-poor.

Food Secretary Mosammat Nazmunara Khanum said they have already sent a letter to the finance ministry to keep the OMS programme running for the next six months from January this year owing to rising food prices.

In a recent Budget Monitoring and Resource Committee meeting presided over by Finance Minister AHM Mustafa Kamal, the Finance Division placed a proposal on readjusting gas and electricity prices to ease subsidy pressure and suggested announcing three stimulus packages to mitigate its ultimate impacts on consumers.

Finance ministry officials say the Finance Division has chalked up strategies to absorb negative impacts of the energy price hike on all sectors, from manufacturing to supply chain to consumption, as well as relieving the poor of inflationary pressures.

But they think there is nothing more to do other than continuing with the ongoing expansionary monetary policy.

There should not be any adversarial selection only to keep on credit flow to the private sector, they warn.

In its strategy paper, the ministry also put importance to speedy implementation of megaprojects, including Padma Bridge, to speed up the supply chain management. Besides, it suggests tightening the belts when it comes to unnecessary government spending.

The ministry believes that “economic growth is moving towards the desired goal” as reflected in revenue collection in the first half of FY22, a rising trend in exports and imports, growing production and a rise in private sector credit flow, according to the paper.

But high imports driven up by a global price spike, depreciation of taka, soaring product costs in the international market and skyrocketing freight costs have kept upward pressure on inflation, eventually putting limited-income people in a tight corner, ministry officials said.

If prices are not calibrated in the local market to ease subsidy pressure, inflation will go up further. Against this backdrop, finance ministry officials find no way other than taking up fiscal measures.

Seeking anonymity, an additional secretary to the finance ministry, told The Business Standard that there have been talks of raising gas and electricity prices, but they have not reached a final decision yet.

They are now reviewing its effects on the economy and how it will be possible to recoup for that, the official added.

Mentioning that diesel accounts for 53% of irrigation, the additional secretary said to keep the next Boro cultivation unhurt from the diesel price hike, the government has a plan to provide farmers who use diesel-run pumps for irrigation with stimulus support.

Be it small or big, all exporters are now enjoying stimulus loans. Export growth is satisfactory, the official said, adding that but both export and import costs have gone up because of skyrocketing freight costs.

As a result, a number of promising sectors are still witnessing a negative growth.

Considering the overall aspect, the government is considering formulating a separate stimulus package for exporters, which is now under review, the official added.

The official said inflation is being projected at 5.7% from 5.5% in the revised budget for the current fiscal year.

According to the Bangladesh Bureau of Statistics, inflation rose to 6.05% in December last year. If winter departs, food inflation may rise further, the official also said.

In this situation, a job creation programme may be announced for the unemployed poor in 60 poverty-prone upazilas prone, the additional secretary concluded.