When subsidies go beyond budget, direct cash transfer can be an option

Originally posted in The Business Standard on 19 February 2022

If 85 million cubic feet (MCF) of imported LNG is added to the national grid every day to meet the demand for gas in the country, the government’s subsidy will stand at around Tk25,000 crore in the current fiscal year alone, which is more than six times the budgetary allocation in FY22.

According to Petrobangla and Finance Division estimates, the import cost then will be Tk32,219 crore, which will end up at Tk44,265 crore if all other expenses are added.

After selling gas at the current price, Petrobangla will need a subsidy of around Tk25,000 crore.

But in the current fiscal year’s budget, only Tk4,000 crore has been allocated to subsidise LNG, of which Tk1000 crore was disbursed so far. The Finance Division suggested hiking gas prices as it is not possible to meet Petrobangla’s demand with the budgetary allocation.

The government gave Petrobangla Tk1,000 crore in LNG subsidy in FY19, Tk2,500 crore in FY20 and Tk2,812 crore in FY21.

Petrobangla also submitted a proposal to the Bangladesh Energy Regulatory Commission (BERC), seeking a 117% rise in prices of locally-produced gas. But the BERC turned down the proposal, saying there is no chance to hike the prices of gas produced in the country. Only the imported gas price can be increased.

But since it is not possible to differentiate who is using imported LNG, the commission asked Petrobangla to calculate how much of the country’s total gas demand is met through imports and how much rise in the prices of whole gas supplied across the country would calibrate LNG subsidy.

The government collects taxes, including VAT, at the gas import stage. For this, the NBR is now claiming Tk5,091 crore in arrears of taxes from Petrobangla. The state-owned oil company in a letter requested the BERC to calculate tax money as a cost while raising gas prices. Although Bangladesh Petroleum Corporation has included VAT and taxes on LNG imports in the pricing formula, the BERC is currently not doing so.

Seeking anonymity, an additional secretary in the finance ministry said the amount of subsidy needed for LNG imports could not be met with government revenue. In the revised budget, the subsidy may be slightly raised from the existing Tk4,000 crore, but it will not be enough to meet such a huge amount of subsidy. That is why the Energy Division has been advised to adjust the gas prices.

The government has made an upward adjustment to diesel and kerosene prices, with a projection that oil prices in the global market will be within $80 a barrel. As a result, it seems that there will be no need for any subsidy, the additional secretary also said.

Although oil prices have recently risen to $100 a barrel because of the Russia-Ukraine tensions, it will be reduced, he added.

The government has not given any subsidy on fuel for several years, rather the BPC made a profit of Tk43,137 crore from FY15 to FY21 it made a profit according to the Bangladesh Economic Survey.

Experts say dependence on LNG imports should not be a right choice to ensure fuel supplies to consumers. It would be good for us if we went into gas exploration with half the money spent on LNG imports. The chances of getting gas are much higher this way.

It is not only in the LNG sector that subsidies are increasing, the government is also burdened with more than three times higher than the budget allocation in the power and fertiliser sectors. The government is looking to raise power and gas prices further, with the state subsidy burden going beyond affordability amid a global price spike.

These issues have been discussed at several high-level meetings of the Prime Minister’s Office, the finance ministry and the energy ministry in the last three months.

Subsidy demands growing far beyond budgetary allocations have reasons for concerns among finance officials who look into macroeconomic issues.

According to ADB, the potential cost of extra-budgetary or off-balance sheet funds and unfunded public subsidies may undermine long-run fiscal sustainability, which underlies sound macroeconomic fundamentals. Fiscal risks from off-budget items can create deviations between budget forecasts and outcomes.

Subsidies have a lot of loopholes. But countries are not abandoning this age-old approach. They are trying to make it more effective and flawless. Direct cash transfer is one of the moves. India has been implementing such policies in energy and farm input support.

“Our past experience points towards opting for direct income transfers to the needy in preference to subsidising goods and services. That would entail smaller bureaucracy to administer, fewer leakages and less likelihood of vested interests emerging,” comments Indian development economist and a former secretary Dr Ajay Dua said in an article.

The same is true for Bangladesh. In a developing country like ours, where millions of people are in poverty and millions more have become the new poor during the pandemic, there is certainly a case of direct subsidy from the government.

The decision to issue smart agriculture cards to more than one crore farmers is a welcome move, which will help marginal farmers get direct cash incentives from the government, like the one given as diesel subsidy for irrigation pumps. Farmers will benefit more from direct support for fertilisers instead of getting administered rates, which basically go to state-owned fertilizer companies, which import more than they produce using subsidised gas.

Another such welfare scheme is the universal pension scheme, expected from the next fiscal year, which is intended to ensure financial security to private sector and informal sector people. Now only government employees get pension, provided as a direct cash transfer through a digital transaction system.

Also, it is good to know that the finance ministry suggested designing three separate stimulus packages for low-income people, farmers and some select exporters in case energy prices are hiked.

While subsidies are inevitable, extra care is needed to use public money to benefit selected groups of few or to make consumers pay for inefficiencies of others.

Consumer rights campaigners question why the unit cost of water of Dhaka Wasa is so high while groundwater accounts for 80% of its supply. They have blamed graft and inefficiency for high cost, which is being cited as an excuse to hike water tariffs.

Energy regulation commission chief questioned why system loss (the official term used to cover up gas theft) in the state gas monopoly Petrobangla is so huge – 10% where the global average is between 0.5% and 1%.

Water subsidy, which amounts to $300 billion globally, also consumes a substantial amount of a country’s scarce public resources.

World Bank research shows all too often that subsidy does not flow to those who need it most. However, it adds, subsidies can be powerful and progressive tools when they are designed in smart and targeted ways and implemented effectively.

From water to oil, such smart designs are needed for all subsidies in addition to expanding direct cash transfers to reach only those people who are targeted and in dire need. Such payouts must not be on a wholesale basis, infinite and life-long.