Will Bangladesh’s energy subsidies finally take a toll on the economy?

Originally posted in Dhaka Tribune on 26 February 2023

For FY23, some government divisions are expecting subsidies of around Tk80,000 crore but the escalating energy crisis may lead to further subsidies.

A year after the Russia-Ukraine war that spurred a spiraling energy crisis, developing countries have been struggling with rising energy prices and inflation.

In Bangladesh, even after the government prepared a record amount of budget subsidy for the ongoing FY23 in the energy sector, it may not be possible for the government to reduce the expenditure of energy subsidy, as per the conditions set for attaining the International Monetary Fund (IMF)’s $4.7 billion loan.

The Russia-Ukraine war further jeopardized the global energy market, especially the fossil fuel market, when it was just recovering from post Covid-19 shocks in February-March last year.

Even if the price of fuel, electricity and gas has been increasing incrementally since August last year, it will not be possible to reduce the total amount of subsidy or percentage in proportion to GDP.

Despite the Tk23,000 crore allocated to the energy sector in the budget announced in June last year, a total subsidy of Tk79,858 crore there are demands for additional subsidy for the revised budget of the current fiscal year.

Actual amount of revised subsidy in FY23

In a meeting with the prime minister at the Ganabhaban on November 6 last year, the Ministry of Finance presented the state of subsidies.

During that presentation it was shown that for FY23 energy subsidy, the government needed an additional Tk56,858 crore to meet the rising costs.

According to meeting sources, surprisingly the presentation shows that even after a 50% price hike of fossil fuel oil on August 5, it needs a huge subsidy in FY23 for the first time since 2012.

Demands for more subsidies 

Fossil fuel has been considered a major source of government revenue generation in the energy sector in the last seven years before 2022.

Given that context, the government had initially allocated no subsidy on fuel oil in the FY23 budget.

But due to the increase in fuel prices in the international market and devaluation of the taka against the American greenback, the Energy and Mineral Resources Division has demanded a subsidy of Tk19,358 crore for fuel oil in the ongoing fiscal year in a mid-budget discussion.

Assuming that additional subsidies will be needed for electricity as well, in the FY23 budget, the allocation for subsidy in this sector was increased by about Tk5,000 crore to Tk17,000 crore.

But the Power Division demanded another Tk32,500 crore as subsidy.

That means with the arrears of the last fiscal year FY22 and total estimated subsidy for FY23, the Power Division demanded Tk49,500 crore.

On the other hand, Tk6,000 crore of subsidy has been allocated for LNG import this year.

But the Energy and Mineral Resources Division has demanded an additional Tk5,000 crore for this sector.

Economists weigh in 

Talking to Dhaka Tribune, many disagree with the government’s subsidy calculations.

They suspect that as high tax rates are being levied, on the other hand they (the government) are talking about subsidies.

It works like a trick, they opined.

Bangladesh Petroleum Corporation (BPC) is also making profit from tax.

Tax-VAT of up to 34% is being levied on some products.

That is, out of Tk100, Tk34 is being taken as duty and other surcharges.

When the price of goods increases in the international market, these taxes also increase in Taka.

Regarding BPC’s demand, a finance ministry official, requesting anonymity, said, “BPC is now making a profit on petroleum prices, but they still have some subsidy as due. They asked for that, but we will not give that.”

However, the official also indicated that the amount of subsidy in the energy sector may increase in the revised budget, than previously announced.

“Subsidies on gas and electricity will be increased by Tk17,000 crore. Therefore, a total of Tk40,000 crore will be allocated for two overheads in the revised budget.”

Energy Adviser of the Consumers Association of Bangladesh (CAB) M Shamsul Alam told Dhaka Tribune: “In the case of commercial electricity production, the acceptable profit rate of the companies can’t be more than 5%. But the government is giving the private sector a profit of up to 18%. Even without using many power plants, capacity charges are being paid by the government.”

“Apart from this, various irregularities and corruption are happening in the electricity sector. If good governance is ensured in these cases, savings would be possible in this sector,” he believed.

Ahsan H Mansur, executive director at the Policy Research Institute (PRI), said: “Although the IMF said to reduce subsidies, I don’t think the government has the financial capacity to meet this subsidy demand at the moment. There is scope for the government to undertake more austerity. In any sector, expenditure can be reduced. It should be listed on a priority basis.”

“All in all, the country is going through a tough time. There is little possibility of revenue growth in the near future,” the former IMF official added.

Country-wise energy subsidies

While the government says that no country in the world gives subsidies on energy, the Paris-based International Energy Agency (IEA) says in a report that many countries subsidize energy sectors, including Bangladesh.

According to a report published by the International Energy Agency (IEA) in October 2022, Bangladesh ranked 21st on the list of 25 most energy sector subsidy countries.

However, if the countries’ GDP is taken into account and then their subsidies to the energy sector are calculated, which is much more reasonable in terms of the macroeconomy, Libya’s name will come out on top.

The country spends 17.45% of its total GDP on subsidies to the energy sector.

And according to that, the position of Bangladesh among the top countries whose government has given the most subsidies in the energy sector, is ranked 22nd.

Data analysis revealed that Bangladesh mainly subsidizes electricity and gas, which amount to 0.4% of our total GDP.

The subsidy amount of the government in the electricity sector is about $1 billion and $0.4 billion in the gas sector every year respectively.

China (0.2%), Mexico (0.2%) and Qatar (0.3%) are the bottom three.

After Libya, the top 5 in this list are Venezuela (6.79%), Uzbekistan (6.65%), Algeria (5.82%), Iran (4.66%) and Turkmenistan (3.19%).

Cost of Europe’s energy crisis

According to the think-tank Bruegel, European countries have spent more than €800 billion to shield households and companies from soaring energy costs since late 2021.

In a recent graphic published by Graphic News, European Union countries have now earmarked or allocated €695 billion in energy crisis spending, while Britain spent €103 billion and Norway €8.1 billion since September 2021.

Germany topped the spending chart, allocating more than €268 billion.

Britain, Italy and France were the next highest as countries protected customers facing Russia’s gas supply squeeze.