The gas subsidy for this fiscal year has more than tripled, alongside subsidies for electricity and fertiliser, due to expensive purchases from the international spot market as a consequence of the Iran conflict.
In the updated budget, the allocation for the gas sector has surged from Tk 6,000 crore to nearly Tk 19,000 crore.
As of May, Tk 13,000 crore has been disbursed to the energy ministry, as per information obtained by The Daily Star from finance ministry officials engaged in the process.
Between March and June, 38 cargoes are set to be procured from the spot market, with an average price projection of $20 per one million British thermal units (MMBtu), compared to $9–$11 per MMBtu prior to the conflict, according to an internal report from the finance ministry.
For the upcoming fiscal year, LNG subsidies have been earmarked at Tk 6,500 crore. The finance ministry anticipates that if the conflict concludes swiftly, international LNG prices might decrease.
In the revised budget for this fiscal year, the total amount allocated for subsidies, incentives, and loans reached Tk 128,956 crore, up from Tk 125,904 crore in the original budget and reduced to Tk 127,563 crore in the upcoming fiscal year.
Various factors such as high inflation, surging global fuel prices, war-induced commodity price hikes, and capacity charges have collectively contributed to the escalation of subsidies in electricity, fertiliser, and food sectors.
For the upcoming fiscal year, a budget of Tk 64,000 crore has been set aside for electricity and fertiliser subsidies, with Tk 37,000 crore allocated specifically for electricity.
In the fiscal year 2020-21, electricity and fertiliser subsidies stood at around Tk 16,000 crore. Presently, they have soared to nearly Tk 70,000 crore.
Consequently, the International Monetary Fund has persistently advised the government to raise electricity and fertiliser prices over the years.
While electricity tariffs have been adjusted periodically, there are no current plans by the government to hike fertiliser prices.
Responding to queries about capacity payments in the power sector during a post-budget press conference, Energy Minister Iqbal Hassan Mahmood Tuku emphasized that the agreements were signed under sovereign guarantees to ensure the viability of private power projects.
The contracts heavily favored investors, providing minimal protection for the government.
Tuku highlighted the critical nature of maintaining capacity payments to avoid disruptions in electricity supply and prevent a new power crisis.
The government has sought legal counsel from the law ministry and is prepared to take legal action based on favorable advice received.
Previous administrations neglected the maintenance of state-owned power plants, heavily relying on electricity purchases from private producers, resulting in accumulated unpaid liabilities amounting to around Tk 56,000 crore, as stated by Tuku.
To mitigate the impact of high inflation on the underprivileged and low-income groups, food subsidies are being significantly bolstered.
In the upcoming fiscal year, Tk 9,798 crore has been allocated, consistent with the current fiscal year. However, the revised budget has raised this amount to Tk 10,215 crore.
Remittance and other incentives have increased by approximately 13% to Tk 7,200 crore.
Export incentives have been allocated Tk 8,825 crore, down from Tk 9,025 crore in the current fiscal year.
Bangladesh was expected to phase out export incentives in 2026 upon graduating from least-developed country status. However, due to the delayed graduation by three years, these incentives will be extended for a further period.
Furthermore, the government will continue to provide subsidies and incentives in jute products and various other sectors in the upcoming fiscal year.
Zahid Hussain, a former lead economist at the World Bank’s Dhaka office, highlighted the political challenges associated with increasing fertiliser prices to reduce subsidies, particularly given the current surge in international market prices.
He emphasized the limited scope for reducing subsidies due to the prevailing market conditions.
Regarding electricity subsidies, he likened the situation to a ticking time bomb, suggesting that the capacity charge continues to accumulate daily without significant reduction unless the contractual agreements are reformed.
Hussain proposed two solutions – cost reduction through reforming capacity charge agreements and price increases to generate additional revenue.
He underscored the necessity for strategic negotiations with power producers to mitigate costs and avoid potential compensation claims in international arbitration.
Hussain also suggested gradual withdrawal of export subsidies as Bangladesh transitions from the list of LDCs and reducing incentives indirectly through adjustments in source tax rates.
With the appreciation of the dollar exchange rate, the need for remittance incentives has diminished, although any reduction remains a sensitive political issue.
The current exchange rate shift from Tk 85 per dollar to around Tk 123 underscores the political sensitivity surrounding any decision to reduce incentives.
