Reduce fund wastage, phase out subsidy in energy sector

The government should stop fund wastage in the energy sector and eventually phase out subsidies, which have created pressure on the public coffer, according to economists and entrepreneurs.

However, the subsidies should not be removed amid the ongoing economic crisis, they said.

These recommendations came after two multilateral lenders -- the International Monetary Fund (IMF) and World Bank -- suggested removing subsidies to make Bangladesh's budget financing more efficient.

The state's planned subsidies ballooned to a record high in the ongoing fiscal year and currently stands at about Tk 83,000 crore, up by some 19 per cent from Tk 67,000 crore the previous year.

Meanwhile, the government's revised subsidy was just Tk 49,330 crore in fiscal 2020-21.

The government has long been subsidising the prices of fuel, fertiliser, electricity and gas in an unstable practice that benefits both the poor and wealthy alike.

The state's planned subsidies ballooned to a record high in the ongoing fiscal year and currently stands at about Tk 83,000 crore, up by some 19 per cent from Tk 67,000 crore the previous year

A visiting mission of the IMF recently called for implementing a pricing formula for fuel, fertiliser, electricity and gas while also cutting back on subsidies by the next fiscal year.

The ten-member mission is in Dhaka on a 15-day tour to decide on the conditions for a $4.5 billion loan sought by the country.

Following these recommendations, The Daily Star contacted a few economists and entrepreneurs for their take on the matter.

"The recommendation to reduce subsidies is logical, especially in the energy sector," said KAS Murshid, a former director general of the Bangladesh Institute of Development Studies.

However, dropping subsidies in the power sector at this point in time would increase the woes of general people, who are passing through a tough period following several hikes in energy prices.

So, the government could negotiate a plan to phase out the subsidy without putting these people in peril, he added.

Murshid went on to say the government should work on implementing the suggested reforms, especially in regard to fixing fuel prices.

"In the energy sector, the government is giving subsidy for lobbying from influential people, which is creating a total mess," he said.

Subsidies should not be based on lobbying or an ad-hock basis and instead, it should be for the betterment of people and in a transparent way, Murshid added.

"The government gazetted a market-based fuel pricing formula in 2005 or 2006 that was neither implemented or voided," said Zahid Hussain, former lead economist of the World Bank's Dhaka office.

"So why should we wait a year to generate a formula when one already exists? Even restructuring the current model can be done with a single stroke of a pen," he added.

Hussain then said there is no logic behind subsidising diesel, kerosene or any fossil fuel in the era of climate change.

Besides, the government should impose tax and introduce environment friendly technology to reduce the use of fossil fuels.

If the government provides subsidies based on equity, the question remains whether rural and urban poor are using less fossil fuel than rich people.

So, rich people are technically getting more benefits from the subsidy.

Instead of giving subsidy through prices, the government could extend the subsidy through social safety net programmes for the poor.

"Then, the poor will get the real benefits of the subsidy as it would be more equitable," he added.

Although both the IMF and World Bank called for reducing subsidies in the energy sector, neither are taking about solving the reasons why subsidies are given in the first place, said Professor Anu Muhammad, former chairman of the economics department at Jahangirnagar University.

"The government is bearing subsidies to give huge benefits to power generation companies in the name of capacity charge. So, they should work reducing fund wastage in the name of subsidy," he added.

The Bangladesh Power Development Board (BPDB), the country's sole electricity buyer, paid 16,785 crore in capacity charges to power plants in the first nine months of the last fiscal year for 22,118MW daily power generation capacity.

Previously, it paid Tk 18,977 crore to 101 power plants in 2020-21 and Tk 18,123 crore to 102 plants in 2019-20, BPDB data shows.

"The irony is that if the subsidy is cut following the IMF's prescription, the mass people will suffer as they are already in a crisis following a drop in their real income," Muhammad said.

Anwar-ul Alam Chowdhury, president of the Bangladesh Chamber of Industries, said the government should grant subsidies considering its own capacity as the country is not in a position to lose jobs or allow higher inflation.

Germany launched an energy subsidy worth 200 billion pounds to safeguard its people and private sector amid the current economic uncertainty.

"So, there is no problem in giving subsidy to give benefits to its people and keep the business competitive," he said.

As the domestic market is not in good shape due to the peoples' lower purchasing power, the subsidy should continue, added Chowdhury, who is also former president of Bangladesh Garment Manufacturers and Exporters Association.