Subsidy for gas trebles in Iran war fallout

The gas subsidy has more than trebled this fiscal year, along with subsidies for electricity and fertiliser, due to costly purchases from the international spot market as a result of the Iran war.

In the revised budget, allocation for the gas sector has risen from Tk 6,000 crore to nearly Tk 19,000 crore.

As of May, Tk 13,000 crore has been paid to the energy ministry, The Daily Star has learnt from finance ministry officials involved with the proceedings.

Between March and June, 38 cargoes would be bought from the spot market, with an average price estimated at $20 per one million British thermal units (MMBtu) compared to $9–11 per MMBtu before the war, according to an internal report of the finance ministry.

For the upcoming fiscal year, LNG subsidies have been set at Tk 6,500 crore. The finance ministry believes that if the war ends quickly, international LNG prices may decline.

In the revised budget for this fiscal year, allocations for subsidies, incentives and loans amounted to Tk 128,956 crore, compared to Tk 125,904 crore in the original budget. It has been trimmed to Tk 127,563 crore in the upcoming fiscal year.

High inflation, rising global fuel prices, war-driven commodity price hikes and capacity charges have all contributed to increasing subsidies in electricity, fertiliser and food.

In the upcoming fiscal year, Tk 64,000 crore has been allocated for electricity and fertiliser subsidies, of which Tk 37,000 crore is for electricity.

In fiscal 2020-21, the electricity and fertiliser subsidies stood at around Tk 16,000 crore. Now, they have risen to nearly Tk 70,000 crore.

For this reason, the International Monetary Fund has been advising the government for several years to increase the electricity and fertiliser prices.

Although electricity prices have been raised from time to time, the government has no plans to increase the fertiliser prices.

Responding to a question about capacity payments in the power sector at the post-budget press conference, Energy Minister Iqbal Hassan Mahmood Tuku said the agreements were signed under sovereign guarantees to make the private power projects bankable.

The contracts heavily favoured investors while offering little protection for the government.

“I have personally sat with the investors. They told us that if capacity payments are stopped, their banks will immediately demand repayment of loans. In that case, they would not be able to continue operating the power plants.”

Any abrupt move to suspend payments could disrupt electricity supply and create a new power crisis, he said.

The government has sought an opinion from the law ministry and will consider legal action if it receives favourable advice.

The previous governments neglected maintenance of state-owned power plants while relying heavily on electricity purchases from private producers, leaving around Tk 56,000 crore in unpaid liabilities, Tuku said.

To provide relief to the poor and low-income groups from the impact of high inflation, food subsidies are being significantly increased.

In the upcoming fiscal year, Tk 9,798 crore has been allocated, the same as this fiscal year. However, in the revised budget, this has been increased to Tk 10,215 crore.

Remittance and other incentives have increased by about 13 percent to Tk 7,200 crore.

For export incentives, Tk 8,825 crore has been allocated, down from Tk 9,025 crore this fiscal year.

Bangladesh was supposed to withdraw export incentives in 2026 after graduating from least-developed country status, but since graduation has been delayed by three years, the incentives will continue for some more time.

Apart from these, the government also provides subsidies and incentives in jute products and various other sectors, which will continue in the upcoming fiscal year.

To reduce fertiliser subsidies, the price of fertiliser for farmers would have to be increased, which is a politically very difficult decision, said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.

And now, since international market prices have gone up, the scope for reducing subsidies has become limited.

On electricity subsidies, he said: “It’s like the hands of a clock -- it will keep adding every day. You give it today, tomorrow it adds again. The reason is the capacity charge, which exists like a ticking time bomb.

There are two solution options, with one of them being cost reduction.

But cost reduction requires reforming the capacity charge agreements, which are already contractually determined. Unless those contracts are reformed, the capacity charge will not decrease.

“The government would have to resort to some cleverness here.”

The private power producers are currently in a strong contractual position.

If the government unilaterally cancels contracts, it may have to pay compensation in international arbitration.

Therefore, to reduce costs, the government should either negotiate with the power producers or, if evidence of irregularities in the contract process is found, use that as leverage to revise the contracts.

“Beyond this, there are limited opportunities to reduce costs.”

Some savings could be achieved by reducing distribution losses and increasing efficiency in electricity management, but compared to total expenditure, these are not very significant.

The second option is price increases.

Implementing such a decision could generate about Tk 13,000 crore in additional annual revenue.

“Even then, a significant amount of subsidy would still be required.”

On export sector incentives, he said that as Bangladesh graduates from the list of LDCs, it will have to gradually withdraw export subsidies.

“However, instead of directly reducing incentives, increasing the source tax rate would have the same effect in a roundabout way.”

Regarding remittance incentives, he said that since the dollar exchange rate has risen significantly, the need for incentives is less pronounced than before.

When the incentive was introduced, the exchange rate was Tk 85 per dollar. Now, it is around Tk 123.

“However, this is a politically very sensitive issue. If incentives are reduced, many economists and opposition parties will become vocal in criticising such a government decision.”