In response to financial constraints, the government has opted to issue bonds in the market to address the debts incurred by the fertiliser and power sectors.
Commercial banks will be the purchasers of these bonds and, in return, will receive interest. A bond, being a type of financial product, serves as a means for both the government and private sector to borrow money over an extended period.
Given the challenges in revenue collection, the government finds itself unable to provide subsidies in the fertiliser and power sectors. Hence, the current initiative involves the issuance of bonds to address this fiscal gap.
According to sources within the Finance Department of the Ministry of Finance, the bond will be initially released to settle outstanding payments for fertilisers. The treasury and debt management section of the finance division has been actively working on this for the past few days. Subsequently, another bond earmarked for the power sector will be released in the next phase, potentially after the parliamentary elections scheduled for 7 January.
The government reports outstanding dues of approximately Tk 260 billion from both the private sector and government agencies in the fertiliser and power sectors. Among these, the electricity subsidy constitutes Tk 140 billion, while outstanding amounts to Tk 120 billion in fertiliser.
Speaking on the condition of anonymity, an official from the finance division informed Prothom Alo on Tuesday that the import and trade situation is currently unfavourable, leading to a decline in revenue collection. As a result, bonds are being released instead of settling subsidy liabilities in cash. The duration for which the bonds will be issued is yet to be determined.
The country is facing a shortage of US dollars, leading to controlled imports, further impacting revenue collection in the import sector. Additionally, the Value Added Tax (VAT) collection from local sources is progressing slowly. In total, the first five months (July-November) of the current fiscal year 2023-24 witnessed a deficit of Tk 164.59 billion. The total revenue collected during this period amounted to Tk 1.32 trillion.
In response to the financial crisis, Bangladesh Bank initially provided government funding by printing currencies. However, the central bank has since shifted away from this approach due to the escalating inflation. Consequently, the government has chosen to address its financial needs by issuing bonds.
The finance division is expected to issue a notification, potentially by today (Wednesday) or tomorrow (Thursday), to release a special bond, aiming to meet the liabilities of the fertiliser and power sectors. However, sources within the finance department indicate that it will take an additional two weeks for the bond to become effective.
The market price of fertiliser is considerably lower than the purchasing cost from importers and producers, and a similar scenario exists for electricity. The government subsidises the gap between these costs. Over the past several months, the government has faced challenges in settling its dues in the fertiliser and power sectors.
In the budget for the current fiscal 2023-24, an allocation of approximately Tk 1.11 trillion has been designated for subsidies. In the preceding fiscal of 2022-23, the government provided subsidies amounting to about Tk 430 billion to the power sector and Tk 260 billion to fertiliser.
The surge in global market prices and the devaluation of taka against the dollar have contributed to an increase in the fertiliser subsidy. Simultaneously, the heightened cost of production in the power sector, driven by increased fuel prices, has led to additional subsidies. Furthermore, substantial government spending in this sector is attributed to capacity payments for the installation of power plants.
Sources indicate that before deciding to release bonds, the finance division had requested information on outstanding dues from the industry ministry and the power division last month. In response, the agencies calculated the arrears up to September, amounting to Tk 260 billion.
It is learned that private power plants, upon generating electricity, sell it to the Bangladesh Power Development Board (BPDB). To facilitate this production, power plants need to import fuel oil, leading to their indebtedness to banks through the opening of Letters of Credit (LC) and loans.
Meanwhile, BPDB sells electricity in the market at a considerably lower price than the purchasing price from the plants. The disparity between the purchase price and the market price is bridged through subsidies provided by the finance division.
Due to the finance division's delay in disbursing funds, power plants faced challenges in settling their debts to banks, resulting in many becoming defaulters. Now, as a solution, the finance division is directly issuing bonds to banks, equivalent to the outstanding loan amounts. This approach mirrors the process followed for bonds issued to banks in the fertiliser sector.
What the BCIC say
The Bangladesh Chemical Industries Corporation (BCIC) has sought cooperation from Sonali Bank to ensure the uninterrupted import of fertiliser by the end of November. BCIC Chairman Saidur Rahman, in a letter to the Managing Director of Sonali Bank, Afzal Karim, highlighted that the loan of Tk 31.67 billion for fertiliser imports has become defaulted, which has created complications in opening new LCs.
The letter further said as of last June, the government is owed Tk 84 billion only in subsidies for urea fertiliser. The bank's liability remains unpaid without the receipt of subsidy funds, and Agrani Bank, facing liquidity constraints, has already expressed its inability to open LCs.
Additionally, it has been reported that the import payment for fertiliser from Saudi Arabia was delayed, causing dissatisfaction among Saudi suppliers. A delegation from Saudi Arabia visited Dhaka and held discussions with Sonali, Janata, and Agrani Banks regarding these matters.
According to officials from the finance division, banks will have the flexibility to consider government special bonds as Statutory Liquidity Ratios (SLRs). This implies that banks will not need to reserve a portion of the bond funds in the central bank for SLR requirements. Consequently, this is expected to enhance the lending capacity of the banks. However, certain banks, like Sonali Bank, may not benefit from this advantage due to having purchased more bonds than the required amount for SLR.
Sonali Bank's Managing Director, Afzal Karim, told Prothom Alo, “The discussion on the bond interest rate is ongoing, and we anticipate it will align with market rates.”
In response to why the government chose to issue bonds, he stated, “I cannot provide a definitive answer. However, this is an alternative approach that is commonly practiced worldwide.”
Bonds to pay electricity dues
The association representing private sector power plants is the Bangladesh Independent Power Producers Association (BIPPA), currently comprising 62 members. These power plants find themselves in a situation where they owe money to banks, contrary to the dues they are expecting from the government for the electricity they supply. The release of bonds is contingent on the amount of outstanding dues.
Imran Karim, the General Secretary of BIPPA, shared with Prothom Alo yesterday, “While the announcement has been made before the elections, there is still substantial groundwork ahead. We anticipate challenges in receiving payments, but we have a system in place to manage our debts. We need to engage in discussions with each bank to navigate through this situation."
In the previous tenure of the current government, the finance division released bonds in favour of banks, even to cover the liabilities of the Bangladesh Petroleum Corporation (BPC).
Ahsan H Mansur, the executive director of the private research organisation Policy Research Institute (PRI), explained to Prothom Alo that the current approach involves issuing bonds instead of printing money, which has its merits. Banks will no longer pursue outstanding dues; instead, they will generate income from the bonds. However, this initiative will contribute to an overall increase in the government's total debt. Mansur added that if there were no crisis, the government might not have opted for this approach.