IMF terms: Subsidy not to drop despite fuel price hike 

The government allocated Tk 827 billion as subsidy to different sectors, including power, liquefied natural gas (LNG), cash assistance, food, and export incentives, in the fiscal year 2022-23. 

In the last few months, it has reduced the subsidy in fuel oil, power and gas sectors and hiked prices. The International Monetary Fund (IMF) welcomed the move. 

Still, the government may have to count an additional subsidy of Tk 400 billion this fiscal, according to the finance ministry’s finance division sources. 

The IMF approved a loan of USD 4.7 billion for Bangladesh on 30 January. After clearing the first instalment, the global lender sought further reduction of subsidy in Bangladesh. 

A drop in subsidy means a rise in price, which eventually pushes up the consumers’ expenses. The IMF, however, believes that it is crucial to reduce subsidy in the energy sector to bring stability in the economy of Bangladesh.  

The government raised the prices of petrol, octane, diesel, kerosene, gas and electricity last year. The IMF hoped the move to bring a positive result in the longer run. It, however, acknowledged that the move to reduce energy sector subsidies would affect economic prospects in the short and long term.

Prime minister Sheikh Hasina is also in favour of subsidy reduction. While inaugurating the Biniyog Bhaban in the capital’s Agargaon area on 5 February, she said it is not possible for the government to bear such a huge amount of subsidy. All should keep in mind that England increased the electricity price by 150 per cent. We are yet to reach that stage. 

“Gas and electricity can be served at the purchase rate. We will subsidize agriculture and food production,” she added. 

The IMF believes that subsidy rationalization would create more financing scopes in the country's social and development sectors. It said the current fuel price in Bangladesh is close to the world market. But the subsidy on gas and electricity is likely to be 0.9 per cent of the gross domestic product (GDP) in the current fiscal. 

The lending agency asked the government to track down ways to adjust the fuel price within the tenure of its loan scheme. State minister for power and energy Nasrul Hamid made an announcement in this regard before the final approval of the loan. Also, the government amended a law to empower the executive department to revise fuel prices. 

The government was under pressure over the high subsidy since the last financial year 2021-22. The subsidy was Tk 538 billion in FY21 and it rose to Tk 668 billion in FY22. 

Finance minister AHM Mustafa Kamal said in his budget speech that the overall situation has created pressure on the government's subsidy management. In the initial estimate of the budget for FY23, the expense on subsidy rose to Tk 827 billion, which is 1.9 per cent of the GDP. 

When the IMF delegation visited Dhaka before sanctioning the loan, Petrobangla briefed them that it is incurring a loss of Tk 7 to 8 per unit in the gas sale even after a phase of price hike in June. Also, there was a deficit of Tk 250 billion in the fiscal year 2021-22. 

This is why the government provided a subsidy of Tk 60 billion. And the shortfall was met with the energy security fund, retained dividends of the gas sector companies, and loans from the gas development fund. 

Finance minister and Bangladesh Bank governor Abdur Rouf Talukder told the IMF that they do not expect the Bangladesh Petroleum Corporation (BPC) to require any more budget support. Gas and electricity prices have been hiked and a time-based method will be introduced to adjust the fuel price in the future.

Also, the subsidy in the power sector will be reduced, they added.

The finance division has long been counting the pension schemes of retired government officials under the social safety programme. But the IMF placed a condition that it must be excluded from the social safety programme.  

The lender suggested that the government save money from subsidy and spend it on the social safety net sector. 

The social safety sector has an allocation of Tk 1135 billion in the current fiscal, which is 2.55 per cent of the GDP. The amount includes Tk 283 billion of retired officials’ pension scheme.  

Bazlul Haque Khondker, an economics department professor at Dhaka University, said, “The IMF has said what we have long been saying. Now the actual allocation to the social safety sector will come to light.” 

He also said the figure would be like 1.7 per cent of GDP if the pension money is excluded from the social safety sector. The sustainable development goal and five-year plan suggested the amount to be 3 per cent of GDP.

As the rich also enjoy the pension, it would be beneficial to the poor if it is removed from the social safety sector, he added.