Energy and electricity sectors in Bangladesh are experiencing pressure due to the heavy reliance on costly imported LNG, coal, and oil, which is raising the country’s fiscal burden, straining budget subsidies and causing economic damage.
The Russia-Ukraine war severely threatened the global energy industry, particularly the market for fossil fuels, just as it was recovering from post-Covid-19 shocks in February and March of last year. Rising energy prices and inflation have plagued developing countries. Even though Bangladesh prepared a record energy sector budget subsidy for FY23, it may not be able to reduce energy subsidy expenditure as required by the IMF’s $4.7 billion loan.
Since August last year, fuel, electricity, and gas prices have been rising gradually, however the total subsidy or percentage of GDP cannot be reduced. Even though the energy sector was given Tk23,000 crores in the budget that was released in June of last year (part of a total subsidy of Tk79,858 crore), there are calls for more subsidies in the revised budget for the current fiscal year.
Is subsidy a good choice to counter increased cost?
The Bangladesh Power Development Board (BPDB) is now paying an extra Tk 9 per cubic metre (CM) of gas for power output since February 1. Based on FY 2021-22’s revised annual report, gas-based energy generation costs Tk 2 per kilowatt-hour (kWh). Likewise, coal remains expensive at USD 245 per tonne on the international market, which is 88 percent higher than the USD 130 per tonne estimated by the BPDB for the fiscal year 2021-22.
Hence, coal-based power generation’s average cost will rise by FY 2022-23. In FY 2021-22, however, BPDB’s average cost to purchase electricity from independent power providers (IPPs) was Tk 11.55 per kWh. Bangladesh’s average power generating cost will likely exceed Tk 10 per kWh in FY 2022-23, up from Tk 8.84 in FY 2021-22. Hence, the BPDB will have a significant revenue shortage, given the recent increases in electricity prices. Notably, the subsidy burden of the power industry is likely to increase further in FY 2022-23.
A revision of subsidy for FY 2023: What does the calculation indicate?
On November 6 of last year, the Ministry of Finance provided an update on subsidies during a meeting with the prime minister at the Ganabhaban. A total of Tk56,858 crores, or almost $70 million, was shown to be required for energy subsidies in FY23 in that presentation. Surprisingly, the presentation reveals, according to meeting sources, that even after a 50% increase in the price of fossil fuel oil on August 5, it will require a massive subsidy in FY23 for the first time since 2012, despite a 50% price increase on August 5.
Prior to 2022, fossil fuels were viewed as a significant source of government revenue in the energy industry over the previous seven years. Considering this, the FY23 budget initially included no fuel oil subsidies. However, in a mid-budget debate, the Energy and Mineral Resources Division requested a Tk19,358 crore subsidy for fuel oil in the current fiscal year due to rising international fuel prices and the taka’s depreciation against the dollar. Considering that extra subsidies would be required for energy as well, the provision for subsidies in this sector was increased by approximately Tk5,000 crores to Tk17,000 crore in the budget for fiscal year 23 (FY23).
The Electricity Division, however, wanted an additional Tk32,500 billion in subsidies. In other words, the Power Division wanted Tk49,500 billion for arrears from the previous fiscal year FY22 and the expected total subsidy for FY23. In contrast, this year a subsidy of Tk6,000 billion has been given for LNG import. Meanwhile, the Energy and Mineral Resources Directorate has asked for an additional Tk5,000 billion for this sector.
Officials have indicated that there is a complexity with subsidy provision because of a restriction imposed by the International Monetary Fund (IMF) as part of its $4.7 billion loan program for Bangladesh.
Ahsan H Mansur, executive director at the Policy Research Institute (PRI), said: “Although the IMF said to reduce subsidies, I don’t think the government has the financial capacity to meet this subsidy demand at the moment. There is scope for the government to undertake more austerity. In any sector, expenditure can be reduced. It should be listed on a priority basis.” “All in all, the country is going through a tough time. There is little possibility of revenue growth in the near future,” the former IMF official added.
Pressure on consumers; industries at risk
The pressure is eventually prompting the government to pass the cost on to the consumers. In January 2023, the government, in response to the high expense of fossil fuels, increased the price of power twice within twenty days. In addition to these increases in the cost of electricity, the government also raised gas rates from 14% to 179% for various sectors. The government says that these price hikes are needed for financial reasons, but the average cost of making electricity in the country will go up a lot if nothing is done to change the energy system, which is based on importing fossil fuels.
Gas shortages have had a disproportionately negative impact on industries due to their heavy reliance on the fuel for process and captive generation. As a result, owners of textile companies have previously shown a willingness to pay approximately 40 percent more for gas, provided the government imports additional LNG to close the demand-supply gap. Yet, an 88 percent increase in gas prices has significantly increased the cost of captive power generation. The price of gas per kilowatt-hour of power produced by a captive unit is currently Tk 6.58, compared to around Tk 3.50 in January 2023.
Similarly, the cost of grid power for major companies, if purchased at a fixed rate, is now Tk 9.32 per kWh, compared to Tk 8.8 per kWh in December 2022, due to two rounds of tariff increases. In addition, the demand note will increase the price of grid electricity. With production costs going up, the apparel industry, which makes up more than 80% of our export earnings, will lose its profit margin unless it can pass on the extra costs to international buyers or get cash incentives from the government.