Subsidy pressure triples to Tk1.6 lakh crore as imports remain costly
The government is worried about how to meet this huge subsidy demand, especially in these times of high inflation and a downward trend in revenue growth
Fuel, fertiliser, and food subsidies are set to jump to a whopping Tk1,61,370 crore this fiscal year – almost three times as high as this year's subsidy allocation for these sectors – because of higher international prices, according to finance ministry estimates based on demands from the ministries and divisions concerned. The original subsidy allocation for the year was over Tk56,000 crore.
The projected amount of subsidies is about 24% of the national budget for the current fiscal 2022-23. If the Tk25,000 crore allocated in the budget for export incentives and cash loans is added to the subsidies, the total requirement for the "subsidies, incentives, and cash loans" sector reaches Tk1,86,595 crore or about 29% of the total budget.
Economists have termed the increased demand for subsidies as a "terrible pressure" on the economy, while the government is worried about how to meet this huge subsidy demand, especially in these times of high inflation and a downward trend in revenue growth.
In a meeting with the prime minister at Ganobhaban on 6 November, the finance ministry made a presentation on the current subsidy pressure, a copy of which was seen by The Business Standard.
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The document shows that the government is having to provide subsidies on fuel oils, for the first time in a decade, despite hiking their prices to a record level in August this year.
After the meeting, Commerce Secretary Tapan Kanti Ghosh told The Business Standard that the Prime Minister had called for reducing the subsidy pressure. She had also suggested increasing bank loans if necessary to meet the increased demand for subsidies, added the commerce secretary.
There will be a review meeting shortly to find ways to meet the subsidy demand. The Council for the Coordination of Fiscal, Monetary, and Exchange Rate Policies and Budget Monitoring would hold the meeting this month with Finance Minister AHM Mustafa Kamal in the chair.
Fuel oil subsidy for first time in a decade
Since 2012, the government has not subsidised fuel oil. In fact, the government profited from this sector for seven years until the outbreak of the Russia-Ukraine war early this year.
Against this backdrop, the government made no allocation for fuel oil subsidies in the FY23 budget. But, the Energy and Mineral Resources Division has recently sought Tk19,358 crore in subsidies on fuel oil due to rising prices in the international market and devaluation of the local currency against the US dollar.
Finance ministry officials have told TBS that the Bangladesh Petroleum Corporation (BPC) was making losses in fuel oil sales even after the price hike in August, and the depreciation of taka against the greenback on a number of occasions in the following months only added to the losses. If the Russia-Ukraine war drags on longer, the corporation would bleed even more, they added.
The officials, however, said the government had no plan to raise fuel oil prices for now.
Fertiliser prioritised for food security
Like in the case of fuel oil, the government this year has raised the price of urea fertiliser by Tk6 per kg, as the major agricultural input price shot up in the global market.
But even after the price hike, the government needs to raise the allocation for the sector by over three times the original budget allocation to meet the increased subsidy demand this year.
On the assumption that the amount of subsidy on fertiliser might increase, the government has earmarked Tk16,000 crore for the agriculture sector in the FY23 budget, up by Tk827 crore compared to the previous year.
But the agriculture ministry has demanded an additional Tk40,247 crore on top of the original allocation. This means the subsidy requirement for the agriculture sector for this fiscal year is Tk56,247 crore, which is double last year's total subsidy allocation for the sector.
Even with this huge fertiliser subsidy, the government does not want to increase the prices of fertiliser.
Currently, the price of urea fertiliser in the country is Tk20 a kg, while in neighbouring India its price is Tk12.
In this situation, a further hike in fertiliser prices might affect food production in the country, explained the finance ministry officials.
Agriculture Minister Abdur Razzaque told TBS that in light of the ongoing food crisis around the world, the prime minister also has decided to increase agricultural subsidies as per demand.
After a meeting with Finance Minister AHM Mustafa Kamal last week, the agriculture minister also said that the finance minister had assured him of taking measures to reduce expenditures in other sectors to meet the increased demand for fertiliser subsidy.
The allocation for this sector will be increased during the revision of the budget next March, the agriculture minister said, quoting the finance minister.
Electricity, gas to become pricier
As the cost of electricity production has increased owing to an increase in the prices of fuel oil, gas, and coal in the international market, the subsidy pressure is increasing in the power sector as well.
Although the government in this year's budget has increased subsidy allocation for the power sector by about Tk5,000 crore to Tk17,000 crore as compared to last year, the Power Division has demanded an extra allocation of Tk32,500 crore.
The government plans to increase electricity prices at the consumer level to deal with this pressure of subsidy in the power sector.
The International Monetary Fund (IMF) also has asked the government to reduce electricity and gas subsidies as a condition for obtaining a prospective $4.5 billion loan.
President Abdul Hamid recently issued an ordinance amending the Bangladesh Energy Regulatory Commission (BERC) Act, allowing the government to adjust electricity and gas prices without holding a public hearing.
According to sources in the finance ministry, the prices of gas and electricity may increase before next February.
Tk6,000 crore has been put aside in the FY23 budget as subsidy allocation for LNG import this year. But, the Energy and Mineral Resources Division has sought an additional Tk5,000 crore for the purpose.
To reduce the LNG subsidy pressure, the government has kept LNG imports from the spot market stopped for several months. This, however, has caused a gas crisis in the country.
After exporters informed the government about their interest in buying gas at a higher price, the prime minister recently decided to buy gas again from the spot market at a higher price. At the same time, LNG import has also been allowed by the private sector.
Food subsidies to protect the poor
To protect the poor from the effects of high inflation, the government is providing food assistance to one crore families at subsidised prices through the Trading Corporation of Bangladesh (TCB), alongside the open market sale (OMS) of rice.
The Ministry of Food and the Ministry of Commerce have demanded additional subsidies for the sector because of an increase in prices of essentials including rice, flour, edible oil, and sugar.
In the FY23 budget, Tk5,965 crore has been allocated in food subsidy for the implementation of the programmes conducted by the food ministry. The food ministry has sought an allocation of Tk4,000 crore more.
On the other hand, the original subsidy allocation for the sale of food products through the TCB is Tk11,300 crore. But, the TCB has sought an additional allocation of Tk9,000 crore.
Export, remittance incentives may drop
In addition, the government provides incentives on exports and remittances, which are basically subsidies. As export income and remittance inflows have decreased, expenditure in this sector may decrease slightly.
Tk15,225 crore has been allocated for export and remittance incentives for the current financial year.
Cash loans
Besides, there is an allocation of Tk10,000 crore this year in the cash loan sector, which is going to remain the same.
Need for more austerity
Ahsan H Mansur, executive director of Policy Research Institute, told TBS that the government at the moment does not have the financial capacity to meet this huge demand for subsidy.
There is little possibility of revenue growth in the near future, he observed, adding, "All in all, the country is going through a tough time. There is scope for the government to take more austerity measures. A list of the sectors where expenditure can be reduced should be made on a priority basis."
Besides gas and electricity, prices of fertiliser may need to be increased a little if necessary, he concluded.
