Quarterly power price hikes to hurt industries, economy: Trade leaders

Business leaders have expressed concerns about the government's plan to remove energy subsidies by December 2026, which involves raising power prices four times a year as prescribed by the International Monetary Fund (IMF). 

They believe this approach would significantly burden consumers, negatively impact industries, and hinder overall economic growth.

In compliance with IMF conditions for its $4.7 billion loan, Bangladesh has pledged to terminate gas and power sector subsidies by 2026. An IMF delegation is now in the country to evaluate conditions for disbursing the third loan instalment.

During a meeting at the Petrobangla office in the capital on 2 May, Power Division officials revealed plans to gradually increase electricity prices every three months and eliminate all subsidies by 2026.

Trader leaders said upon Bangladesh's graduation from a least developed country (LDC) status in November 2026, export subsidies will be cancelled. The withdrawal of power and gas subsidies is expected to drive up production costs, potentially harming new investments, job creation, and export competitiveness. 

Moreover, the full removal of subsidies may fuel inflation and weaken consumer demand, ultimately hindering overall economic growth.

The most recent electricity price hike took place in March. Power division officials announced plans for electricity price hikes in June, October, and December this year, with further increases scheduled in March, June, October, and December over the next two years. 

However, prices will be gradually adjusted during each increment to mitigate the sudden impact on consumers, they told the IMF team. 

Business leaders have questioned the government's strategy of adjusting subsidies by raising electricity prices, asking why subsidies are being granted instead of efforts to reduce power production costs. 

They said the government maintains excess generation capacity by idling plants and shows no initiative to curtail power system losses or introduce competitive electricity purchasing systems. Consequently, subsidies are escalating, burdening traders and citizens disproportionately, which is undesirable.

In fiscal year 2022-23, the Power Development Board (PDB) reported a Tk43,539 crore loss from electricity sales, with a Tk39,534 crore subsidy allocation.

Currently, the average wholesale price of electricity per unit is Tk7.4. Without the electricity subsidy, this rate would exceed Tk12, resulting in an average consumer-level price of approximately Tk15 per unit, up from the current Tk8.95.

Between January and March 2023, electricity prices were increased three times. Over the past fifteen years, wholesale electricity prices were hiked 12 times, while retail prices were hiked 14 times.

Businesses for reducing systems loss, capacity charges

Mahbubul Alam, president of the Federation of Bangladesh Chambers of Commerce and Industries (FBCCI), told TBS that the government is planning to raise electricity and gas prices over the next three years but uninterrupted supply remains a challenge. This disruption is hampering factory production.

He emphasised the need for the government to ensure consistent electricity and gas supply.

Mohammad Hatim, executive president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said, "While the government continues to raise prices in the name of subsidy withdrawal, uninterrupted gas and electricity supply remains lacking, adversely impacting the industry."

"The government should stop the theft in the power sector, reduce the system losses and stop the huge amount of capacity charges that are being paid to the idle rental, quick rental power plants. If these issues are addressed, there will be no need for subsidy," he said, adding that the general public and the industries should not bear these burdens. 

During a question-and-answer session in the Parliament last February, State Minister for Power Nasrul Hamid revealed that 70 out of 82 Independent Power Producers (IPPs) had received Tk76,242 crore for capacity charges from 2009 to 30 June 2023. Additionally, the government paid Tk28,685 crore as rent to 32 rental power plants during this period.

Syed Nazrul Islam, first vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told TBS that since the pandemic, production costs in the garment sector have surged by 27% due to factors like hikes in wages and gas-electricity prices, among others. However, product prices have not seen a corresponding increase. 

"In this context, if electricity prices spike four times annually, the survival of this sector would be challenging," he said.

Nazrul emphasised the necessity of finding alternative solutions to offset potential losses if electricity prices must rise due to IMF conditions. Options could include incentives, reduced bank interest rates, or any other measures deemed suitable by the government.

Md Saleudh Zaman Khan, vice president of the Bangladesh Textile Mills Association (BTMA), said, "If electricity prices rise four times a year, more than half of the factories could face closure within the next twelve months."

"Gas and electricity prices have already surged significantly. Bank interest rates have risen, and recently, textile worker wages increased by over 60%. With these formidable challenges, sustaining the textile sector appears increasingly difficult. If this trend persists, it could lead to the collapse of the entire economy," he added.

Shovon Islam, a director of BGMEA, expressed concerns: "We are competing with heavily incentivised exporters like China and India. While they receive substantial government support, our incentives are being slashed. How can we compete?"

"Despite increasing gas and electricity prices, the quality of supply remains inadequate. We are forced to rely on fossil fuel generators, driving up production costs," he said.

"Now the government plans routine power price hikes. In this challenging landscape, we feel trapped," added Shovon Islam, also the managing director of Sparrow Group.

The recent changes in government policy regarding the withdrawal of energy subsidies and also increasing prices will have an adverse effect on major sectors, particularly RMG and Textiles, Shams Mahmud, managing director of Denims Ltd, told The Business Standard.  

"We are witnessing dampened demand for clothing due to historic high interest rates globally and also geopolitical instability worldwide. Coupled with this, in Bangladesh, because of devaluation, businesses have incurred almost 40% erosion of capital," he said. 

With policy changes and new legislations coming into place mainly in Europe, the private sector actors who are export dependent to these countries need to invest in new technology to remain competitive, he added.  

"However we see no proactive steps particularly by the central bank in this regard."

On other issues, Mahmud said the quality of electricity supplied remained poor and also uninterrupted gas supply was non-existent. 

"This has also reduced our competitiveness and increased cost of doing business. On top of everything, exporters are not getting fair value for the foreign they are bringing into the country," he said. 

"All together, if the government does not improve and act on these points, it will hurt new investment, which in turn will affect employment generation. Also again I want to emphasise that no safeguard mechanism or policy exists for CSME .  Uncoordinated policies will only make imports feasible dealing a major blow to import substitute industries."

Govt should ensure fair prices: Economists

Ahsan H Mansur, executive director of the Policy Research Institute, told TBS that completely withdrawing subsidies and increasing prices every three months has dual effects. While it relieves the government of subsidy pressure, it adversely affects customers.

He said to alleviate the burden on customers, electricity should be provided at a fair price, necessitating the elimination of inefficiencies in production, transmission, and distribution systems. 

However, Mansur highlighted a lack of government focus in addressing these issues. 

The economist proposed determining electricity prices through competitive means, suggesting the government should invite tenders from five 500 MW private power plants. By selecting the lowest bidder to construct the power plant, the government could secure cheaper electricity.

Towfiqul Islam Khan, a senior research fellow of the Centre for Policy Dialogue, told TBS, that the government's ability to spend has decreased due to lower revenue. Subsidies in the power sector are putting huge pressure on the budget.

Khan emphasised that the government is overlooking the underlying cause of the subsidies, noting an excess capacity created by the government.

Sources present at the meeting with the IMF said that the global lender has raised concerns about the justification for the capacity charges paid to private power plants. 

In FY23, the PDB allocated more than Tk26,000 crore for power plant rents. The CPD reports that 41% of power plant capacity remained unused last year.

The power division officials informed the IMF that capacity charges must be paid as per contractual obligations. However, the government has implemented the "no electricity, no bill" policy, resulting in waived capacity charges for new contract renewals.