Mountain of unpaid subsidies clouds energy, agri future

Infograph: TBS

The government finds itself trapped in a never-ending cycle of accumulating outstanding subsidies in the agriculture and electricity sectors as it now requires to utilise the current financial year's allocation to settle the subsidy arrears from the previous fiscal year.

The outstanding subsidy in the power sector for this fiscal year is nearly equivalent to the total cost of constructing both the Padma Bridge and the Karnaphuli Tunnel. Additionally, the combined outstanding subsidy in the fertiliser and power sectors is approximately equal to the cost of building two Padma bridges.

Finance Division officials reveal that despite multiple price increases in fertiliser and electricity, around 72% of the approximately Tk86,000 crore of subsidy generated in these sectors during this financial year remains unpaid.

Officials are concerned that covering this outstanding subsidy will be challenging even with the budget allocation for the upcoming financial year. Despite allocating Tk49,000 crore in the current fiscal year's revised budget to the power and agriculture sectors, the projected outstanding subsidies is expected to reach around Tk62,000 crore.

The upcoming FY24 budget may include an allocation of approximately Tk52,500 crore for these two sectors. However, considering its size, it is unlikely that the outstanding subsidy from the current year will be fully paid.

Consequently, the subsidy requirement for fertilisers and electricity in FY24 will continue to accumulate as pending liabilities. These obligations will need to be addressed using the allocation from the FY25 budget.

War, devaluation of taka cause huge rise in subsidies 

Officials note that the ongoing Russia-Ukraine war has led to a significant increase in international market prices for fertilisers, fuel oil, gas, and coal. Additionally, there has been devaluation of the taka against the dollar on several occasions. These factors have contributed to a substantial rise in subsidies required for these two sectors in both the previous and current financial years.

Usually, the subsidy allocation in the budget for a fiscal year is meant to cover subsidies for that specific year in each sector. However, unforeseen circumstances have caused an escalation in subsidy amounts in these sectors.

Finance ministry officials highlight that the government's expenses are increasing due to the inability to pay power and fertiliser subsidy arrears on time.

For instance, the Bangladesh Chemical Industries Corporation obtains loans against trust receipt (LTR) from state-owned banks for a 180-day period to import urea fertiliser for distribution to agriculture ministry dealers. But, if the agriculture ministry does not receive the subsidy amount promptly, it becomes unable to settle the owed subsidy to the corporation. Consequently, the bank loan expires, putting strain on the financial stability of the banks involved.

The agriculture ministry had requested Tk17,046 crore in subsidies from the finance ministry by December last. However, only Tk7,123 crore was released, leaving a substantial amount outstanding.

Four state-owned banks disbursed Tk10,731 crore as loans against trust receipt (LTR) for importing fertilisers by 9 February this year. However, an LTR worth Tk2,395 crore expired due to non-payment within the designated time-frame.

Data from the Finance Division indicates that Tk18,300 crore has been released for fertiliser subsidies this fiscal year until April.

For the current fiscal year, the agriculture ministry plans to import 14 lakh tonnes of urea fertiliser through private channels with subsidies. The private importers will sell the fertilisers to dealers across the country at government-fixed prices. These dealers then sell the fertilisers to farmers or retailers at prices subsidised by the government.

The government subsidises the price difference between the import cost and the price at which the importers sell to the dealers. This subsidy is facilitated by the agriculture ministry through the bank responsible for issuing letters of credit (LC) to the importers.

Rampal, Payra fear shutdowns

In the power sector, the Power Division procures gas, coal, diesel, and furnace oil from the Energy and Mineral Resources Division to ensure a steady supply of raw materials for power plants. However, the Power Division faces challenges in settling dues with the Energy Division if subsidy funds are not received promptly. This situation has led to financial crises within the energy sector entities, making it difficult for them to cover import costs.

The Bangladesh Petroleum Corporation has informed the Energy Division of foreign exporters notifying it of their intentions of halting oil supply to Bangladesh due to non-payment of fuel oil import arrears. The Rampal Power Plant and the Payra Power Plant are also concerned about shutdowns due to a shortage of coal arising out of non-payment for coal cargo.

Dr Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, told The Business Standard that if the outstanding subsidy liabilities of one fiscal year are covered using the following year's budget, it would compromise fiscal discipline.

"This approach could also pose financing challenges. Moreover, if subsidies are not paid promptly, it may result in a crisis if suppliers are unable to continue supplying the required products," he said.

He further said that if the government fails to enhance revenue collection, it will inevitably lead to a rise in the budget deficit, necessitating increased borrowing from banks. In the current fiscal year, the government's loans from banks are projected to exceed Tk1 lakh crore.

'Ukraine war not sole reason' 

Zahid Hussain, former lead economist of the World Bank's Dhaka office, said the current situation is not only leading to the accumulation of subsidy arrears but also causing delays in the payment of import bills. This has resulted in product suppliers threatening to halt exports which poses a significant fiscal risk.

He criticised the tendency to attribute all issues, including the dollar crisis and subsidy increases, solely to the Ukraine war.

While there was an initial increase in international market prices due to the war, prices are now falling again, but this trend is not adequately reflected in the country's economy, observed Zahid Hussain.

Subsidy trend in agriculture, power

In FY21, subsidies in the power sector were Tk11,509 crore, which increased to Tk31,008 crore in FY22. Finance Division officials feel the figure may increase to Tk40,000 crore in the current fiscal.

On the other hand, in FY21, agriculture subsidies were Tk9,550 crore, which rose to Tk28,000 crore last year and will increase to Tk46,000 crore this fiscal.

In the FY24 budget, around Tk18,500 crore and Tk34,000 crore may be allocated to the agriculture sector and the power sector, respectively.

On the other hand, at the end of the current financial year, the amount of outstanding subsidy in the agricultural sector may stand at Tk22,000 crore and the subsidy outstanding in the power sector will be around Tk40,000 crore.

Therefore, even if the entire allocated subsidy amount for these two sectors is disbursed in the upcoming fiscal year, it will not be sufficient to fully cover the subsidy obligation of the current fiscal year.

Power sector in crisis 

Finance Division officials said around Tk34,000 crore will be allocated in power subsidies in the upcoming budget, but the amount will not be sufficient to cover subsidy liabilities in FY24. This is primarily due to the emergence of subsidy arrears from the current fiscal year, spanning 11 months, which could surpass the allocation for next year.

The power sector subsidy allocation in the original FY23 budget was Tk17,000 crore, which has been revised to Tk23,000 crore. The Finance Division has implemented a disbursement schedule of Tk1,000 crore in the first week of every month and Tk1,000 crore in the last week, ensuring a regular subsidy release.

Finance ministry officials said subsidy arrears have been settled until June 2022. However, in July of the current fiscal year, subsidy claims totaling Tk4,500 crore were reported, with Tk3,000 crore still remaining unpaid. To address this, the outstanding amount will be released in three instalments – one in the last week of this month, and the remaining two in the first and last weeks of June.

Finance Division officials have submitted a subsidy bill amounting to Tk19,000 crore to the finance ministry, covering the period from August to November. The average monthly subsidy disbursed during this time was Tk4,500 crore. However, the finance ministry projects a potential decrease in the subsidy amount to Tk3,000 crore per month starting from December, attributed to the rise in electricity prices at both the wholesale and retail levels.

Based on this projection, the government will have to pay around Tk21,000 crore in subsidies from December to June of the current financial year.

Therefore, during the 11-month period from August to June of the current financial year, a subsidy payment of approximately Tk40,000 crore is required, exceeding the total amount allocated for the sector in the budget of the next financial year by Tk6,000 crore.

The finance ministry and the Power Division have informed the IMF about plans to raise electricity prices again in June. If the prices of fuel oil, coal, and gas in the international market do not decrease to a manageable level, further price increases may be considered.

In the loan agreement with the IMF, the finance ministry has committed to completely withdraw the subsidy in the electricity sector by 2026.

Regarding the role of capacity charges in power subsidies, Finance Division officials clarified that capacity charges existed even before the Covid-19 pandemic, but the subsidy amount remained manageable at that time.

The substantial subsidy liability in the power sector is primarily attributed to the significant increase in fuel oil, gas, and coal prices in the international market, along with the devaluation of the taka against the dollar.

According to data presented to the IMF, PDB's energy expenditure for power generation in the current fiscal will stand at Tk55,892 crore. Tk37,222 crore will be spent on capacity charges and power plant maintenance. That means the total production cost will be Tk93,115 crore. PDB's potential income from selling electricity will be Tk50,675 crore.

Finance Division officials state that recent power tariff hikes at the wholesale and retail levels are not playing a major role in controlling subsidies. However, three rounds of electricity price hikes since last December will reduce annual losses by Tk9,200 crore.

PDB officials believe that high capacity charges of large-scale power plants coming into production have played a significant role in creating large subsidy amounts, in addition to the depreciation of the taka and the rise in fuel prices.

PDB officials anticipate that subsidies will decrease next year as fuel prices fall in the international market. However, further depreciation of the local currency may increase losses as foreign exchange rates are left to the market from July.

According to the PDB, a Tk1 devaluation of the taka against the US dollar increases their losses to around Tk600 crore.