Subsidy burden balloons on war

The government's subsidy to various sectors ballooned in the current fiscal year pushed by the Russia-Ukraine war-induced inflation.

Despite an additional subsidy demand of Tk110,105 crore from various government agencies for supplying electricity, fertiliser, fuel oil, gas and food products, the Ministry of Finance has allocated only Tk16,812 crore in the revised budget of FY23, according to ministry sources.

Finance Division officials said this huge subsidy burden was created due to the increase in the prices of goods and services in the international market and the devaluation of the taka against the US dollar stemming from the prolonged war.

Officials also said the shortfall in revenue collection is another reason for allocating only 15% of the total additional demand.

An official of the Finance Division, on condition of anonymity, told The Business Standard (TBS) that the shortfall in revenue collection this year will be about Tk30,000 crore. 

In addition, the government's import expenditure has increased due to high global prices. This is why there is a big gap between the subsidy demand and the ability to meet it, he added.

In the revised budget for the current financial year, the Ministry of Agriculture has sought an additional allocation of Tk40,247 crore but got only Tk10,000 crore. 

Similarly, an additional allocation of Tk32,500 crore was requested for electricity subsidy, but the finance ministry provided only Tk6,000 crore. The Directorate General of Food sought an additional allocation of Tk4,000 crore for food aid and got Tk812 crore.

Infograph: TBS

The Energy and Mineral Resources Division sought an additional allocation of Tk24,358 crore for the import of fuel oil and liquified natural gas (LNG), but the finance ministry did not allocate a single taka for their subsidy needs. 

The Trading Corporation of Bangladesh (TCB) and other organisations demanded an additional Tk9,000 crore for subsidies, but the finance ministry did not respond to it.

Finance Division officials said the government has tried to ease some of the subsidy pressure by raising electricity and gas prices. But it has to be done step-by-step instead of withdrawing subsidies all at once, otherwise, inflation might intensify.

Over the past five years, Tk9,000 crore of subsidy was allocated to fertilisers and the agriculture ministry has not been able to spend all of it in any year, officials said, adding that no subsidy was needed for fuel oil since 2013, rather the government has made profits from this sector.

After the Ukraine-Russia war broke out, due to the extra US dollars spent on importing products from the international market at higher prices, there has been a crisis in the foreign exchange reserves in the country, which led to the devaluation of the Taka and eventually increased the subsidy amount in monetary terms.

Finance ministry sources said it is not possible to meet the demand for subsidies this year from the budget. Hence, government agencies will convert their losses into domestic and foreign loans and repay them in stages over the coming years. If they are unable to pay their debts from their own income, their liabilities will be met from the budget as a loan to the government.

Another official of the finance division, wishing not to be named, told TBS, "Prices of goods have started to fall in the global market. On the advice of the International Monetary Fund (IMF), the government will soon start auto price adjustment of fuel oil. Gas and electricity subsidies will also be adjusted in phases. If the currency exchange rate becomes stable, the subsidy amount will reduce a lot in the next financial year."

Economists, however, fear that a gridlock in subsidies might arise as the government is unable to meet the subsidy demand. Because the loss of one agency has to be borne by another agency and the subsidy has to be repaid by converting it into debt. 

Dr Ahsan H Mansur, executive director of the Policy Research Institute, told TBS, "The amount of subsidies will decrease in the next fiscal year as the prices of commodities including fuel oil and gas are on the decline in the global market. However, the subsidies that the ministries will convert into loans this year will have to be paid from the next financial year. Therefore, additional money has to be spent in the new financial year to cover the old losses."

He also said the government has increased the prices of gas and electricity towards the end of the current financial year. If this initiative was taken at the beginning, the subsidy pressure could have been reduced significantly.

When the Russia-Ukraine war broke out in February last year, the government, anticipating that the war will end in three-four months, tried to contain inflation by increasing subsidies during the formulation of the budget for FY23.

That is why the government allocated more subsidies for fertiliser, electricity and food aid in FY23 than it did in the previous financial year, except for fuel oil. The government made a profit of about Tk42,000 crore from fuel oil in the previous seven years.

But the war lingered, global prices jumped and to deal with the situation, the government hiked fuel oil prices by a record amount. Gas and electricity prices have also been increased several times. 

Although boosting domestic food production is a priority, the government also raised the prices of fertilisers in August last year to minimise subsidies. 

But none of these efforts managed to reduce subsidies as various ministries ahead of November last year demanded an additional subsidy allocation of Tk110,105 crore from the Finance Division.

An inter-ministerial meeting, chaired by Prime Minister Sheikh Hasina, was held in November last year to determine what to do to deal with the subsidy pressure. It was then decided to control the subsidy by increasing the price of various services. 

Besides, in the context of the dollar crisis, there was pressure to reduce subsidies on gas, electricity and fuel oil as a condition for taking a loan of $4.7 billion from the IMF. That is why, the prices of gas and electricity were hiked several times in the following months.

In the budget of FY22, Tk9,500 crore was allocated for subsidies in the agriculture sector. But at the end of that fiscal, the subsidy amount stood at Tk28,000 crore due to the increase in fertiliser prices. In the revised budget of the last financial year, the subsidy was increased and Tk15,173 crore was allocated. That is, Tk12,827 crore of fertiliser subsidy of last financial year remains as loans to the Ministry of Agriculture.

An official of the budget wing of the Ministry of Agriculture, requesting anonymity, told TBS that a total of Tk26,000 crore in subsidy is being given from the Ministry of Finance this year and the rest of the amount will remain as a loan.

He also mentioned that if funding is not available from the budget, fertilisers will be imported by borrowing from local banks or foreign sources. In that case, the borrowed amount will be adjusted in subsequent years.

The loan for the 2020-21 financial year is currently being adjusted with the money received from the budget, the agriculture ministry official said.

It has not yet been decided how much subsidy will be allocated in the budget for the next 2023-24 fiscal year. A decision will be taken to determine the amount of sector-wise subsidy in a meeting with the prime minister in early May, the official said.

However, the government will not give any subsidy on fuel oil, he said, for this reason, the government is taking initiatives based on the IMF prescription. At the same time, the subsidy on electricity and gas will also be phased out.

According to Finance Division officials, since the government has decided to increase the price of electricity towards the end of this fiscal year, the amount of subsidy will not decrease much. Because of the latest price hikes, the electricity subsidy will be reduced by only Tk5,000 crore. But a further hike in electricity prices to reduce losses will have an adverse impact on inflation. 

Therefore, to increase local production and keep inflation at a bearable level, the amount of subsidy in the power sector has been increased by Tk6,000 crore to Tk23,000 crore in the revised budget.

After industrialists expressed interest in buying gas at higher prices, the government hiked gas prices and began importing spot LNG. That is why, the officials of the finance division believe that there will be no need for additional subsidies in the current financial year.

In a pre-budget discussion with the finance minister on Monday (20 March), Saiful Islam, the president of the Metropolitan Chamber of Commerce and Industries (MCCI), said traders should be informed about the method by which the government will adjust the prices of fuel oil and gas so that they can take preparations accordingly.

"We do not want subsidies on gas and fuel oil. We want uninterrupted supply, the MCCI president added.