Govt 'subsidy' main hurdle in talks with IMF

As 'subsidy' stands as the main hurdle in talks with the IMF, the global lender has suggested the Power Division to 'reform' the sector and do away with 'subsidy' through revision of fuel and energy prices as per international market rates.
The visiting team of International Monetary Fund (IMF) suggested this to the Power Division on Wednesday while they sat with the Secretary and officials to discuss the issue.
"They (IMF) said in the name of subsidy the PDB is bearing the 'political cost,' on the other hand 'capacity charges' finally adds to the economic burden on the masses," official told the Daily Observer on Wednesday following the meeting.
Dhaka is now negotiating a major loan from IMF to minimise its budget deficit. The IMF has responded positively to the loan proposal that Bangladesh has sent to the global lender's newly created Resilience and Sustainability Trust (RST).
The Finance Ministry has been struggling to
accommodate the exorbitant demand for subsidy payment for 2021-22 fiscal year (FY), due to the rise in the prices of petroleum and liquefied natural gas (LNG) in the global market, IMF team said.
"The demand for subsidies in different sectors has outweighed the budget allocation for FY22: about 135 per cent of additional budget allocation (Tk 11,500 crore) is required for the power sector, 525 per cent (Tk 21,000 crore) to import LNG, and about 194 per cent (Tk 18,500 crore) to produce fertiliser using natural gas," Finance Ministry book said.
IMF team has also recalled the Prime Minister's promise of achieving the target of meeting 30 per cent of the total energy requirement in Bangladesh with clean power by 2030.
According to annual reports of Bangladesh Power Development Board (PDB) and Bangladesh Petroleum Corporation (BPC) in 2021, the state-run organisations are in an about-face where their operating incomes are concerned. BPDB's net operating income has been in red over the last several years-even after receiving subsidies.
In 2021, BPDB incurred a loss of net income (-Tk 8,665 crore), which was 99 per cent higher than that of 2020 (-Tk 4,351.7 crore). Meanwhile, BPC's operating income has been green over the years. In 2021, its net operating income was Tk 6,593.7 crore, which increased by 30.2 per cent from that in 2020 (Tk 5,065.3 crore). However, due to a rise in energy prices during FY22, the financial balances of BPDB and BPC have weakened significantly, and will be in the red, which will be better understood after the end of this fiscal year (June 2022). Against such a backdrop, both the organisations' subsidy issues need to be considered, the official told the team.
However, IMF team said over the last decade, the BPDB has received a significant amount of subsidy: A total of Tk 71,466 crore between 2010 and 2021-Tk 5,956 crore per year, on average. The amount of subsidy increased every year. On the other hand, the BPC received a subsidy of Tk 30,086 crore between 2010 and 2015, and from 2016, it did not take any subsidy from the government as it was making profits.
The private power generation companies enjoy other forms of subsidies, such as long-term tax breaks, duty waivers at the import stage, and lower rates of corporate taxes. Similar tax breaks are also provided to renewable energy-based power producers.
It also asked the Power Division to put pressure on different public, semi-government and private entities to pay their massive dues to these two organisations; as of 2021, the amount that BPDB owed stood at a staggering Tk 9,000 crore.
IMF team also suggested the Power Division to look into improving its operational efficiency in power generation and withdrawing from the obligation of paying capacity charges to the IPPs for the medium term.
The power sector abounds with surplus generation capacity, which is as high as 59 per cent as of February 26, 2022. First, the BPDB should not approve the extension of the quick rental power plants' contracts after completing their current terms (most scheduled to end in 2023 or 2024). Second, old, dated and inefficient power plants (mostly under the public sector) should be shut down. Third, the BPDB should consider discontinuing power plants using expensive fuels. And should focus on improving efficiency throughout the power supply chain-generation, transmission, and distribution.
Almost 90 per cent of the Power Development Board's loss accumulated until the financial year 2020-21 - about Tk 59,000 crore - was actually the loans to the board and the interest on the loans that successive governments publicised as subsidy.
Since 2006-07, successive governments gave the Power Development Board Tk 43,000 crore in loan, in the guise of subsidy, always with 3 per cent interest, generating Tk 9,500 crore in interest until 2020-21, according to PDB officials. PDB has never repaid the loans disguised as subsidy or their interest, which together stood at about Tk 1,300 crore a year while it always used its accumulated loss as the justification for increasing the power price on 10 occasions since 2009.
Bangladesh has also been spending subsidies on paying massive capacity charge. Capacity charge is the money paid to electricity traders whether or not they produce any electricity.
In the past 11 years since 2010-11, the incumbent government has paid Tk 72,566.63 crore in capacity charge, according to an estimate by the Bangladesh Working Group on External Debt, more than Tk 47,262 crore of which has gone to 12 foreign and local private companies.
In 2021-22, according to PDB officials, more than Tk 29,000 crore was sought as subsidy, an over 150 per cent increase compared to the year before, mainly because of increased capacity charge.
Between 2017-18 and 2020-21, about Tk 34,000 crore was given as subsidy to the power sector.
Between 2017-18 and 2020-21, about Tk 34,000 crore was given as subsidy to the power sector.
In 2021-22, the accumulated PDB loss was estimated to reach about Tk 80,000 crore.
Government officials told the meeting that implementing the directive requires a number of short-, medium- and long-term impacts and implications for the power and energy sectors to be considered. In the absence of subsidy, the immediate implication would be faced by the BPDB and Bangladesh Petroleum Corporation (BPC), two leading agencies in the power and energy sectors-how they would realise their additional financial burden due to a rise in petroleum and LNG prices.