Plan to phase out power subsidies in line with IMF recommendation

Power Division has formed a committee to prepare a concrete proposal for identifying "vulnerable groups" to provide direct cash subsidies around TK 1.80 crore without any anomalies.

"As the government plans to gradually phase out the current subsidy structure within three years, in line with the International Monetary Fund's (IMF) recommended three-year roadmap, we are working on that. However, the committee will sit today (Sunday) to provide direct cash subsidies to around 1.80 crore "lifeline" or vulnerable electricity consumers, similar to social safety net programmes," according to the Power Division.

"The government intends to replace annual budgetary support with direct cash transfers to the targeted consumers. In FY2023-24, the government paid around Tk 62,000 crore in electricity subsidies," he added.

Additional Secretary KM Ali Reza of Power Division was made the convenor. Representatives from the Social Welfare Ministry and the Bangladesh Bureau of Statistics (BBS) are the member of the committee.

Bangladesh Rural Electrification Board (BREB) data said that more than 1.63 crore are vulnerable consumers, out of 4.88 crore of electricity consumers.

Earlier, an IMF technical team placed a series of recommendations to mitigate the impact of electricity pricing on vulnerable groups. These include: adjusting the tariff structure to reduce regressively, improving interoperability between the social registry and electricity distributors to enable automatic application of targeted discounts, developing pilot schemes targeting to phase out tariffs in wealthier areas while expanding targeted social programmes, expanding coverage and enhancing targeting of social registry programmes to better reach poor households, and implementing a broad-based tariff increase, paired with a national PMT-based transfer system to support both low- and middle-income households.

The IMF also recommended overhauling the tariff-setting process, including replacing the cost-plus methodology with one that incentivises efficiency, strengthening BERC's regulatory role, and creating a harmonized utility data system to improve transparency.

The IMF report urged Bangladesh to adopt a three-year roadmap to gradually reduce subsidies, set annual reduction targets, and align tariff hikes with subsidy cuts. 

It also suggested retiring inefficient and costly power plants to address overcapacity, developing coordinated infrastructure plans across generation, transmission, and gas distribution, seeking support from development partners for a Power Sector Model to improve planning and cash flow oversight, and investing in transmission to remove bottlenecks.

"The proposed reform will be politically difficult. The upper middle class, who are major electricity consumers, are the main beneficiaries of the current subsidy. We need to introduce the targeted subsidy," Prof. M Tamim, energy expert and Vice Chancellor of Independent University, Bangladesh (IUB) said.

The IMF report also flagged the worsening financial position of the Bangladesh Power Development Board (BPDB), the country's sole electricity buyer. Existing tariffs and subsidies fail to cover power purchase costs, leading to ballooning losses.

In FY2023-24, BPDB's break-even bulk tariff jumped to Tk11.74 per kilowatt-hour, almost double the Tk6.18 needed in FY2019-20. Without tariff reforms, the IMF warned, BPDB will be unable to recover losses or invest in critical infrastructure upgrades.