54% of Bangladesh’s power subsidies benefit wealthiest 40%: IMF

Electricity subsidies in Bangladesh are doing the opposite of what they are meant to do. Instead of supporting the poor, a major share of the government's subsidy for electricity is being consumed by wealthier households, according to a latest report by the International Monetary Fund (IMF).

The global lender found that 54% of electricity subsidies go to the top 40% income group, who typically live in larger homes and use more electricity due to higher ownership of appliances and air conditioners. In contrast, poorer households — who often use less power — are receiving far less support from the subsidy system.

The findings were shared in a report submitted to the Ministry of Power, Energy and Mineral Resources on Tuesday by an IMF team led by Fabiana Machado, along with Nicolo Bird, Nusrat Chowdhury, and Alberto Tumino. The team studied Bangladesh's power consumption patterns and the fiscal framework around subsidy management.

The report also noted that over 70% of the power sector subsidies go to household users, but this distribution is not equitable.

To address the imbalance, the IMF proposed a series of short- and long-term measures aimed at better targeting subsidies and reducing fiscal pressure. The recommendations focus on three pillars: pricing policy, its fiscal implications, and the impact on households.

A key proposal is to move towards geographically targeted tariffs — lower rates in poverty-prone regions — using poverty maps developed by the Bangladesh Bureau of Statistics (BBS). This would ensure that subsidies reach those who actually need them.

The IMF also suggested linking subsidy allocation to the social registry and utility billing systems, which would allow for more accurate identification of vulnerable groups.

To minimise disputes over eligibility, the IMF advised beginning the targeting mechanism in rural and less densely populated areas, where vulnerability mapping is simpler.

Also, the IMF recommended using a crude measure of vulnerability, carefully calibrating energy accounting systems, and tracking the actual demand curve to shape future pricing models.

These suggestions come at a time when the government is under growing pressure to reduce its subsidy burden amid rising fiscal constraints and pressure from the IMF. Ensuring that subsidies reach the right population could not only improve equity but also help the government optimise its limited resources.

Consumer Association of Bangladesh (CAB) Energy Adviser M Shamsul Alam welcomed the IMF recommendations, saying CAB has been campaigning for years to provide targeted subsidies to vulnerable communities.

About determining electricity price, the IMF team suggested a yearly adjustment of the power tariff on the basis of the cost-plus methodology.

It also suggested the strengthening of the Bangladesh Energy Regulatory Commission (BERC) capacity to play a greater role in the power sector, except for reviewing electricity tariffs.

IMF said, BERC should be given the "scope of action to include a role in reviewing PPAs, coordinating sectoral investment plans, and protecting consumers' interests."

Instead of collecting sector-wide data in determining power price, the IMF suggested creating a system to periodically collect harmonised data on utilities' technical and financial data to increase transparency, facilitate oversight and tariff reviews.

Reasons for high generation cost

The IMF had identified five factors for the high production cost of electricity in Bangladesh. According to the global lender, high electricity generation costs are attributable to various interrelated factors like faulty demand projections and overcapacity.

Power plants contracts allowed on "good faith" rather than competitive bidding increased the production cost as well as fuel mix, with high import dependency and high import costs.

Low levels of coordination hindering resource optimisation and exchange rate devaluations also pushed the high generation cost in the power sector, said, IMF in its recommendations.

Short- and long-term suggestions to reduce subsidies

In the short term, the IMF suggested formulating a fiscally sustainable subsidy levels roadmap and improving coordination to optimise the use of power generation by ensuring adequate fuel delivery and transmission capacity.

The IMF also suggested designing a tariff increase path that is consistent with subsidy reduction targets, considering changes in generation costs and developing a Power Sector Model to improve sector planning and oversight of cash flows with the help of development partners.

For the long term, the IMF suggested establishing coordinated infrastructure planning across power generation, transmission, and gas distribution to prevent overcapacity, optimise resource use, and reduce inefficient spending.

Other long-term plans include designing plans to retire less efficient and costlier power plants and developing transmission investment plans to reduce transmission bottlenecks, as well as developing gas distribution investment plans to reduce supply bottlenecks.