Changes in fuel mix to help reduce power subsidy, PDB tells IMF

Changes in the fuel mix for power generation – especially if shares of hydropower and other renewable sources see a jump – can be a potential option for Bangladesh Power Development Board (PDB) to run the electricity supply system without relying on government subsidies.

PDB officials informed the International Monetary Fund (IMF) team about this way out while sharing their plan to continue power supplies even if the government withdraws the subsidy.

A six-member team of the IMF held a meeting with the power agency to collect information about the state-owned single buyer of electricity from public and private power producers.

However, at a separate meeting, the commerce ministry could not apprise the IMF of its separate projection of export earnings for the next three years.  The multilateral lender inquired about Bangladesh's target for export earnings from RMG and non-RMG sources in FY23, FY24 and FY25.

The IMF delegation arrived in Bangladesh on a 15-day visit on 26 October to discuss conditions related to the release of a $4.5 billion loan for budget support to the country.

The Washington-based lender is now talking about reforms in various economic sectors and utilities. In particular, the multilateral lender is pressing for a reduction in subsidies in various sectors. As part of this, the global lender is pressuring the government to end subsidies on fuel and electricity.

"During the meeting with power development board officials, the IMF team's first inquiry was about what we are going to do if the government stops providing subsidies for electricity," said SK Aktar Hossain, member (Finance) at the PDB.

In reply, the state-owned agency said renewable energy sources, including hydropower, could be a potential option to minimise power production costs, he said.

The government allocates a certain amount in the budget every year for power generation and it goes to the BPDB as a subsidy.

The Finance Division has always termed it a loan assistance to the Power Development Board at 2% interest, but the board never refunds this money. 

In the second inquiry, the IMF visiting team wanted to know how the PDB will phase out the power plants of independent power producers. It also asked if it will have to pay capacity payments to them even after 2030.

In their response, PDB officials told them that they have not analysed the matter yet.

Recently, some large IPP power plants came into operation and some are waiting to commence their operations soon. As such, the PDB will have to continue capacity payments to them beyond 2030.

In FY11, the subsidy for the power sector was Tk4,511 crore, which rose to Tk11,777 crore in FY21.

The IMF team also asked the PDB about current bulk and retail tariffs of electricity.

Before sitting with the PDB officials, the IMF team had a meeting with high officials of the Power Division, led by its Secretary Md Habibur Rahman.

"They wanted to know the current situation of the power sector, what was and what would be our plan for the future. The team also asked about why we are running independent power producers in the power system," Md Habibur Rahman told the media after the meeting.

He also said the IMF delegation also wanted to know the impact of the Russia-Ukraine war on the power and energy sector of Bangladesh.

The team also wanted to know about the country's plan regarding the renewable energy issue, he added.   

Commerce could not show export forecasts for three fiscal years

The commerce ministry could not apprise the International Monetary Fund (IMF) of its export earnings projection for the next three years.

The multilateral lender inquired about Bangladesh's target for export earnings from RMG and non-RMG sources in FY23, FY24 and FY25. This was one of the five issues that the Washington-based lender asked for in a meeting with top ministry officials on Wednesday.

About a month ago, the IMF incorporated this question into the agenda forwarded to the commerce ministry. Later, the ministry instructed the Export Promotion Bureau (EPB) to prepare a response.

But a senior ministry official said they did not get any such information from the EPB until the meeting with the IMF delegation got underway in the morning.

However, the IMF did not make any comments on the commerce ministry's failure to disclose the export targets in the meeting, the official noted.

The EPB meets with stakeholders at the beginning of every fiscal year and drafts an export target for that year and sends the projection to the commerce ministry. Later, the ministry finalised the target and published it. But the ministry does not set any export target in the medium term.

The ministry formulates a three-year export policy order with a forecast of export earnings at the end of three years. The latest export order issued this year has set an export target of $80 billion in 2024.

In addition, the finance ministry publishes a book called the medium-term budget framework along with the budget document every year, which outlines the export target for the next three years. But there is no match between that target and the annual projection set by the commerce ministry.

After the meeting with the IMF mission, Md Hafizur Rahman, director general of the WTO cell, told The Business Standard that the IMF team was informed of various steps taken by the government with respect to boosting export capacity after LDC graduation, tariff rationalisation and export diversification.

In response to the IMF's query on post-LDC market access plan, the commerce ministry said a high-powered committee headed by the Prime Minister's Office and seven sub-committees are working on the matter.

The ministry told the IMF that Bangladesh has continued discussions with the EU Trade Commission and the EU Parliament to keep Article 29 of the existing GSP scheme unchanged in the EU's new GSP rules that will take effect from January 2024.

If this article is changed, Bangladesh's garment sector will not get GSP benefits in the EU, which may result in a fall in Bangladesh's exports. The commerce ministry has been in communication with European Commission Executive Vice-President and Trade Commissioner Valdis Dombrovskis so that Bangladesh is exempted even if the EU changes this article.

Commerce ministry officials informed the IMF mission that they will continue to pursue a decision in the WTO for continuation of duty- and quota-free market access for six years after its graduation in the run-up to the 13th ministerial conference.

Bangladesh has taken initiatives to bilaterally engage in discussion with the EU, UK, Japan, Canada, Australia, Republic of Korea, China and India so that these countries support Bangladesh and other graduating countries in getting preferential market access for an extended period after graduation.

If countries cannot agree to a decision at the WTO, they may request to be permitted to follow the EU and UK, by extending duty-free, quota-free market access to graduated LDCs for an additional three years.   

The commerce ministry also told the IMF about Bangladesh's plans to sign bilateral and regional free trade agreements.

For example, both Bangladesh and India completed a joint feasibility study and will initiate negotiations for the Comprehensive Economic Partnership Agreement (CEPA), while Bangladesh will complete the final feasibility study with China to sign a FTA with it by June 2023.

Bangladesh has also initiated discussions on FTA with Singapore, Malaysia, Indonesia, Nepal and Sri Lanka. JETRO Bangladesh conducted a survey regarding a proposed PTA/FTA between Japan and Bangladesh and presented the findings to the commerce ministry.

The commerce ministry and Japan's ministry of International Trade and Industry have prepared a draft memorandum of understanding to promote comprehensive cooperation between the two countries in the field of trade, industry and economy, which is likely to be signed during the upcoming visit of Bangladesh's prime minister to Japan.

Bangladesh has completed a feasibility study and stakeholder consultation for assessing economic benefits and challenges of joining the RCEP. Bangladesh also continues engagement with Eurasian Economic Union and Mercosur and Canada for FTA negotiation with them.  

Moreover, the commerce ministry finalised a time-bound action plan on preferential market access and trade agreements and WTO issues, and has started implementing the action plan.