Power rate hike again in June to meet IMF conditions

The government is going to increase electricity prices for the fourth time this year by June to secure the second tranche of the International Monetary Fund's $4.7 billion loan package, finance ministry officials said.

Despite the adverse impact on low-income groups who are already struggling to manage their livelihoods due to rising inflation, the government is compelled to make this unpopular decision to reduce the subsidy burden as it pledged for the IMF's loan package.

The finance ministry officials also assured the visiting IMF review team that the price of fuel oil will be adjusted in line with the global market rate from September.

There were some disagreements on the mode of reserve calculation, officials said, which they hoped would be resolved in the next course of discussions.

Several ministry officials, who were present in the meeting with the IMF team tasked with reviewing the implementation status of the terms of the $4.7 billion loan agreement, confirmed The Business Standard on the development.   

A Finance Division official, requesting anonymity, said while the pledge to hike electricity price was made in the meeting, the rate or amount to be increased was not discussed.

Whether the price of electricity will rise again after the pledged hike in June will depend on the price of fuel in the global market, the official said.

"If the current trend of decreasing fuel price in the global market continues, there will be no need to increase electricity prices further after June," said the official, adding, "If fuel prices go up, we will have to think about hiking the price once again."

The IMF condition stipulates that even if the price of fuel oil, gas, fertiliser or coal increases in the international market, the subsidy cannot be increased. Besides, the organisation has fixed the maximum rate of subsidy in proportion to the country's GDP. The government increased the price of electricity by 5% three times in two months, including twice in January and once in February, to rein in the subsidy as per the conditions.

Due to the previous three rounds of price hikes, the government will save Tk9,200 crore even if the electricity consumption is the same as the previous year. If the price is hiked another 5% in June, it will save the government some Tk4,000 crore.

However, the government's adoption of a pass-through method to reduce subsidies will have a negative impact on traders and consumers. Another hike in electricity prices will increase business costs. This would further increase commodity prices, which could further fuel the already high inflation.

According to the Bangladesh Bureau of Statistics, the average inflation rate increased to 9.33% last March.

Jasim Uddin, president of the Federation of the Bangladesh Chambers of Commerce and Industry told TBS in February, "The prices of all raw materials have spiked over the past year. Electricity prices are also being increased over and over again. As a result, we are losing capacity and competitiveness in the international market."

Kamruzzaman Kamal, director (marketing) of Pran-RFL Group, said industries' profit margin has already been impacted by the energy price hike. Ultimately, consumers will have to bear the brunt of this hike.

Complete subsidy withdrawal by 2026

In the loan agreement signed with the IMF, the government has pledged to completely withdraw subsidies in the power and energy sectors by 2026 and it announced that the price of electricity and fuel will be increased in stages.

However, the government did not agree to the IMF's terms of reducing agricultural subsidies to increase food production while continuing agricultural production. 

Allocation for fertiliser in the current fiscal year was Tk16,000 crore, which was later increased to Tk26,000 crore in the revised budget. However, the agriculture ministry claimed a total subsidy of Tk56,247 crore for this year.

In the meeting with the IMF, the finance division discussed in detail the subsidy situation in the revised budget of the current fiscal year and how much subsidy will be estimated in the next fiscal year. At the same time, Bangladesh Bureau of Statistics is working to publish the quarterly GDP data as per the conditions of the IMF, ministry officials told the IMF review team.

Finance division officials said the amount of subsidy in the power sector last fiscal year was Tk11,963 crore. The allocation in the main budget for the current fiscal year has been increased to Tk17,000 crore. But the power department has demanded an additional subsidy of Tk32,500 crore in the power sector due to increase in the fuel oil price in the international market and devaluation of taka against dollar.

Even if there was no IMF condition, the government does not have the ability to bear the burden of such a huge amount of subsidy. Hence increasing the price of electricity was imperative for the government.

One official said, "The electricity price is being hiked by 5% in stages so that the impact of the price increase is bearable for the industry and consumers."

The Energy and Mineral Resources Division, however, has sought an allocation of Tk19,358 crore for subsidy.

The IMF has set conditions to coordinate domestic fuel prices with international market rates, which should be implemented by December. The finance secretary told the IMF team in the meeting that it will be implemented from next September.

Doubts over meeting reserve threshold

About the condition of reaching the net reserve threshold requirement of $24.46 billion by June, the ministry officials acknowledged that fulfilling this condition is quite challenging.

Bangladesh Bank Governor Abdur Rouf Talukder told the IMF team that they would be able to meet most of the pledges within June or July deadlines, but would require more time to achieve the reserve threshold, meeting insiders said.

An official, who was present at the meeting, told TBS that currently Bangladesh's gross reserves are more than $31 billion. Excluding loan distribution and investment money in various sectors including the Export Development Fund, the amount of net foreign exchange reserves according to the Bangladesh Bank is close to $23 billion.

However, the IMF refused to accept this calculation. They say that net foreign exchange reserves should be calculated after excluding the outstanding foreign payments of Bangladesh including the Asian Clearing Union (ACU) payments. According to the IMF, net reserves stand at a little over $20 billion.

Bangladesh did not agree to accept this calculation method of the IMF, said the official.

The finance ministry told the IMF that around $1.5 billion in budget support will be available from various development partners including the World Bank by next June and will be added to the reserves. Besides, the remittance inflow is expected to increase around the Eid-ul-Azha at the end of June and it will also increase the amount of reserves.

On the issue of calculating the reserve, Bangladesh Bank Spokesperson Md Mezbaul Haque said that the net reserve calculation will be done as per BPM6 from July, and the calculation of gross reserves will also be available as usual.

About the IMF's reserve threshold, he said, "There is more time ahead. I do not wish to comment on this at this moment."

The central bank official also said that the IMF is mainly looking at how our macroeconomic indicators are faring.

"IMF forecasts on indicators of our country and this visit is to revise them. They will see our economic progress and development. They will talk to the relevant departments of the Bangladesh Bank. It has nothing to do with the loan," he claimed.

He also said the country is moving towards a single exchange rate.

"The central bank's dollar selling rate is now Tk103. That is, we have almost reached a single exchange rate. We are trying to be market oriented by reducing the dollar rate differences," he said.

The central bank spokesperson said that an eight-member delegation of the IMF visited the central bank yesterday as part of the regular staff visit from the multilateral lender, and its resident representative was also with them.