Subsidy arrears to be cleared using unspent ADP funds

Infographic: TBS

The government plans to clear all outstanding subsidies for the fertiliser, electricity, and energy sectors – a substantial accumulation over the past few years – within the current fiscal year using unspent allocations from the Annual Development Programme (ADP), according to Finance Division sources.

According to the sources, as of November, the total outstanding subsidies for the sectors amounted to around Tk55,000 crore. Additionally, an estimated Tk20,000 crore will be required to meet subsidy needs for the rest of the fiscal year.

They say the current FY25 budget allocates Tk35,000 crore for subsidies, meaning the government will need an additional Tk40,000 crore beyond the budgeted amount to fully cover the subsidies.

Of this additional amount, Tk35,000 crore will be sourced from unspent ADP allocations for FY25, as the government anticipates a significant portion of the ADP funds to remain unutilised. The remaining Tk5,000 crore will be raised through bond issuance, they added.

According to the Implementation Monitoring and Evaluation Division (IMED), only 7.9% of the ADP funds were utilised in the first four months (July–October) of FY25 due to political unrest, marking the lowest spending rate in over a decade.

The ADP allocation for the current fiscal year stands at around Tk2.78 lakh crore.

Will help with fair monetary management 

Finance Division officials say the interim government has decided to clear the outstanding subsidies to avoid future burdens as it expects a rise in development spending once an elected government takes office.

Besides, they mentioned that the IMF advised clearing outstanding subsidies by FY27 to ensure fair monetary management.

Experts view the government's plan positively, noting that it will bolster confidence among international lenders and suppliers.

Both defaulting on loans and leaving bills unpaid tarnish a government's reputation similarly. Therefore, the arrears must be cleared, Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, told TBS.

But this should be done within the budget framework, without increasing the budget deficit, he added.

Sources say according to preliminary estimates from the Ministry of Finance, if the entire subsidy amount is paid, the fiscal deficit is expected to remain well below 5%.

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), said that since ADP spending will be lower this fiscal year, the unused funds could be redirected to settle outstanding subsidies.

According to Finance Division sources, separate meetings have been held with the Bangladesh Power Development Board (BPDB), Bangladesh Petroleum Corporation (BPC), Petrobangla, Bangladesh Chemical Industries Corporation (BCIC), and Bangladesh Agricultural Development Corporation (BADC) to gather information on the outstanding subsidies, and to determine how much will be needed in the current fiscal year.

The sources also indicated that these subsidy-related institutions have been instructed to submit their bills to the Ministry of Finance in a timely manner.

IMF's conditions on subsidy

A senior official of the Finance Division, speaking on condition of anonymity, told TBS that the International Monetary Fund (IMF) has stipulated in its loan conditions that providing subsidies for the electricity and energy sectors must be stopped by FY27.

At the same time, the IMF has advised that outstanding subsidies should be cleared by FY27 to ensure fair monetary management, he said.

According to the official, to avoid excessive pressure in a single fiscal year, the IMF has recommended gradually paying off the arrears annually at a specific rate to complete the process. The international lender has also provided a methodology for calculating the portion of subsidies that remain outstanding, the official said.

Challenges in implementing the plan

Dr Zahid Hussain, however, mentioned that the interim government would face some challenges in implementing the plan.

He said, "In the ADP, a portion of the allocation is usually cut in the revised budget. The original budget is just a figure, while the revised budget reflects what the government actually implements.

"The key question now is how many projects, which have the potential to be implemented, will be left unexecuted or have their funds diverted to other sectors."

He believes the number of such projects will not be very high. "Therefore, meeting the substantial funds required for clearing subsidy arrears solely by reducing ADP implementation will be challenging."

CPD's Fahmida Khatun suggested that in some cases, subsidies should be phased out, especially in the electricity and energy sectors. "On the other hand, subsidies in the agriculture sector, such as those for fertilisers, should be reduced gradually rather than being eliminated all at once."

Low ADP implementation, rising govt expenses

Due to the political unrest at the beginning of the fiscal year, including the anti-quota movement, fall of the Awami League government in mass uprising, and the assumption of office by a new government, ADP implementation has been limited.

Meanwhile, the government has made a policy decision not to implement politically-driven development projects taken by the ousted Awami League regime.

Officials from the Finance Division have indicated that the revised ADP for the current fiscal year could be reduced by nearly Tk1.10 lakh crore from the original budget.

However, despite the reduction in the ADP size, the overall budget will not see a significant decrease as the subsidy arrears will be paid and the government will need to allocate an additional Tk15,000 crore outside the budget to cover interest obligations, according to Finance Division sources.

Sources from the Finance Division said the cost of domestic debt interest has increased. Additionally, due to the rise in the exchange rate of foreign currencies, the government is facing higher interest payments on foreign debt.

Meanwhile, the government is incurring additional expenses for the medical treatment and compensation of those injured or killed in the protests, as well as for increased salaries resulting from promotions in various sectors and additional spending on social safety programmes.

Govt wants to avoid future subsidy burden

An additional secretary from the Finance Division, speaking on condition of anonymity, told TBS that the interim government believes development spending under the ADP will increase significantly once the next administration takes office after the election.

Additionally, the lower ADP spending this fiscal year is expected to create higher development demands in the future. As a result, the upcoming government may have no option but to take on debt to cover subsidies later.

To avoid this, the interim government aims to pay off as much of the outstanding subsidies as possible within the current fiscal year, he added.

Sources from the Ministry of Finance said the previous Awami League government, despite spending a long time on the matter, failed to resolve an international arbitration claim from 1997, resulting in legal complications for Bangladesh in the United States.

As a consequence, during a government visit to Washington last October, a judicial order was issued by a US court against Finance Adviser Dr Salehuddin Ahmed and Bangladesh Bank Governor Ahsan H Mansur. Following the interim government's intervention, the order to appear in court was later lifted.

However, one of the main reasons for the current initiative is to avoid any similar embarrassing financial situations for the government in the future, the sources said.