Iran war pushes subsidy demand to Tk1.20 lakh crore in FY27

The US-Israel war against Iran is expected to inflate the government's subsidy burden in the fiscal 2026-27, with ministries asking for additional funds to make up for the surge in energy, fertiliser and food import costs.

Finance ministry officials said proposals seeking nearly Tk1,20,000 crore in subsidies have already been submitted to the ministry's Finance Division and three-fourths of the demand were from the energy ministry.

The largest demand has come from the Power Division, which has sought nearly Tk60,000 crore in electricity subsidy for the entire fiscal year, while the Energy and Mineral Resources Division has requested Tk27,000 crore to subsidise primary fuels used in power generation for the first six months of the next fiscal year (July-December).

Infographic: TBS

The agriculture and food ministries together have proposed an additional Tk30,000 crore in subsidies.

Sources said in separate letters to the finance ministry, the three ministries have cited rising global LNG prices, depreciation of the taka against the US dollar, increased use of alternative fuels due to gas shortages and higher fuel prices resulting from the Iran war. The agriculture ministry pointed to higher fertiliser prices and transport costs due to disruption in production and supply due to the Middle East war, while the food ministry cited increased procurement and shipment costs and a growing number of beneficiaries.

A senior Finance Division official, speaking on condition of anonymity, told The Business Standard that global developments had increased subsidy requirements across sectors, particularly in power and gas.

"However, these demands are not final," the official said.

He noted that the government currently subsidises electricity tariffs and has allocated Tk36,000 crore for power subsidies in the 2025-26 budget. Subsidies may go up in the next fiscal year, although the final amount has not yet been determined.

"Prices of fuels used in power generation, particularly gas, furnace oil and coal, have increased. At the same time, the taka has weakened. As a result, subsidy requirements will rise. On the other hand, if electricity tariffs are adjusted, subsidy requirements could decline," he said.

Meanwhile, the Bangladesh Energy Regulatory Commission (BERC) yesterday raised the consumer-level retail electricity price by 16.68% (Tk1.52) per unit with effect from June billing month. The hike is estimated to cut the government's electricity power subsidies by up to Tk13,000 crore in FY27. The government has also raised fuel oil prices twice to adjust the import cost hike caused by the Middle East war that restricted supply through the Strait of Hormuz.

The Bangladesh Power Development Board (BPDB) purchases electricity from public and private power plants at agreed rates and sells it to six distribution companies at government-fixed wholesale prices, which are generally lower than purchase costs. The resulting gap is covered through government subsidies.

The official added that subsidy requirements could ease if tensions in the Middle East subside and prices of LNG, fertiliser, fuel and food commodities decline.

"It does not necessarily mean that all requested amounts will be allocated. A reasonable allocation will be made based on current market conditions, and it can be adjusted later if needed," he said.

The government is planning to allocate Tk1,25,000 crore under subsidies, incentives and cash loans in the next budget. Of that amount, Tk80,000 crore may be earmarked for subsidies, Tk33,000 crore for incentives in agriculture, exports, jute products and remittances, and Tk12,000 crore for cash loans.

By comparison, the 2025-26 budget allocated Tk112,000 crore under these three categories.

Power Division seeks Tk59,145cr subsidy

In a letter sent to the Finance Division on 24 May, the Power Division said gas prices in the power sector had increased by 208%, the taka had depreciated sharply against the dollar and the use of liquid fuels had risen due to gas shortages.

It also noted that the Bangladesh Energy Regulatory Commission's decision to set furnace oil prices supplied by the Bangladesh Petroleum Corporation at Tk113.54 per litre would further increase fuel costs.

As a result, the division estimated that Tk59,145 crore would be required to ensure uninterrupted electricity supply between July 2026 and June 2027.

The letter warned that growing electricity demand during heatwaves and large unpaid subsidy arrears owed to power companies were making it difficult to import sufficient coal and fuel on time.

According to BPDB estimates, Tk45,040 crore will be required for independent power producers (IPPs), Tk4,307 crore for the Matarbari-based Coal Power Generation Company Bangladesh Limited (CPGCBL), Tk2.5 crore for rental power plants, Tk1,974 crore for electricity imported from Nepal and India, and Tk7,821 crore for power imported from India's Adani Power.

Nearly Tk10,000cr subsidy for imported electricity

At a meeting of the Cabinet Committee on Economic Affairs on 7 May, policymakers gave in-principle approval to include joint venture power plants, Adani Power and imported electricity from India and Nepal under the subsidy framework.

Under the decision, subsidies will apply to the state-owned BR Powergen Limited from 6 March 2025, the Bangladesh-China joint venture RPCL-Norinco International Power Limited from 30 September 2025, Adani Power's undisputed claims from 1 March 2026 and electricity imports from India and Nepal from the same date.

Tk27,000cr for 6 months' gas subsidies

Finance Division sources said Petrobangla has sought Tk27,000 crore in subsidies for the first six months of FY2026-27.

Petrobangla noted that actual requirements would depend largely on developments in the US-Iran conflict. If the Strait of Hormuz remains open, LNG imports under long-term contracts from Qatar and Oman continue uninterrupted and spot market LNG prices decline, subsidy needs could fall significantly.

A senior Energy Division official told TBS that the proposal was based on an assumed average LNG price of $20 per unit.

"If current conditions persist, total gas subsidies could reach nearly Tk50,000 crore over the full fiscal year," he said.

The current budget allocated Tk7,000 crore for gas subsidies, but the amount has already been exceeded due to global market conditions. Finance Division data show that Tk10,600 crore had been released by April. The Energy Division has since requested another Tk4,100 crore to support imports of 11 LNG cargoes in May, while Petrobangla estimates that around Tk5,000 crore will be needed for June alone.

Food, agriculture

The agriculture ministry has requested Tk18,000 crore in subsidies, while the food ministry has sought Tk12,000 crore.

Agricultural subsidies mainly support fertiliser, seed and irrigation programmes. The current fiscal year's allocation stands at Tk17,000 crore.

The food ministry provides subsidised rice and flour through Open Market Sales (OMS) and food-friendly programmes. Officials say higher rice and paddy prices, rising transport costs and a growing number of beneficiaries are driving the need for additional subsidies.

The government is also planning to allocate Tk16,000 crore in incentives for exports, remittances and jute-based products.

'Inefficiency and governance failures'

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD), told TBS that while energy subsidies may increase because of higher global fuel prices linked to Middle East tensions, this is not the only reason.

"The power sector continues to suffer from inefficiency, corruption, resource wastage and poor decisions. Instead of becoming financially sustainable, it remains dependent on subsidies," she said.

She argued that governance and efficiency in the sector had failed to improve over many years, causing subsidy requirements to rise rather than fall.

"The government must address inefficiency, corruption and waste, while increasing electricity generation from domestic sources," she said.

Fahmida also warned that Bangladesh's low tax-to-GDP ratio raises serious questions about how higher subsidies will be financed.

"Although the government plans to raise its revenue target next fiscal year, there are doubts about whether the target can be achieved. If budget financing relies heavily on bank borrowing, it could fuel inflation and crowd out private-sector credit," she said.