No scope for increasing subsidy without justification

Allocations for all sectors including subsidies were finalised after analysing the global market situation. Discussion on the proposal to increase subsidy should prioritise how logical they are just a few months after the budget was announced.

Liquid fuel price in the domestic market was hiked by a large margin in August and then price in the international market dropped, so the sector should not incur any loss.  Besides, the government has various initiatives to save fuel oil. In this situation, it is difficult to find the rationale for huge subsidies on fuel oil.

Along with fuel prices, Liquefied Natural Gas (LNG) prices also fell in the international market. After that it increased slightly but its price is still lower than it was in March and April. Liquefied Petroleum Gas (LPG) prices are often increasing at the consumer level in the domestic market. Private sector entrepreneurs are also asking for gas at market price. In this situation, there is no justification for additional subsidy on LNG either.

Wholesale bulk rate of electricity has been increased. Various initiatives are being heard to increase retail prices as well. Even after that, what is the rationale behind the proposed price increase?

We are hearing that the Bangladesh Power Development Board has not been able to pay the bills of its Independent Power Producers (IPP) for several months. Is it due to lack of allocation, or is it due to complications over fund release? The budget has a huge subsidy allocation for this sector. There is no reason they should not be able to pay the dues for three-four months due to lack of money.

If there is an initiative to conduct another round of food assistance programmes under the Trading Corporation of Bangladesh (TCB), and an initiative to increase the number of TCB card holders ahead of the month of Ramadan, it will be justified to increase subsidies in this sector. I do not see any reason to increase subsidies in other sectors.

Now the question is where the subsidy will be financed from. Revenue earnings increased some 7% in the first four months of the fiscal year – previously it was over 10%. As the import tax is also on the decline, this huge pressure of subsidy cannot be handled by revenue earnings alone.

Although the foreign aid in the implementation of the Annual Development Program (ADP) increased in terms of the value of taka, it did not increase in terms of dollars – the increase is merely on the exchange rate due to the devaluation of taka.

The budget support of $500 million from the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) will be mainly spent on social security. Even after adding the World Bank's $250 million and the IMF's first tranche of $440 million, the amount of budget support will be below $1.2 billion.

In this situation, the government's dependence on internal sources is increasing to meet the pressure of subsidy and budget deficit.

As of last week, the government has taken a loan of around Tk29,000 crore from the Bangladesh Bank. Usually in the first few months of the year the government tends to pay off some of the previous year's debt and the net debt stays negative in those months. This time the total debt of the government is positive by a large amount. At this time the bank loan was paid off with a loan from the Bangladesh Bank. Such loans increase the money supply in the country.

One fourth of the Tk6.78 lakh crore budget is spent on subsidies. To meet this liability through Bangladesh Bank, the supply of money will increase to a large extent. As a result, the rate of inflation will also increase.

A major liquidity crisis has emerged in the banking system as deposit growth has come to a screeching halt. Under this pressure, the situation will become more difficult if the government wants to take additional loans from the banks. As a result, it will be difficult to get money in the public or private sector.

The government may need to revise the entire budget or allocation in some sectors for various reasons. However, it should also be limited to 5-7%. There can be no scope for increasing the subsidy allocation several times without substantial justification. A detailed explanation is needed for the proposed allocation from Tk56,265 crore to Tk161,370 crore.

Although subsidy reprioritisation is very important, there is very little initiative in this regard. Subsidies in sectors such as export earnings remittances can be reduced while increasing subsidies in food, agriculture, power and fuel. However, as the size of the allocation in these two sectors is not very high, not much savings will be possible.

The volume of remittances through formal channels is increasing. In addition to the money sent by the workers, some other sectors have added more money than the previous year. Now the problem is that although subsidy rationalisation is being talked about by the government, the amount of subsidy is increasing in various sectors.

No initiatives are yet to be seen regarding incentives in the export sector. Apart from the IMF program, the government is talking about reforms, but in reality, there is no visible step in this regard.

Dr Zahid Hussain, former lead economist, the World Bank, Dhaka office