Cutting back on energy subsidies

Presently, the government is expending more than 4% of its GDP on subsidising energy prices, which is more than what it spends on health and social welfare programmes. As with many developing economies, energy subsidies have strong advocates who preach that such measures aid the poor, particularly agriculture, where the heavy duty usage of energy-intensive equipment such as irrigation pumps that play a crucial role in production. With about seven-tenths of the total cultivable land being tilled with some form of mechanisation, any talk of reforming subsidies on energy is bound to be political dynamite.
According to a recent study published by Bangladesh Institute of Development Studies, the country's energy subsidy basket for the current fiscal stands at around Tk. 282 billion ($3.4 billion), "almost 90% of the total amount spent on all subsidies. Nearly 34% of these subsidies are off-budget, such as government loans for Bangladesh Power Development Board (BPDB) at favourable lending rates."
The present government, when it took office, made a serious attempt to generate electricity to boost economic development. The decision to go for electricity purchase from independent rental power plants was made as a stopgap measure. Yet, the retail price that consumers paid for electricity generated by liquid fuel-fired plants fell behind the rising cost of electricity. The result was that the government has had to bail out BPDB over the years with soft loans amounting to $734 million every year from 2008 to 2009. Subsidies grew exponentially after 2008 due to the price fluctuations in global oil markets. With nearly half the electricity generated coming from these oil-run plants, the government finds itself in a Catch-22 situation. Raising fuel prices to cut the subsidy trap and eventually help rectify the negative balance of payments comes at a political price. Yet, to continue to sell power at a price lower than production cost, though politically acceptable in the short-run, exacts a heavy price on the economy since it requires the state to borrow heavily from state-owned commercial banks. With rampant cross-border smuggling a ground reality, subsidised fuel has a habit of crossing national boundaries to meet demands in neighbouring countries where fuel prices are much higher.
The arguments for subsidising energy are inherently flawed. Data published by Bangladesh Bureau of Statistics (2010) show that lower income groups (income up to Tk.1,500 per month) consume approximately 0.1% of traditional fuel and biomass. Roughly translated, the poor consume about 0.1% of kerosene and less than 0.1% of natural gas and LPG. At the other end of the spectrum, we have the upper middle class and rich consuming about 79% of natural gas and LPG, 88% of petrol, 89% of diesel, 94% of motor oil and CNG. If we are to trust government published data, the information basically negates the popular belief that any rationalisation of energy prices through reduction in energy subsidy will adversely affect the poor in the country. Hence, a fundamental rethinking is required here.
Rethinking is required in terms of two broad questions: are such subsidies a good utilisation of government's limited fiscal resources? And secondly, would fuel subsidies (i.e. the nearly $3.5 billion being spent annually) be money better spent on upgrading the distribution network and more reliable power delivery? The government has a number of options to mitigate the pains associated with the higher tariff consumers will have to pay from now on. Drawing upon the experience of other countries which have gone down this path may serve as a good example. Indonesia initiated Cash Transfer Assistance programme (BLT) in 2005 and again in 2008 to counter opposition to fuel price increases and simultaneously help poorer families to cope with increased energy bills. Poor families were paid two instalments of $30. This cash incentive was backed up by an increase in social spending: education, health and rural infrastructure (Beaton & Lontoh, 2010). Although there were some discrepancies, these measures largely helpful in aiding poor households make the transition to higher fuel prices. Different countries have adopted different measures to reach basically the same goal. For instance, Jordan initiated its energy subsidy reform in 2008 and increased the national minimum wage. Low income groups and government employees received a onetime payment.
What measure Bangladesh will adopt or can adopt largely depends on the government machinery's capacity to implement these programmes. But the options are out there. It would be a fatal mistake to pass on revised pricing of energy without putting into effect some measures, like the examples stated above. Mere cash transfers and increased social spending will not be enough. These multi-billion taka programmes need to be prepped for public acceptance. The general populace must understand why an increase in tariff is necessary. Regular disclosure of information on changing fuel prices in the international market, costs associated with transportation, distribution, etc. needs to be disseminated to the wider audience through well articulated public awareness campaigns -- in print and electronic media, over the course of months not days. The benefit of these measures is that such disclosure can help increase transparency and accountability of government bodies something that is woefully in short supply at present.

The writer is Assistant Editor,

The Daily Star

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