Record subsidy, but will it be enough?

Strange times are these in which we live when record subsidy allocation may still come short of what is needed.

The elevated prices of commodities in the global market as a result of Russia's invasion of Ukraine and the galloping inflation at home have made living unbearable for ordinary people, particularly the poor and the vulnerable.

To mitigate the situation and to prevent the accelerating post-pandemic recovery from derailing, the government has prepared a Tk 82,745 crore subsidy package for the next fiscal year that begins on July 1.

The allocation is an increase of 53.7 percent from this year's original outlay, which, in turn, had to be revised upwards by 24.1 percent to Tk 66,825 crore to contain the ripple effect of the Ukraine war, which began on February 24.

In March, the prices of oil catapulted to a 14-year high and those of fertilisers and natural gas to record levels as countries scrambled to make sure they have enough stock of reliable energy before supplies from Russia, the world's biggest exporter of crude, fuel and natural gas, begin to contract.

The government has no option but to increase the allocation for subsidies, said Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue.

"It would not be right to pass on the higher prices to the ordinary people -- their purchasing power has already declined. This year must be viewed as an exception. Because, the situation in the international market will not go on for too long and will fall back to historical trend," he added.

In that spirit, the administered pricing for oil, fertiliser, gas and electricity is being subsidised generously to offset the impact of inflation, which leapt to a 17-month high in March.

The biggest allocation in the upcoming year's subsidy provision is going towards electricity generation: Tk 18,000 crore, which is a doubling of this fiscal year's original budget and a 50 percent increase from the revised budget.

Fertiliser is being subsidised liberally, in keeping with governments everywhere.

Some Tk 15,000 crore has been earmarked to subsidise key soil nutrients, which, in turn, can suppress the runaway inflation. The amount is a 57.9 percent increase from fiscal 2021-22's original budget and 25 percent from the revised budget.

Subsidies for liquefied natural gas and oil imports as well as for the government's interest obligations and payroll fall under the miscellaneous overhead, whose share will increase about 68 percent from this year's original budget to Tk 17,300 crore.

And yet, it might not be sufficient to rein in inflation and lessen the sufferings of the common people.

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, deems the subsidy allocation to not be enough to fully absorb the higher prices of oil, fertiliser, gas and electricity and the impact of inflation.

"This means there will be some adjustments in the electricity and gas tariffs. And both the BPDB (Bangladesh Power Development Board) and BERC (Bangladesh Energy Regulatory Commission) have been soliciting for a hike."

The prices of oil, gas and fertilisers will not come down easily but the chances of those going up further are not much.

"If the existing uncertainty continues, the government cannot continue to absorb the prices. There has to be price adjustment and there will be inflationary pressure."

The government could have avoided the scenario had it retracted the export subsidy and 2.5 percent cash incentive for remittance and redirected those to taming inflationary pressure, Hussain said, while calling for a restructuring of subsidy components.

Some Tk 14,500 crore has been assigned for the two ends, up 33.9 percent from this year's original budget.

"Cash subsidy for remittance is not necessary at all."

The reason being the dollar's official exchange rate and the kerb market rate has diverged by as much as Tk 5, which is more than the amount of the cash incentive being offered for sending money in through the official channel.

"Taka has depreciated much -- let your exchange rate become flexible."

In that way, remittance through the official channel will soar and imports can be reined in. Exporters will be benefitted too as they would get a higher amount in taka against their dollar invoices.

"Export subsidy is not necessary too. The whole point of the export subsidy was to encourage product and country diversification. But that has not happened at all. This shows the subsidy policy has not been effective. Why are we not getting to the root of the problem?"

The amount could have been re-routed as cash transfer to the neediest members of the society to help them manage the impacts of inflation.

"Everyone benefits from subsidy but a price hike does not affect everyone equally. The rich can take the hit but the poor cannot."

Instead of giving subsidies to artificially keep the prices down, Hussain recommended the government spend the amount on income support for the poor and the vulnerable.

"That must be done through MFS transfer as that has proven to be the most effective channel yet in taking the government's aid to the true beneficiaries. There are too many irregularities in food transfers and open market sales. Those who need it do not always get it," he added.

Some Tk 6,745 crore has been allocated for food transfer, up 22.6 percent from this year.