TBS
The Bangladesh economy suffers from revenue shortages and weaknesses, yet the whole economy is burdened with huge subsidies.
The FY2025-26 national budget has allocated Tk125,000 crore for subsidies and incentive payments. Given the current deficit in the country’s revenue earnings and the present vulnerabilities in its macroeconomy, these huge amounts of subsidies may create a pressure on the economy.
Five years ago, during the 2019-20 fiscal year, the amounts of subsidies in the Bangladesh economy were Tk32,000 crore. In the original FY25 budget, subsidies were initially set at Tk115,000 crore. But because of payments of arrears in various sectors of the economy, that figure went up to Tk141,000 crore by the end of the fiscal year.
As the country’s revenue earnings are below their targets, the scope of increasing subsidies in the current budget is rather limited. Yet the FY26 budget has allocated Tk126,000 crore to subsidies, which is 9% higher than that of the original allocation last fiscal year.
Majority of the current fiscal year’s subsidies will go to sectors such as power, fertiliser, agriculture and food. The subsidies to the power sector is the largest — 30% of total subsidies, followed by 21% to agriculture, 8% to food.
Why does the Bangladesh economy bear so many burdens of subsidies? The reasons are varied, ranging from recent cost increases in power, increases in energy prices in the global market, high inflation in the economy, enhancement in food support to people, depreciation of Taka etc.
Whatever be the reasons, a basic question is, can the Bangladesh economy sustain the increased burden of subsidies, particularly in a situation where economic growth is sluggish, inflation is high, public revenue earnings are low, costs are increasing and the global economy is vulnerable.
Why did the amounts of subsidies in the Bangladesh economy become so huge? The subsidies to the power sector amount to Tk37,000 crore. The government has been sustaining subsidies to the power sector, because along with honouring their financial liabilities in this sector, it is also committed to stabilise power supply in the country.
One of the reasons for subsidy hikes in the power sector is that the previous government, rather than phasing out the old power plants, established a series of new mega power plants. As a result, on one hand, subsidies had to be provided to old power stations to sustain them, but on the other, as new power plants were not operating at full capacity, they also had to be provided resource support.
Furthermore, power generation costs also went up significantly because of energy price increases in the global market because of the Ukraine war. The situation worsened because of the depreciation of Taka. As the previous government failed to ensure timely payments for the power generating plants, the arrears for those skyrocketed.
Thus, increased subsidies to the power sector became essential. Currently, the difference between the purchase price and sale price per unit of Liquified Natural Gas (LNG) is about Tk17,676. This gap is being covered with a subsidy of Tk6,500.
For the current fiscal year, the agricultural sector has been allocated a subsidy of Tk27,000 crore. Last year, the amount was Tk25,000 crore. Subsidies are provided to fertilisers and mechanisation of agriculture to ensure food and nutritional security in the country.
This fiscal year, the amount of food subsidies will be Tk9,500 crore — nearly 31% higher than last year. The number of families who are beneficiaries of the open market sale (OMS) system and the Trading Corporation of Bangladesh (TCB) programme will be increased from the current level of 50 lakh to 55 lakh. In addition, every family will get 30kg of rice at a price of Tk15 per kg for six months, which in the past used to be five months.
As the country’s revenue earnings are below their targets, the scope of increasing subsidies in the current budget is rather limited. Yet the FY26 budget has allocated Tk126,000 crore to subsidies, which is 9% higher than that of the original allocation last fiscal year.
What needs to be done to reduce the burden of subsidies on the economy? As the major parts of subsidies go to the power and the agriculture sectors, measures to reduce them must also concentrate in these two sectors.
First, it is necessary to ensure stable power supply to people at affordable prices. To that end, the contracts with old power plants must be terminated and those plants must be closed. It is also imperative to start production at the Rooppur Nuclear Power Plant and the Matarbari coal-based power plant. Let us also reiterate some of the old suggestions traditionally given.
The opportunities and potentials for hydro-electricity and solar power should be explored to overcome the power supply shortage in the country. Can we not stop the misuse and abuse of electricity? Limiting nightly operating hours of shops, shopping malls and business concerns, imposing conditions on electricity use in social events, ensuring efficient and effective use of electricity at home, work places and other instances will reduce the demand for electricity.
These would reduce the need for subsidies to the power sector. In addition, the power tariff structures need to be rationalised so that the sector no longer requires subsidies.
With regard to agricultural subsidies, one fundamental question that needs to be addressed is whether the subsidies would be on inputs, outputs or final products. The economic and equity outcomes of these two different approaches would be different. Therefore, the subsidy structure must be formulated on the basis of whose welfare it wants to enhance.
At present, the agricultural subsidies in Bangladesh are primarily on agricultural inputs. The utility and the effectiveness of this approach needs to be evaluated.
Furthermore, apart from food and nutritional security, the major objective of food subsidy is to reduce the incidence of poverty and inequity in the society by providing assistance to the poor people and marginalised groups.
But in addition to food subsidies, there are other alternative means to reduce poverty and inequity. Therefore, for reducing poverty and inequities in Bangladesh, while on one hand, the effectiveness of food subsidies needs to be evaluated, on the other, other means under the social protection programmes need to be considered. For example, employment-based cash payments may be a means both to boost jobs as well as reducing impoverishment of families. These may reduce the need for relevant subsidies.
Also, the export sector of Bangladesh cannot enjoy subsidies for indefinite periods, and such subsidies should gradually be phased out. As Bangladesh would graduate next year from the least developed countries category to the category of developing countries, subsidies on exportable goods will have to be reduced. Similarly, since Bangladesh has now adopted a market-based free exchange rate, the current incentives of remittances need to be gradually reduced.
Some forms of subsidies will always prevail in any economy. And the reasons for that are varied. But the extent and the depth of subsidies should not reach such a level where it becomes an unbearable burden on the economy. Even bearable subsidies sometimes become unbearable. The important message is subsidies must be rationalised and they should not be a permanent feature in any economy.
Dr Selim Jahan is the former director of the Human Development Report Office and Poverty Division at the United Nations Development Programme, New York, US.