Government set to issue bonds to pay off bank debts against power subsidies today

Independent power producers and fertiliser importers can breathe a sigh of relief as starting today, the government is all set to begin issuing special bonds to cover bank debts accrued from unpaid subsidies.

To settle bank debts totalling Tk25,500 crore till June 2023, the finance ministry will issue bonds to 40 banks in phases, offering a 7.7% coupon or interest rate matching the Bangladesh Bank repo rate, according to ministry officials.

As of last June, the amount of outstanding subsidy in the fertiliser and power sector is about Tk42,000 crore. Of that, bank debts amount to Tk25,500 crore.

Power producers' bank debt stands at around Tk15,000 crore and fertiliser importers' debt is Tk10,500 crore.

An official of the Treasury and Debt Management Department of the Finance Division told TBS that in the first phase, two bonds worth Tk4,500 crore could be issued on Thursday to clear fertiliser subsidy arrears, with the state-owned Sonali Bank receiving a bond worth Tk4,000 crore and the private IFIC Bank receiving a bond worth Tk500 crore.

"If for some reason the bonds cannot be issued on Thursday, they will be issued next Monday. All the bonds will be issued to banks within this month," the official said on condition of anonymity.

Finance Division officials said banks will be able to maintain their Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements with the Bangladesh Bank aside from getting interest at a fixed repo rate against these bonds. At the end of a bond's tenure, the government will take it back by paying the money with interest. However, a bond's tenure for each bank will be different.

An official of the Finance Division said the government usually issues bonds with a 20-year maturity period. However, these are special bonds and their maturity period is being fixed based on discussions with the banks concerned. So, these bonds could have a tenure of 8-10 years.

In the fiscal 2022-23, the total subsidy given to the power sector was Tk42,893 crore. After several hikes in electricity prices last year, the amount of subsidy has started to decrease. In 2022, the subsidy requirement was over Tk4,000 crore per month, which has now come down to around Tk3,000 crore.

Finance Division officials said the government has paid the electricity subsidy due till October 2022.

A welcome move but comes with a caveat

Former finance secretary Dr Mohammad Tareque told TBS that this initiative to pay subsidy debt with bonds is somewhat good for the independent power producers (IPPs) and banks but may cause problems for the government's fiscal management because the government will have to pay this money with interest.

"How will the government pay the money to the banks? I see no other option other than printing money. And if money is printed, it will fuel inflation," he said.

Habibur Rahman, senior secretary of the Power Division, welcomed the initiative, saying, "This will reduce the immediate financial burden of the government, while banks and IPPs will get some relief."

However, Imran Karim, former president of the Bangladesh Independent Power Producers Association, said paying the full dues with bonds would have been a much-appreciated move by the government.