Subsidy spending set to go up Tk10,000cr for power, food

Infographic: TBS

The government plans to increase subsidy and incentive allocation by nearly Tk10,000 crore for the next fiscal year, primarily for the power and agriculture sectors, despite plans to scale back export incentives and falling international prices of fertilisers, fuel, and food products. 

According to Finance Division sources, Tk1,20,585 crore has been proposed for subsidies and incentives, which is 2.15% of the country's GDP. In FY24, the allocation was Tk1,10,672 crore.

The upcoming budget is likely to allocate a significant portion of subsidies and incentives to the power and agriculture sectors totalling Tk65,000 crore. This increase is driven by factors such as LNG imports, food subsidies, and government initiatives to promote food security.

However, in anticipation of Bangladesh's graduation from Least Developed Country (LDC) status, the allocation for export incentives is being reduced.

When asked why the government is planning to increase power subsidies when the IMF recommends elimination, Mahbub Ahmed, former senior secretary of the Finance Division, told TBS, "Subsidies cannot be eliminated abruptly at once, they should be phased out gradually. Otherwise, such a move could negatively impact the economy."

He said a significant amount of subsidy is squandered, with the power sector experiencing the highest level of wastage. Removing these inefficiencies could potentially lead to a reduction in subsidy.

Mahbub suggested reducing fertiliser subsidies, noting that excessive urea use by farmers leads to reduced production, soil degradation, and higher subsidies.

"With the rise in the dollar rate, I think remittance incentives are unnecessary. However, we can retain export incentives for ready-made garments but limit them to new markets and new products. The finance ministry has already started reducing incentives for other sectors," he added.

Sector-wise allocations, power get highest

Despite a global decline in prices for power generation raw materials such as oil, gas, and coal, power subsidy allocation is likely to rise to Tk40,000 crore from this year's Tk35,000 crore due to dollar price surge even with several hikes in power prices and plans for further increases.

According to Finance Division data, the power sector subsidy, including previous year arrears, totalled Tk42,000 crore by the end of January. Of this, the government disbursed Tk17,000 crore, leaving Tk25,000 crore outstanding.

With an average monthly power subsidy of Tk3,000 crore, the period from February to June will see an additional Tk15,000 crore in dues.

Independent Power Producers (IPPs) in Bangladesh and Indian exporters are urging the government to settle outstanding power bills. In response, the government has partially cleared some outstanding subsidies by issuing bonds.

India's Adani Group, with five months of power bill arrears worth around $700 million, met Finance Minister Abul Hassan Mahmood Ali on Wednesday at the Secretariat to discuss payment. 

Additionally, the Tripura government has reportedly decreased power supply to Bangladesh due to outstanding bills of around Rs150 crore, providing only 90-100 MW of electricity out of the contracted 160 MW.

Finance Division officials said power subsidy allocation will primarily settle dues from the current fiscal year within two fiscal years, thereby incrementally increasing electricity prices every three months from the upcoming fiscal year. This strategy aims to ease the subsidy burden in the 2025-26 fiscal year budget, they said

Officials noted an increase in LNG import subsidies for the next fiscal, with a Tk7,000 crore allocation compared to Tk6,570 crore in this fiscal due to the strong dollar and plans for heightened gas imports, despite stable international gas prices.

Agri subsidy remains the same, food gets more 

The government is expected to keep the budget for agricultural subsidies at Tk25,122 crore for the next fiscal year, the same amount allocated this year. 

However, due to financial limitations, the Ministry of Finance has been facing difficulties paying agricultural subsidy dues. To address this issue, the government has issued bonds to banks.

The upcoming budget might allocate Tk7,360 crore to food subsidies, which is an increase from Tk6,766 crore allocated this year. These subsidies mainly go towards supporting government employees.

Additionally, funds are allocated from the budget as grants to various institutions, including private hospitals, charities, research institutes, and NGOs, classified as subsidies. An allocation of Tk12,000 crore is planned for this in the next financial year.

The Trading Corporation of Bangladesh (TCB) provides subsidised food products such as rice and edible oil to one crore families. Around Tk14,000 crore may be allocated for these subsidies in the next financial year.

The government is set to announce a proposed budget of Tk7,98,000 crore for 2024-25 in the first week of June, targeting a GDP growth rate of 6.75% and an inflation rate of 6.5%, despite the current inflation rate being over 9%.

Allocation for all incentives to see cuts 

Since Bangladesh is graduating from LDC status in 2026, export subsidies won't be allowed anymore. To prepare for this change and soften the blow, the government has already started reducing export incentives, including those for the RMG, in the current budget and in the next budget.

Although money has been allocated as an export incentive in the budget, the amount of expenditure will depend on the growth of exports. As growth increases, so does stimulus spending.

In FY23, allocations for export incentives were set at Tk9,025 crore but were reduced to around Tk8,000 crore in FY24. An allocation of Tk7,825 crore is planned for the next budget, said officials.

In addition, around Tk1,200 crore may be designated as an incentive for the export of jute and jute products.

The government offers a 2.5% incentive to encourage expatriates to send remittances through banking channels. Around Tk6,200 crore is likely to be allocated for this purpose in the next budget, mirroring the allocation in the current fiscal year.