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Gas price increase creates opportunity for reforms

Hitoshi Hirata | Published: July 13, 2019 21:08:35


No government wants to raise utility prices. It is politically destructive. But on July 01, the government did just that. The Bangladesh Energy Regulatory Commission (BERC) raised natural gas prices by an average of 32.8 per cent for all users. The government deserves the highest praises for this courageous and necessary move.

Bangladesh has long been enjoying a low-cost energy society supported by inexpensive domestic natural gas. Faced with signs of depletion, however, Bangladesh has started feeding imported liquefied natural gas (LNG) into the grid since April 2019. This addresses 17.0 per cent of national gas demand. This percentage is forecasted to increase to 40 per cent by 2023, 50 per cent by 2028, and 70 per cent by 2041 according to Power Sector Master Plan 2016.

The price of imported LNG is said to be 6-10 times more than that of the domestic supply. This gap has to be paid by the consumer as gas tariff or by the government as subsidy to Petrobangla. Historically, the gas price was set low to relieve the burden of the consumers; in this direction, the government has doubled the gas subsidy in FY 2019-20 budget to Tk 96 billion. However, considering the scale of the expected future gap, it is not sustainable to continue depending on government subsidy. It is under this circumstance that the government rightly decided to increase or rather rationalise the price.

I would like to argue here that this price increase has broader positive implications that can induce Bangladesh's reforms necessary in becoming a middle-income country. In other words, this is a great opportunity.

First is obvious. This has created an environment towards an energy-efficient and low-carbon society. Japan, after the Oil Crisis in the 1970s experienced a similar situation. As a country completely dependent on imported oil, the Oil Crisis forced Japan to reconsider its energy mix and at the same time pursue maximum energy efficiency. Japan is now considered as a leading country in energy-efficient technology.

Bangladesh has so much potential to take the same path. The JICA-assisted Energy Efficiency Master Plan (2015) in Bangladesh estimated that 20 to 25 per cent energy efficiency is an achievable target. With the implementation of the recommended policies, Bangladesh can reduce 10,000 MW by 2030, an amount almost equivalent to constructing ten large scale thermal power plants.

Bangladesh can further promote this transformation into a low carbon economy by advancing appropriate pricing mechanisms. For example, there is a lot of room for reform of the flat rate pricing structure for consumer gas price. Appropriate pricing mechanism will also illuminate the economic loss from gas leaks and system loss from gas transmission and distribution. This will force us to pay closer attention to the integrity of the existing infrastructure.

Second positive implication of the price increase may be more subtle. In order to offset the inflationary pressure caused by the gas price increase, reduction of import tax and restructuring of trade barriers in general should be promoted. As proved by all recently developed economies including Japan and Korea and more recently Thailand, Vietnam and all the other ASEAN countries, economies grow by lowering trade barriers and engaging deeply into the global manufacturing supply chain. Reduction of import tax will not only curve inflation but also prepare Bangladesh to be linked to the global network of supply chain.

Third implication is on fiscal policy. Because the imported gas is a global commodity, Bangladesh will become more vulnerable to the global market price fluctuation. In order to increase its resilience towards this vulnerability, Bangladesh's fiscal condition will need to be strengthened. Bangladesh's tax revenue ratio to gross domestic product (GDP) which is one of the lowest in the region should be increased by appropriately taxing income and asset. Not only will this increase Bangladesh's resilience but also create an environment for a more equitable society.

I cannot stress enough that the gas price increase is the right policy with broad implications towards Bangladesh becoming a middle incoming country by 2021 and achieving the 2030 SDGs.

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. I believe people of Bangladesh are optimists.

Hitoshi Hirata is the Chief Representative at the JICA Bangladesh Office

DISCLAIMER: The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of JICA.

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