Taking a hard look at sugar mills' liabilities

In medical science, amputation becomes the only option when a limb is so severely damaged or infected that it poses a direct threat to the patient's overall health and survival. This decisive measure prevents the spread of infection, isolating the problem to protect the rest of the body. The situation with Bangladesh's state-owned sugar mills bears a striking resemblance to this medical incumbency. Chronically plagued by mismanagement, financial irregularities, and a lack of modernisation, these mills have been left to deteriorate by successive governments. As a result, they are now creating a ripple effect in the broader financial sector. Their accumulated unpaid loans have accumulated to a staggering Tk 105.18 billion-and continue to grow-posing a serious risk to the financial health of some state-run banks. These loans, provided under state guarantees, are straining the banks' asset quality, increasing their provision shortfall, and damaging their international reputation. This, in turn, raises the cost of the banks' international trade and ultimately erodes profitability. The banks, therefore, are now demanding repayment of these loans, including accrued interest, or the issuance of government bonds to cover the outstanding liabilities.

In the past, the government had issued treasury bonds to settle the debts of the Bangladesh Petroleum Corporation and the Bangladesh Jute Mills Corporation. A similar approach now seems likely for the Bangladesh Sugar and Food Industries Corporation (BSFIC). While issuing bonds may help banks recover their non-performing loans in the sugar industry, it does not address the underlying problem. Ultimately, the burden of these ever-growing debts will fall on the government. The prospect of financial viability of state-owned sugar mills is bleak.

The mills have been incurring a loss of about Tk 140 for each kilogram of sugar with the production cost reaching at Tk 300 as against the selling price of Tk 160 (Brown Sugar). Naturally, sales remain stagnant, leading to an unsold stockpile, as imported raw sugar is significantly cheaper. It happens because production process of the mills is inefficient. Recovery rate from sugarcane is among the lowest in the world.

Beyond incurring financial losses, the sugar mills have failed to fulfil their stated objective. The objective was to safeguard sugar from private-sector monopolies through state intervention. However, the mills have had little to no influence on the market. Bangladesh's annual sugar demand is estimated at around 2.4 million tonnes, yet domestic production is just 30,000 tonnes-barely 1.0 per cent of the requirement. Consequently, the country is almost entirely dependent on imports to meet demand. Worse still, the government often imposes high import duties on raw sugar, seemingly to offset the mills' financial losses, thereby pushing up domestic sugar prices.

Maintaining these mills in their current state, therefore, is not only economically unsustainable but also counterproductive. But shutting down the mills remains a politically sensitive issue, as it would leave thousands of employees jobless. The fate of hundreds of thousands of sugarcane farmers is also tied to the state of the mills, even though sugarcane acreage in areas surrounding the mills has long been declining due to deteriorating health of the sugar mills. Nonetheless, continued subsidies in the form of state-guaranteed loans-poured into what is essentially a bottomless basket-make no economic sense. A decisive course of action is required. The sugar mills must either be divested, with assets auctioned and liabilities settled, or privatised to allow for restructuring and revitalisation under more efficient management. The government must perform the necessary surgery swiftly to prevent the state's financial haemorrhage spreading further.