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The Financial Express

The subsidy dilemma in Bangladesh

| Updated: January 15, 2022 21:48:43


The subsidy dilemma in Bangladesh

Subsidies are not new in Bangladesh, nor in other countries for that matter, the developed ones included. There are certain sectors of economy which have been given subsidy by governments of every stripe, except erstwhile socialist ones with command economies. The prime purpose is to help producers to keep their production costs low so that they can sell at prices that are within the reach of consumers. Conversely, subsidy is given to producers or sellers to earn a reasonable level of profit when they cannot or are not allowed to increase prices of their products in the market. It is also given to prevent producers with higher costs of production being priced out of market by cheaper imported goods or to give them a competitive edge over exporters of other countries having lower costs of production. Subsidy given under any of these circumstances is indefensible on efficiency criteria as it results in misallocation of resources. But it appears indispensible from welfare point of view which requires producers and consumers to be protected from unregulated market forces. So subsidy as a deliberate intervention of a government belongs to the domain of political economy in contrast to laissez faire economy.

Since subsidy is given by government from tax collected from public its ultimate incidence devolves on them. If price levels of goods and services for which subsidy is given remain satisfactory and within the reach of consumers no objection is raised by them. Rather, if subsidy is not enough to suppress price hike, public outcry results. The government's' dilemma is whether to increase taxes to finance higher subsidy or to lower subsidy to ease pressure on the fiscal space. In normal circumstances, a government does not face this awkward choice between the two. Covid-19 has replaced normal circumstances creating an economic emergency in the wake of and  alongside one in the health sector. An economy like Bangladesh, which had been grappling with chronic fiscal squeeze by ever rising public debt, was least prepared to face and cope with an unprecedented crisis like the Covid pandemic that required almost quantum leap in public expenditures overnight. At first the government tried to 'monetise' the fiscal policy by asking banks to finance the various stimulus packages, assuring them to subsidise the interest that would be charged for the loans to be given under the stimulus packages. When banks dilly dallied apprehending default, government announced that refinancing would be available for the sectors about which banks had misgivings. When even this did not enthuse the banks,  government used its agencies to disburse loan  particularly to the small and medium scale industries. That meant advancing the loanable fund  and subsidising the interest rate. Providing loan money involved immediate payment. Similar payment from government fund was at first given to the garment sector even before the stimulus packages were announced. With subsequent cash grant given to the poor, the fiscal expenditure to address the pandemic started ballooning. That was only the beginning of the enlargement of government role in saving life from the virus and to this has been added the requirement to finance recovery of the economy. The government, already straining under burgeoning debt, is very much worried about the future of fiscal policy. The growing burden of subsidy caused by the preventive health  measures and various stimulus programmes has forced it to revisit the issue of subsidy and take a tough stand even at the cost of popularity. The recent price hikes of diesel and kerosene are indicative of that. But this concern at the top to initiate measures to restore fiscal health has not percolated down to ministries, at least not yet.

According to a news report, soon after the first quarter of fiscal 2021-2022, requests for additional subsidy have been made by various ministries  to meet  the need arising from Covid-19 (Bonik Barta, November 15).

On top of the list are the ministries of agriculture and energy. The ministry of agriculture has requested for an additional amount of Tk.18 billion as subsidy for the sector against the allocation of Tk.8.5 billion in the current budget. Increase in the price of fertiliser in the international market has been cited as the reason for the additional demand for subsidy. According to the same newspaper, total subsidy required may exceed Tk 25 billion given the upward trend in the price of fertiliser in the international market. The prices of some types of fertilisers remained stable before the rise in price of oil during pandemic outbreak in 2020. Since July last year the prices of urea, tsp and mop fertilisers increased by 80 to 100 per cent. If subsidy is given on the basis of past practice and procedure, total amount of subsidy will amount to Tk 25 billion only for urea, the most popular and useful fertiliser. The estimate made by the Finance Division of the ministry of Finance also corroborates this. This will put the budget to such a great strain that not to speak of balancing budget, even scraping through the resources mobilised will be a herculean task. Payment of subsidy of such great magnitude will make the fiscal situation chaotic and untenable. On the other hand, the burden of high fertiliser price cannot be shifted to farmers as they are unable to bear it because they cannot pass it on to consumers and also because of the poor bargaining position of farmers in the market. Their only response will be cutting production which is anathema to government because of concern to maintain food security. So what is the escape route from these horns of a dilemma? One solution may be reduction in subsidy combined with increase in the price of the main crop, rice. Increase in procurement price by government will ensure equivalent high price in the market.

Apart from fertiliser the other area where subsidy is required is in mechanised irrigation requiring power. At present 50 per cent of irrigation equipment is powered by diesel and the remaining half by electricity. The recent hike in diesel price amounts to reduction in subsidy. To offset this, more of the irrigation equipment should be run by electricity. This will also solve the problem of ' leakage of subsidy ' on diesel caused by its fungibility, that is selling it in black market for other purposes.

For the energy sector, allocation made in the current budget is Tk.9 billion for electricity  plus Tk.6 billion for LNG. The energy ministry has requested for enhanced  subsidy for the same reason as in the case of fertiliser viz., rise in price of oil in international market. Reducing subsidy, rather than increasing it, will be resented both by producers of power and its consumers. Some reduction in subsidy on electricity can be made if Power Development Board buys more power from its own plants rather  than from Independent Power Producers (IPP) and rental power plants because the prices charged by the latter are higher than that charged by public sector power plants. The higher price of private sector plants is wholly unjustified as their cost of production is less than that of public sector because they are given gas for power generation; most of public sector power plants have to use diesel, a costlier raw material. Here one cannot but smell rat. Similar suspicion of malfeasance arises over the clause that government has to pay the rental power plant even when  the plant is kept idle. With the setting up of plants in public sector the responsibility of ensuring excess capacity can devolve on them. Very recently the agreement with rental power plants was renewed keeping the same clauses, particularly the one relating to the payment of charges even while plants lie idle. If subsidy in energy sector has to be reduced, an independent review of the sector is urgently required.

The government has been giving incentive to wage earners abroad at the rate of 2 per cent on the amount remitted by them. This has been very successful in motivating them to send money home through official channel. The wage earners demanded the rate to be raised to 3 per cent from the current fiscal. The government has decided to raise the rate to 2.5 per cent. This subsidy has paid off in bigger volume of remittance being sent and therefore the decision to raise it is very much justified.

For distribution of food to certain institutions ( Army, Police, Ansar etc)  the government sells food at very low prices. Since this subsidy has to continue on political grounds, a serious thought should be given to raise the sale prices of the items of ration by reducing the present subsidy allotted in budget. The current budget has earmarked subsidy under this head amounting to Tk 5.5 billion.

For the export sector subsidy allocated in the budget is Tk 6.5 billion  of which the garment sector is a major recipient. When it comes to subsidy to this sector, there is almost a throwback the ' infant industry' argument of the Fifties. Recalling the flaws in this argument there should be planned steps taken to wean the sector away from subsidy gradually. This will be difficult as many of the owners of garment are politicians accounting for a large number of members of parliament and quite a few are ministers.

Paying a total of Tk 530 billion annually in various sectors and now faced with the sudden increase in public expenditures, the government is anxious to reduce the burden of subsidy. Given the various compulsions under which subsidy is given it will be no easy task to achieve this goal. But at least a serious attempt should be made to not to allow it become a runaway freight train. It has got to be reined in.

 

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