The dilemma of subsidies in Bangladesh



| Update:
January 15, 2022 9:48:43 PM


Subsidies are not new to Bangladesh, or to any other country for that matter, including developed countries. Certain sectors of the economy have been subsidized by governments of all persuasions, with the exception of the former socialist command economies. The primary objective is to help producers keep their production costs low so that they can sell at prices accessible to consumers. Conversely, a subsidy is given to producers or sellers to make a reasonable level of profit when they cannot or are not allowed to increase the prices of their products in the market. It is also granted to prevent producers with higher production costs from being forced out of the market by cheaper imported goods or to give them a competitive advantage over exporters from other countries with lower production costs. . A subsidy awarded in either of these circumstances is indefensible on the basis of efficiency criteria because it leads to a misallocation of resources. But this seems indispensable from a welfare point of view, which requires that producers and consumers be protected from unregulated market forces. Thus, subsidy as a deliberate intervention by a government belongs to the realm of political economy, unlike laissez-faire economics.

Since the subsidy is provided by the government from taxes collected from the public, its ultimate impact rests with them. If the price levels of the goods and services for which a subsidy is granted remain satisfactory and within reach of consumers, no objection is raised by them. On the contrary, if the subsidies are not enough to suppress the rise in prices, the result is a public outcry. The dilemma for government is whether to raise taxes to fund higher subsidies or cut subsidies to ease pressure on fiscal space. Under normal circumstances, a government is not faced with this delicate 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 was struggling with a chronic fiscal squeeze due to ever-growing public debt, was less prepared to face and cope with an unprecedented crisis like the Covid pandemic which required an almost quantum leap. public spending overnight. At first, the government tried to “monetize” fiscal policy by asking banks to finance the various stimulus packages, assuring them to subsidize the interest that would be charged for the loans to be granted under the stimulus packages. . When the banks were slow to fear a default, the government announced that refinancing would be available for the sectors on which the banks were apprehensive. When even this did not enthuse the banks, the government used its agencies to provide loans, especially to small and medium industries. This meant advancing the loanable fund and subsidizing the interest rate. The granting of a loan implied an immediate payment. A similar payment from the government fund was first granted to the garment sector even before the stimulus packages were announced. With the cash grants that were then given to the poor, budgetary expenditure to deal with the pandemic began to explode. This was just the beginning of the expanded role of government in saving lives from the virus and added to this was the requirement to fund the recovery of the economy. The government, already struggling with growing debt, is very worried about the future of fiscal policy. The increasing subsidy burden caused by preventative health measures and various stimulus programs forced him to revisit the subsidy issue and take a tough stance, even at the cost of popularity. Recent increases in the price of diesel and kerosene bear witness to this. But this concern at the top to initiate measures to restore fiscal health has not trickled down to the ministries, at least not yet.

According to a news report, shortly after the first quarter of the 2021-2022 financial year, requests for additional grants were made by various ministries to meet the needs arising from Covid-19 (Bonik Barta, November 15).

At the top of the list are the Ministries of Agriculture and Energy. The Ministry of Agriculture has requested an additional Taka 18 billion as a subsidy for the sector compared to the Taka 8.5 billion allocation in the current budget. The increase in the price of fertilizers on the international market was cited as the reason for the additional demand for subsidies. According to the same newspaper, the total subsidy required could exceed 25 billion taka given the upward trend in the price of fertilizers on the international market. The prices of some types of fertilizers remained stable before the rise in the price of oil during the pandemic epidemic in 2020. Since July last year, the prices of urea fertilizers, from teaspoon and mopping have increased from 80 to 100%. If the subsidy is granted on the basis of past practices and procedures, the total amount of subsidy will amount to 25 billion taka only for urea, the most popular and useful fertilizer. The estimate made by the Finance Division of the Ministry of Finance also corroborates this. This will put a strain on the budget that, let alone balancing the budget, even scraping the mobilized resources will be a herculean task. The disbursement of subsidies of such magnitude will make the budgetary situation chaotic and unsustainable. On the other hand, the burden of high fertilizer price cannot be shifted to farmers as they are unable to bear it because they cannot pass it on to consumers and also due to poor bargaining position of farmers. on the market. Their only response will be to cut production, which is anathema to the government because of the concern to maintain food security. So what is the escape route from these horns of a dilemma? One solution may be the reduction of subsidies combined with an increase in the price of the main crop, rice. The increase in the purchase price by the government will ensure an equivalent high price in the market.

Besides fertilizers, the other area where a subsidy is needed is mechanized irrigation requiring energy. Currently, 50% of irrigation equipment is powered by diesel and the other half by electricity. The recent increase in the price of diesel is equivalent to a reduction in subsidies. To compensate for this, more irrigation equipment should run on electricity. It will also solve the problem of “subsidy leakage” on diesel caused by its fungibility, i.e. its sale on the black market for other purposes.

For the energy sector, the current budget allocation is 9 billion taka for electricity plus 6 billion taka for LNG. The Ministry of Energy requested an enhanced subsidy for the same reason as in the case of fertilizers, namely the increase in the price of oil on the international market. Reducing subsidies, rather than increasing them, will be felt by both electricity producers and consumers. Some reduction in the electricity subsidy can be made if the Power Development Board purchases more electricity from its own power stations rather than from independent power producers (IPPs) and rental power stations, as the prices charged by the latter are higher than those charged by public sector power plants. . The higher price of power plants in the private sector is completely unjustified because their production cost is lower than that of the public sector because they receive gas for the production of electricity; most public sector power plants have to use diesel, a more expensive feedstock. Here, you can only smell the rat. Similar suspicions of wrongdoing arise over the clause that the government must pay the rental plant even when the plant is kept idle. With the establishment of factories in the public sector, the responsibility for ensuring excess capacity may be devolved to them. Very recently, the agreement with the rental centers was renewed while retaining the same clauses, in particular that relating to the payment of charges even in the event of inactivity of the centers. If subsidies in the energy sector are to be reduced, an independent review of the sector is urgently needed.

The government has granted incentives to overseas employees at the rate of 2 per cent on the amount they pay. This has been very successful in motivating them to send money home through official channels. The employees demanded that the rate be increased to 3% compared to the current financial year. The government has decided to raise the rate to 2.5%. This grant has paid off in increasing the volume of remittances sent and therefore the decision to increase it is entirely justified.

For the distribution of food to certain institutions (army, police, Ansar, etc.), the government sells food at very low prices. Since this subsidy must continue for political reasons, serious consideration should be given to increasing the selling prices of ration items by reducing the current subsidy allocated to the budget. The current budget provides for such subsidies amounting to 5.5 billion taka.

For the export sector, the subsidy allocated in the budget amounts to 6.5 billion taka, of which the clothing sector is one of the main beneficiaries. When it comes to subsidizing this sector, it almost goes back to the “infant industry” argument of the 1950s. Bearing in mind the flaws in this argument, steps should be taken to wean the sector off subsidies gradually. It will be difficult because many clothing owners are politicians representing a large number of MPs and a good number are ministers.

Paying a total of 530 billion taka per year in various sectors and now faced with the sharp increase in public spending, the government is keen to reduce the burden of subsidies. Given the various constraints under which grants are awarded, achieving this goal will not be easy. But at least a serious attempt should be made not to let it become a runaway freight train. It must be mastered.

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