What do the taxpayers subsidise in Bangladesh?

Posted in economics, macro by jrahman on November 11, 2012

Back in August, I wrote about the government expenditure in Bangladesh.  On subsidies, I wrote:

Subsidies used to average less than 0.5 per cent of GDP under the last BNP government.  In FY2013, it’s budgeted to be around 1.4 per cent of GDP.  What is the government – that is, the taxpayers – subsidizing?  Is it worth it?  Is the economy on a fundamentally better trajectory?

Well, the government should be credited for its transparency.  It actually publishes the data for what has been subsidised in recent years for anyone with internet to see for themselves (Table 4.4 here).  This is a graphical representation of that.

What the chart shows is that subsidies in Bangladesh are not only inefficient, they are also quite unfair.

Let’s think this through, covering each of the items individually.

The first thing that the government — that is, taxpayers — subsidise is food.  This is a genuine ‘pro-poor’ policy.  It may cause inefficiency at the margins, but making sure that the poor doesn’t go hungry is justified on equity grounds.  And it’s quite cheap too.  In 2006-07, food subsidies amounted to only 8 billion taka (less than a fifth of total subsidies), rising to 16 billion in 2011-12 (about one-twentieth of total subsidies).  Just look at the chart — this isn’t where the action is.

The next item is agriculture.  This is subsidy for seeds, fertiliser and other farm inputs.  The idea is to improve farm productivity and output with these subsidies.  These subsidies increased under the 1/11 regime, and the current government is spending similar amounts.  I am not sure how effective these are in practice, but at least in theory this could be money well spent.

The same can be said about export subsidies — if manufacturers and other entreprenuers create jobs, then the society as a whole might do well to support them, at least in theory if not in practice.  But export subsidies are not the prime mover in recent rise in subsidy.

Look at the next item — fuel.  Fuel subsidies ballooned in FY2008, as the world oil prices spiked.  Then fuel subsidies plummeted after the global recession.  In more recent years, fuel subsidies have risen strongly again.  Of course, global oil prices are nowhere near their 2008 levels.  Then how come fuel subsidies are so high?  Well, because the government subsidises the diesel that goes into the rental power plants.

And that brings us to the next item — electricity.  In FY2007, the government spent practically nothing on electricity subsidies.  In FY2012, it spend 60 billion taka — over a fifth of total subsidies.

Let that sink in.

In the past couple of years (that is, since the advent of the rental power plants), half of the government’s subsidy bills — 230 billion taka over two years — have gone to fuel and electricity.

Let that sink in.

And now let’s think about what’s going on, and who is being subsidised.

As is well known, Bangladesh faces an electricity shortage.  That is, not enough electricity is produced to meet the demand.  In any market, when demand outstrips supply, prices rise.  When you subsidise the product, you prevent the price from rising.  You subsidise the consumer.

But unless you actually increase the production, this subsidy can become very expensive very quickly.  And when it comes to electricity in a developing country like Bangladesh, it’s important to increase productive capacity because your very development process — industrialisation, job creation, poverty reduction — depends on it.

Now, electricity production requires a lot of money and long term investment.  It’s hard work.  In 2010, the government took an easy option.  It built diesel fuelled small scale rental power plants.  The idea here is that the government (that is, taxpayers) buy oil in the global market, sells it to the owner of these small plants at a subsidised price, and then buys the electricity from them, and sells it to the consumer at a subsidised price.

Who is being subsidised here?

The owners of the power plants — who are all politically connected.  And the electricity consumers, most of whom are affluent city dwellers.

Sure, the factory owners, or schools and hospitals, also benefit from subsidised electricity.  But if we want to subsidise these, then there are more efficient ways of doing that.  Why not subsidise the garments owners or other exporters directly?  Why not give hospitals and schools more money?

Instead what we have is a ighly inequitable, grotesquely unjust redistribution to the affluent classes.

Pro-poor policy this most definitely ain’t.

And this pseudo-populism is not going to be sustained.  The IMF wants the government to cut subsidies now, and allow multinationals to dig up coal and gas.  It’s just a matter of time before that happens.  The question really is, whether it will happen under this government or the next one.



6 Responses

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  1. বর্ণচোরা said, on November 13, 2012 at 1:35 pm

    Excellent analysis. Wish econocrats at home can be this convincing and can persuade politicians.

  2. Diganta said, on November 14, 2012 at 11:08 pm

    There’s one more point I wanted to highlight in terms of subsidy. In Bangladesh, approx 40-50% households has access to electricity. So, if there’s a subsidy in electricity the rest misses out. If there’s a subsidy in cooking gas, most of the people who do not use it will miss it out (guess what, again they are the vast majority). So, subsidy fuels the asymmetry already prevailing in society.

    • jrahman said, on November 15, 2012 at 9:39 am


  3. […] with structural reforms like a new VAT law, renewal of 2G licenses, gradual removal of electricity subsidies.  Against the positive appraisal of monetary-fiscal-structural policy actions, there are words of […]

  4. […]  For now, let’s accept that electricity is important, and put aside the question of whether subsidies are appropriate.  The relevant issue for us is, how the fiscal blowout caused by the mistaken fuel price […]

  5. […]  For now, let’s accept that electricity is important, and put aside the question of whether subsidies are appropriate.  The relevant issue for us is, how the fiscal blowout caused by the mistaken fuel price […]

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