IMF's loan conditions: Power subsidy likely to go down next fiscal

Staff Reporter :
The government has started working to reduce subsidies in power sector to fulfil loan conditions of the International Monetary Fund (IMF).
Officials said IMF has suggested allocating less subsidies in power sector in the next fiscal’s budget (2023-24) than the allocation provided in this year’s budget.
“IMF may set a cap on subsidy in power sector in next budget,” said a finance ministry official, asking not to be named.
According to him, an IMF delegation is scheduled to visit Dhaka next April to discuss subsidies and other related issues that it recommended in the loan programme.
In the original budget for this fiscal year (2022-23), Tk 17,000 crore has been allocated as power subsidy. But the amount has already been used, and another Tk 32,000 crore was demanded to the head of subsidise electricity generation.
In such a situation, if the subsidy in this sector is to be reduced in the next financial year, the electricity tariffs will have to be increased at a higher rate. This may further fuel inflationary pressure on the economy.
The government in November last year raised wholesale electricity tariff by 19.92 per cent, in a move to unlock IMF’s $4.7 billion aid.
Later in January this year, the government, in an executive order, increased retail power tariff by 5 per cent (per unit). IMF has been informed that the power tariff would go up further in the days to come.
On January 30 this year, IMF approved a $4.7 billion loan for Bangladesh: $3.3 billion under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements and $1.4 billion under the new Resilience and Sustainability Facility (RSF).
The global lender on February 2 this year released the first tranche of $476.2 million of the $4.7 billion loans approved for Bangladesh.
However, in order to receive the loan, Bangladesh must implement the IMF’s recommendations, including phasing out subsidies in power and energy sectors.
“The IMF has asked to reduce subsidies in power sector but has not yet said by when. Their delegation will make specific suggestions on power sector subsidies to be provided for the next budget during their meeting with us in next April,” said the finance ministry official.
He believed that the demand for power subsidies may decrease in the next fiscal year as the price of fuel oil in the world market is going down.
In this context, the executive director of the Policy Research Institute (PRI) Dr Ahsan H. Mansur said the conditions of the IMF are that the electricity tariffs would be cost reflective. But it is not possible in one year. Therefore, the IMF will recommend determining how much allocation can be kept for power subsidy in the next budget.
He said Sri Lanka has recently increased electricity prices by 66 per cent to get IMF loans. Bangladesh will not be an exception in this case.
“To complete the IMF’s loan programme, Bangladesh will also have to raise electricity prices”. However, he suggested increasing the price step by step.
At present, he mentioned, half of the electricity subsidy goes to capacity charges.
The government had allocated Tk 9,000 crore as subsidy in the power sector in the original budget for the fiscal year 2021-22, but in the revised budget, the amount raised to Tk 12,000 crore.