When grants exceed budget, direct cash transfer may be an option

If 85 million cubic feet (MCF) of imported LNG is added to the national grid every day to meet gas demand in the country, the government subsidy will amount to around Tk 25,000 crore in the current fiscal year alone , which is more than six times the FY22 budget allocation.

According to estimates by Petrobangla and the Finance Division, the import cost will then be Tk 32,219 crore, which will end up at Tk 44,265 crore if all other expenses are added.

After selling gas at the current price, Petrobangla will need a subsidy of around Tk 25,000 crore.

But in the current year budget, only Tk 4,000 crore has been allocated to subsidize LNG, of which Tk 1,000 crore has been disbursed so far. The Finance Division has suggested increasing the gas prices as it is not possible to meet Petrobangla’s demand with the budget allocation.

The government provided Petrobangla with Tk 1,000 crore of LNG subsidy in FY19, Tk 2,500 crore in FY20 and Tk 2,812 crore in FY21.

Petrobangla has also submitted a proposal to the Bangladesh Energy Regulatory Commission (BERC), asking for a 117% increase in the prices of locally produced gas. But the BERC rejected the proposal, saying there was no chance of raising the prices of gas produced in the country. Only the price of imported gas can be increased.

But since it is not possible to differentiate who uses imported LNG, the commission asked Petrobangla to calculate how much of the country’s total gas demand is met by imports and how much increase in prices for whole gas supplied through the country would calibrate the LNG subsidy. .

The government collects taxes, including VAT, at the gas import stage. For this, the NBR is now claiming Tk 5,091 crore in back taxes from Petrobangla. In a letter, the state oil company asked BERC to calculate tax money as a cost while raising gas prices. Although Bangladesh Petroleum Corporation has included VAT and taxes on LNG imports in the pricing formula, the BERC does not currently do so.

Seeking anonymity, an additional finance ministry secretary said the amount of subsidy needed for LNG imports could not be funded from government revenue. In the revised budget, the grant could be slightly increased from the existing Tk 4,000 crore, but this will not be enough to cover such a high amount of grant. This is why the Energy Division was asked to adjust gas prices.

The government has made an upward adjustment to diesel and kerosene prices, with a projection that oil prices on the world market will be below $80 a barrel. As a result, it appears no subsidy will be needed, the additional secretary also said.

Although oil prices recently rose to $100 a barrel due to Russian-Ukrainian tensions, they will be reduced, he added.

The government has not provided any subsidies on fuel for several years, but the BPC instead made a profit of Tk 43,137 crore from FY15 to FY21, according to the Bangladesh Economic Survey.

Experts say reliance on LNG imports should not be a good choice to secure consumer fuel supplies. It would be good for us if we went into gas exploration with half the money spent on LNG imports. The chances of getting gas are much higher this way.

It is not only in the LNG sector that subsidies are increasing, the government is also burdened with more than three times the budget allocation in the energy and fertilizer sectors. The government is looking to raise electricity and gas prices further, with the burden of state subsidies going beyond affordability amid soaring global prices.

These issues have been discussed at several high-level meetings of the Prime Minister’s Office, the Ministry of Finance and the Ministry of Energy over the past three months.

Grant requests that greatly exceed budget allocations are cause for concern for finance officials who look at macro issues.

According to the AfDB, the potential cost of extra-budgetary or off-balance-sheet funds and unfunded government grants can undermine long-term fiscal sustainability, which underpins strong macroeconomic fundamentals. Fiscal risks related to off-budget items can create gaps between budget forecasts and results.

Subsidies have a lot of loopholes. But countries are not abandoning this age-old approach. They are trying to make it more efficient and flawless. Direct cash transfer is one of the movements. India has implemented such support policies for energy and agricultural inputs.

“Our past experience shows that one should opt for direct transfers of income to the needy rather than subsidizing goods and services. vested interests,” India’s development economist and former secretary Dr. Ajay Dua said in an article.

The same is true for Bangladesh. In a developing country like ours, where millions live in poverty and millions more have become the new poor during the pandemic, there is certainly a case for direct government subsidy.

The decision to issue smart farming cards to more than one million farmers is a welcome move, which will help marginal farmers obtain direct cash incentives from the government, such as the one given as a diesel subsidy for water pumps. ‘irrigation. Farmers will benefit more from direct support for fertilizers instead of getting administered tariffs, which essentially go to state-owned fertilizer companies, which import more than they produce using subsidized gas.

Another such social protection scheme is the universal pension scheme, expected from the next fiscal year, which aims to provide financial security to people in the private and informal sectors. Now only government employees receive a pension, provided as a direct cash transfer through a digital transaction system.

In addition, it is good to know that the Ministry of Finance has suggested designing three separate stimulus packages for low-income people, farmers and selected exporters in the event of energy price increases.

While subsidies are unavoidable, careful attention is needed to use public money to benefit selected groups of a few or to make consumers pay for the inefficiencies of others.

Consumer rights campaigners wonder why Dhaka Wasa’s unit water cost is so high when groundwater accounts for 80% of its supply. They blamed corruption and inefficiency for the high cost, which is cited as an excuse for raising water tariffs.

The head of the energy regulatory commission asked why the system loss (the official term used to cover gas theft) in the state gas monopoly Petrobangla is so huge – 10% when the world average is between 0.5% and 1%.

The water subsidy, which amounts to $300 billion globally, also consumes a significant portion of a country’s scarce public resources.

World Bank research too often shows that subsidies do not reach those who need them most. However, he adds, subsidies can be powerful and progressive tools when designed in a smart and targeted way and implemented effectively.

From water to oil, such smart designs are needed for all grants in addition to extending direct cash transfers to reach only those targeted and in need. These payments need not be on a lump sum, infinite and lifetime basis.

About Christopher Easley

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