“Subsidy on Agricultural and Energy sectors and its impact on Bangladesh economy”
Course: BUS 530
Md. Rafiqul Islam Rony
Section: 02
ID# 1130181060 (MBA)
Instructor : Dr. Salehuddin Ahmed
North South University
Date: December 19, 2012 2|Page
ACKNOWLEDGEMENT
This report is prepared as part of the requirement of the course Bus 530. First of all, I would like to thank almighty Allah for making me capable of doing this research work. I am also thankful to our honorable faculty Dr. Salehuddin Ahmed for giving me the opportunity to work on this topic-―Subsidy on agricultural and energy sectors and its impact on Bangladesh economy‖ and express gratitude for his specialized comments to improve the quality of the research paper. I have tried my best to finish this paper with required information and I apologize for any reluctant mistakes.
Table of Contents Executive Summary Introduction
iv 1
Agricultural sector in Bangladesh
2-3
Subsidy allocation in Agricultural Sector
4-6
Types of subsidies provided in agricultural sector
6-8
Impact of agricultural subsidies on the economy of Bangladesh
8-9
Recommendations Recommendations for better allocation of subsidies in agricultural sector Energy sector in Bangladesh
9 10
Energy Subsidies in Bangladesh
10-11
Types of subsidies provided in energy sector
12-15
Impact of energy subsidies on the economy of Bangladesh
15-17
Conclusion
18-19
References
20
List of Tables Table 1: Agricultural subsidy during the five fiscal year
5
Table 2: Total Subsidies in Bangladesh during FY 2012
11
Table 3: Domestic retail prices of petroleum products
12
Table 4: Operating losses incurred by BPC in recent years
16
List of Figures Figure 1: Agricultural subsidy during the five fiscal year
5
Figure 2: Agriculture subsidy as percentage (%) of total subsidy
6
Figure 3: Broad Sectoral composition of public expenditure
11
Executive Summary This report titled ―Subsidy on agricultural and energy sectors and its impact on Bangladesh economy‖ mainly focuses on cash and other forms of subsidies support provided to these two
sectors by the government of Bangladesh to increase agricultural production and develop energy and other related sectors like infrastructure, transportation etc. The report also shows the impact of such subsidies on the economy of Bangladesh. Subsidy on agricultural inputs over the years is substantially increasing but it shows slightly declining trend as percentage of total subsidies provided each year by the government. government . In Bangladesh, subsidy support for producers is provided on different agricultural inputs to boost up agricultural productivity. Subsidies are mainly given to keep the price of production inputs within the purchasing capacity of producers. Subsidies potentially generate both direct and indirect economic effects. In the agricultural field, direct effects include the influence on growth and location patterns, investment, and trade. Agricultural subsidies in Bangladesh also lead to indirect effects on both upstream and downstream industries, such as the input (e.g., agro-chemicals) and transformation (e.g., processed food) industries. A strong rationale for subsidizing energy is to support access to energy for the poor. Bangladesh’s agricultural sector depends heavily on energy -intensive irrigation, especially
during the dry season. The development of infrastructure also heavily depends on energy. Energy subsidies contribute to raising household incomes, both directly and indirectly. Total energy subsidies for the FY 2012 are estimated at more than BDT282 billion (US$3.4 billion), almost 90 per cent of the total amount spent on all subsidies. Large fuel subsidies make the country’s fiscal position highly vulnerable to changes in global energy prices.
Introduction Bangladesh Government, like many countries around the world, has used subsidies for decades to promote a wide range of social and economic objectives. The government provides subsidies in a number of areas, including agriculture, petroleum products, electricity, health, education and food. Subsidies have wide-ranging impacts on the distribution of wealth within a country, economic growth and the environment. This report mainly focuses on agricultural and energy subsidies, which receive a large share of subsidy spending in Bangladesh. As a less developed country, Bangladesh economy largely depends on agricultural development. Also the agricultural development largely depends on government subsidies on agricultural sector. In Bangladesh the government distributes huge amount of money for agricultural sector in each and every year for agricultural development. It has been found that in 1973-74, the government subsidies were tk. 40 crore for agricultural sector, but in 2011-12 the government subsidies for agricultural sector became tk. 4500 crore. Thus it can be concluded that in Bangladesh the government subsidies on agricultural sector corresponding to the year 2011-12 is 112.5 times compared to year 1973-74. On the other hand, Bangladesh started subsidizing the retail prices of energy products following independence in 1971. Today, with soaring global fuel prices and rapidly rising demand for fuels, these subsidies take a heavy toll on government finances. The term ―energy‖ includes all commercial types (e.g., electricity, petroleum products,
natural gas, diesel, kerosene, and furnace oil) for which the government provides subsidies. The report discusses the size of subsidies to different energy types, the segments of society that benefit the most, and how they affect the country’s economy. economy.
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Agricultural Agricultural sector in Bangladesh Agriculture was considered to be the backbone of the Bangladesh economy at the time of its independence since about half of its gross domestic product (GDP) would come from this sector. Over the years the contribution of the agriculture sector to GDP has declined due to the structural change of the economy. With the dominance of the service sector followed by the industrial sector, agriculture is now positioned in the third rank with a contribution of about 20 percent in the GDP. Despite a relatively lower contribution in the national income, the importance of the sector is still very critical from the point of its role to employment generation and poverty reduction. Agriculture still employs about 47 percent of total employment of the country. Per capita food grain availability in Bangladesh has increased from 453 grams in FY92 to 605 grams in FY11 due to the admirable performance of the sector. Agriculture is also a supplier of raw materials for the manufacturing sector. The unprecedented growth of the agriculture sector has increased income of farmers and wages of agricultural laborers and has contributed to increase their purchasing power. This, in turn has contributed to the expansion of demand for non-agricultural products. Opportunities in the agricultural sector:
1) Agriculture is the single largest contributor to GDP. 2) Crop production system is highly labor intensive and there is abundance of labor in the county 3) Agriculture is the largest source if employment for skilled and unskilled labor 4) Favorable natural environment generally exist throughout the year for crop production 5) Wide range of biodiversity exists for different crops, 6) Agriculture commodities are the main source of nutrition including protein, minerals and vitamins
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Constraint in the agricultural sector:
1) Agriculture is dependent on the vagaries of nature and is risky 2) Availability of cultivable land in decreasing 3) Widespread poverty among the population engaged in agriculture 4) Lack of required capital for agricultural activity 5) In adequacy of appropriate technology considering farmers socio-economic conditions 6) Uncertainly of fair price of agricultural commodity due to underdeveloped marketing system 7) Agricultural commodities and rapidly perishable and post harvest losses are too high 8) Limited knowledge of common people about nutritional value on agricultural commodities including fruits and vegetables. Agriculture development strategy:
The government commitments towards the agricultural development include: 1) Timely supply of agricultural inputs at affordable prices 2) Appropriate action plan for agricultural credit and marketing of agricultural products 3) Government support to agriculture 4) Priority for the development of agro-based small and medium industries 5) Enhanced rate of private sector participation in different sectors of agriculture i.e. seeds, fertilizers, agro machinery and also in established agribusiness 6) Agricultural mechanization 7) Pest management 8) Greater co-ordination between the government, NGOs and private sectors 9) Food based nutrition 10) Environmental protection in agriculture and finally involvement of women in agriculture. 11) Involvement of women in agriculture.
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Subsidy allocation in Agricultural Sector Subsidy has become a part and parcel of ensuring increased agricultural production which is reflected through higher allocation (Table 1). This is important for keeping cost of production affordable for farmers. Input prices have increased pushing up the overall cost of production of the agriculture sector which is not matched by selling prices of agricultural products. However, the efficient utilization of subsidies, its return and its impact on the economy are to be probed since subsidy puts pressure on the government's expenditure stream. Therefore, subsidies and other price support schemes for the agriculture sector have to be economically justifiable through efficiency of allocation and maximization of returns. In Bangladesh, subsidy support for producers is provided on different agricultural inputs to boost up agricultural productivity. productivit y. Subsidies are mainly given to keep the price of production inputs within the purchasing capacity of producers. Only implicit support is given on nitrogenous fertilizers and in the price of diesel i.e. the fuel used for operating the LLPs (Low Lift Pumps) and STWs (Shallow Tube Well) to uplift underground water for irrigation, especially in the dry season. The fertilizer is implicitly subsidized and distributed through a controlled channel keeping the prices reasonably stable. The costs of both irrigation and fertilizer for Boro rice production are higher in Bangladesh. The higher prices of the fertilizers and diesel are the major concerns for giving subsidy to the producers in Bangladesh as incentive for production. produ ction.
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Table 1: Agricultural subsidy during the five fiscal year (in crore taka) Fiscal year
2007-08
2008-09
2009-10
2010-11
2011-12
Agriculture subsidy
2250
4285
3600
4006
4500
Total subsidy
4200
6717
6989
7662
9286
54
64
52
52
48
Agriculture
subsidy
as % of total subsidy
Source: Ministry of Finance (MOF) – http://www.mof.gov.bd
Figure 1: Agricultural subsidy during the five fiscal year 9286
10000 8000 e r o r C n i
T D B
6000 4000
6717 4200
4285
6989
3600
7662
4006
4500 Total subsidy
2250
Agricultural subsidy
2000 0 2007-08
2008-09
2009-10
2010-11
2011-12
Year
Subsidies on agricultural inputs have shown little fluctuations over the years. Although agricultural sector requires a huge amount of subsidy, the subsidy allocation for the agriculture sector as percentage of the total subsidy is on the decline during the last few years. As Table 1 depicts in FY2011-12 the percentage share of the agriculture sector’s subsidy in the total subsidy has come down to 48 percent compared to 64 percent in FY 2008-09.
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Figure 2: Agriculture subsidy as percentage (%) of total subsidy 70 60 50 e g a t 40 n e c r 30 e P
Percentage (%) of agricultural subsidies
20 10 0 2007-08
2008-09
2009-10
2010-11
2011-12
Year
Types of subsidies provided in agricultural sector: The government of Bangladesh provides agricultural subsidies not only in the form of cash but also on price of agricultural inputs such as fertilizer, diesel etc. Cash subsidy:
Bangladesh government has been providing cash subsidies to the farmers over the years. To make Bangladesh self-sufficient in food, the government announced an ―Agriculture Input Assistance Card Programme‖ that would allow marginal (0.02 -0.19 ha), small (0.20-1.00 ha) and
medium (1.01-3.03 ha) farmers to get cash subsidies. The new system would conduct smooth cash transfers and reduce misappropriation of financial support. It is to make best use of all facilities sponsored by government. Cash subsidies are given mainly based on the type of farmers through the ―Input Assistance Card‖. Total 1.82 crore farmers of the country will be
brought under this program. Farmers would receive incentives from banks by using the ―Agriculture Input Assistance Card‖ to buy diesel or any other input. For drawing the subsidy
and monetary transactions, the farmers have to open bank accounts for only Tk 10. Moreover, the condition for keeping minimal money with a bank account has not been tagged to operating the farmers’ accounts and they do not need any identifier to open the account. The Agriculture
Input Assistance Card will be considered as the final identity for the farmers. Bangladesh 6| P a g e
government has targeted a total of 35 million tons of Boro rice production in 4.8 million ha land in 2011-12. Therefore to achieve the targeted production of Boro rice in this year, the irrigation cost would be one of the major concerns for the whole production system. Under this scheme, as the first-ever such agriculture-welfare agenda in the history of Bangladesh, a total of 10 million Boro farmers would be given money through banks as direct subsidy on diesel used for irrigating croplands for the dry-season rice farming. The farmers who are cultivating Boro rice especially under diesel running STWs will take subsidy in cash from bank through their account. Initially marginal and small farmers have got Tk 800 (less than 1.01 ha) and medium farmers have got Tk 1000 (more than 3.03 ha) as cash incentives. According to statement mentioned in the card, later farmers will also get seed, agricultural credit, fertilizer, other inputs and agricultural resettlement facilities through this card. Subsidy on the price of agricultural inputs:
Over time, import cost of fertilizers experienced significant increase when there was rise in the price of fertilizer in the world market and cost of local urea production also accelerated. Government reintroduced the subsidy for imported products. In 2007 for each ton of urea costing Tk. 31,000, a subsidy of Tk. 25,700 was given. During the year 2007-08, Tk. 3,120 crore was provided for urea, whereas Tk.486 core for TSP, DAP and MOP. During the beginning begin ning of Boro season of 2009, government again subsidized the price of fertilizer. The prices of non-urea fertilizers were slashed to almost half per kilogram to help farmers during the Boro season. Nonurea fertilizer prices were further reduced beginning of Boro season of 2012. The aim of the government was to reduce the production cost of rice for the farmers and make fertilizer more easily available to the poor farmers.
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Impact of agricultural subsidies on the economy of Bangladesh :
Subsidies potentially generate both direct and indirect economic effects. In the agricultural field, direct effects include the influence on growth and location patterns, investment, and trade. The Agriculture; value added (annual % growth) in Bangladesh was last reported at 4.96 in 2011, according to a World Bank report published in 2012. Apart from this, Per capita food grain availability in Bangladesh has also increased from 453 grams in FY92 to 605 grams in FY11 due to the admirable performance of the sector which was possible due to the subsidies provided to the sector to improve production.
Without subsidies, Agricultural products would have been replaced by imports, leaving the country dangerously dependent on foreigners for food.
In Bangladesh, subsidies are intended to alleviate farmer poverty and to raise farmer incomes by remedying low crop prices.
Bangladesh now exports some agro-products and processed foods after meeting our own demand which contributes largely to our economy.
Subsidy in agriculture helps us to achieve food sovereignty and ensure nutrition for every single citizen by increasing the production allover.
Agricultural subsidies in Bangladesh also lead to indirect effects on both upstream and downstream industries, such as the input (e.g., agro-chemicals) and transformation (e.g., processed food) industries. indus tries.
Subsidy creates difficulties for the government because it has to cut a large amount from another sector which could be used for the development of that sector. So opportunity cost is very high.
Budgetary allocations for agricultural subsidies fail to benefit farmers fully due to the involvement of middlemen. So a third party gets the economic benefit as well from these subsidies.
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Recommendations for better allocation of subsidies in agricultural sector:
A critical policy discussion should be initiated regarding making subsidized fertilized to all categories of farmers or not. Such a discussion is highly important to ensuring efficient use of chemical fertilizer and saving public money.
Government should start providing irrigation support alongside the privately owned irrigation facilities. Irrigation projects of Water Development Board and BADC should be resumed.
Cash subsidy on diesel should be transferred to farmer’s bank account before the irrigation starts.
Dredging/digging canals to ensure the availability of surface water for irrigation
Attention should be given to produce more Aman and Aush paddy that requires less irrigation. It has positive impact on environment and ecology as well as potential for saving public money.
Strict measures should be taken to remove the corruption and conditions of harassment associated with getting agricultural loan.
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Energy sector in Bangladesh: An essential precondition for industrial development is uninterrupted supply of energy. The government of Bangladesh has embarked on a well-planned policy to generate more energy through higher public and private investment, reduce system loss to the minimum and harness natural gas, solar power, atomic power and hydroelectric resources. A strong rationale for subsidizing energy is to support access to energy for the poor. While there is some degree of truth to this argument, energy subsidies often benefit wealthier segments of society disproportionately, given that they use more energy. This is true in Bangladesh, where the poor are mostly dependent on traditional biomass and have little access to electricity and other public utilities. Energy subsidies also divert public funds from social programs and welfare schemes that may be of greater benefit to the poor. Nonetheless, an increase in energy costs can have a disproportionate impact on poorer citizens if adequate social safety nets are not in place. Governments also provide energy subsidies to support important parts of the economy. For instance, energy subsidies play a critical role in Bangladesh’s agriculture sector, which employs
nearly half of the country’s labor force. Bangladesh’s agricultural sector depends heavily on energy-intensive irrigation, especially during the dry season. Nearly 87 per cent of the irrigation equipment is run on diesel, accounting for nearly 71 per cent of the area under mechanized irrigation. Naturally, shortages or price hikes in power or fuel lead to higher production costs and, subsequently, to higher market prices for agricultural products, particularly rice, the staple food.
Energy Subsidies in Bangladesh: Total subsidies provided in Bangladesh for the 2012 fiscal year (FY) amount to nearly BDT320 billion (US$ 3.9 billion). This is more than tha n 4 per cent of o f the gross domestic product (GDP) and nearly a quarter of the total budget (Table 2), equivalent to what the government spends on education and more than health and social welfare expenditures (Figure 3). Total energy 10| P a g e
subsidies for the FY 2012 are estimated at more than BDT282 billion, almost 90 per cent of the total amount spent on all subsidies. Nearly 34 per cent of these subsidies are off-budget, such as government loans for Bangladesh Power Development Board at favorable lending rates. Table 2: Total Subsidies in Bangladesh during FY 2012 (July 1, 2011 – June June 30, 2012) Products
Total cost
Total sales
Total subsidy
(billion BDT)
(billion BDT)
(billion BDT)
Power
79.04
70.59
8.45
-
-
123.56
Natural gas
100.1
103.6
-3.46
Petroleum
572.6
418.8
153.8
Fertilizer
-
-
19.8
Food (consumption)
-
-
17.5
Total
-
-
319.7
Power (rental power plants)
Figure 3: Broad sectoral composition of public expenditure: Budget FY 2012 Others 21.10%
Local Government & Public administration 22.10%
Education 12.40%
Transport 6.90% Energy & Power sector 5.10% Health 5.40%
Social & Public security 12%
Agriculture 7.70% Defence 7.30%
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Types of subsidies provided in energy sector: Energy subsidies result from the government setting retail prices for fuel and electricity at much lower than market prices. Although the government periodically adjusts prices to bring them closer to world market levels, subsidies have remained substantial. Table 3: Domestic retail prices of petroleum products Petroleum
Aug
Dec
Jan
Jan
June
Jan
Jun
April
Nov
Jan
product
2000
2001
2002
2003
2004
2005
2006
2007
2011
2012
Kerosene
15.17
16.67
16.67
16.83
16.83
22.52
32.37
40.00
56.00
63.00
16.22
17.60
17.60
19.71
19.71
22.0
28.00
40.00
56.00
63.00
6.50
12.50
12.50
10.00
12.00
12.00
14.00
20.00
55.00
62.00
62.87
62.87
65.99
70.00
70.00
73.91
73.91
73.91
73.91
79.93
(BDT/L) Diesel (BDT/L) Furnace oil (BDT/L) Natural gas (BDT/1000cft)
Note: Figures are based on unpublished data provided by the Ministry of Energy and Mineral Resources, Government of Bangladesh.
Subsidy on fuel Oil:
Bangladesh has small proven oil reserves, and thus imports much of its oil products. In the domestic market, petroleum prices are subsidized and administratively fixed by the government. The price of kerosene was raised in November 2011 from BDT40/liter to BDT56/liter (US$0.49 $0.68). With average annual consumption of 508.5 million liters, the total subsidy for 2012 is expected to amount to BDT14.9 billion (US$182 million). Kerosene is largely consumed by low income households for lighting and cooking. The average annual consumption of diesel is
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4,007.6 million liters, most of which is used for operating irrigation equipment. The total subsidy for diesel for 2012 is estimated to be BDT116.9 billion (US$1.4 billion), which is the highest amongst the petroleum subsidies. The average annual consumption of petrol is 152 million liters, most of which is used for transportation. The amount of subsidy is expected to be BDT1.39 billion (US$16.9 million) during FY 2011 – 12. 12. Finally, average annual consumption of furnace oil, which is mainly used as fuel for electricity generation, is 3,035.6 million liters, and the subsidy amounts to BDT13.2 billion (US$161 million). Natural Gas
Natural Gas Natural gas is Bangladesh’s only significant source of commercial energy, and is expected by some independent analysts to grow by around 6 per cent annually over the next two decades. Potential uses for natural gas in Bangladesh include petrochemicals, compressed natural gas (CNG) for vehicles, power generation and fertilizer production. Bangladesh also possesses around 55 million barrels of natural gas liquids, which could be used for petrochemical production or as a cooking fuel. Production of natural gas liquids is currently about 200 billion barrels per day (bbl/d). Bangladesh periodically raises the price of natural gas as part of its efforts to reduce subsidies. Still, natural gas prices in the country are relatively low by international standards, with electricity consumers, the fertilizer industry and household consumers receiving most of the benefits. Unfortunately, there are no available estimates for the cost of these subsidies.
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Electricity
Electricity is a scarce service in Bangladesh. In a country of around 160 million people, electricity is used by only about 55 per cent of the households, mostly in urban areas. Only 43 per cent of rural households have access to electricity. Natural gas, diesel oil, furnace oil, coal and hydro are the major types of fuel that are used in electricity generation in Bangladesh. From 1972 to 2008, gross electricity generation increased from less than one terawatt hour (TWH) to more than 25 TWH. By official accounts, electricity generation has grown at 7.5 per cent per year, but in reality the growth may have been lower more likely 4 to 5 per cent over the 1976 – — more 2003. The provision of low-cost electricity has played a critical role in growth and development of the Bangladesh economy. Although the per-unit supply cost of electricity has risen over time, the rate of increase is rather small. However, due to rapidly rising demand for electricity, the Bangladesh Power Development Board (BPDB) has recently taken steps to install new power plants and to purchase electricity el ectricity from independent i ndependent power p ower producers to meet power shortages shorta ges on an emergency basis. As the selling price has fallen behind the rising cost of electricity supply over the years, the government provided the BPDB with loans of BDT10 billion (US$122 million) every two months in 2007, BDT60 billion (US$734 million) each year from 2008 to 2009, and BDT39.4 billion (US$482 million) in 2010 to purchase electricity from rental producers. Considering the rising supply cost of electricity, the bulk electricity tariff rate has recently increased to reduce -unit electricity increased from BDT2.37 to BPDB’s losses. As a result, the bulk price of per -unit BDT2.61 (US$0.029 – $0.032) $0.032) in February 2011. At present, an acute shortage of electricity has emerged as a major constraint to development efforts in different sectors of the Bangladesh economy. Although it is expensive, the government is trying to meet the shortage by installing rental power stations and adopting other quick means of generating electricity. As a result, subsidies for electricity are rising fast.
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Coal
The country’s coal resources have great potential for diversifying its energy sources. Extracted
coal can be used in coal-based power plants, and is also a source of energy for manufacturing industries. Bangladesh’s total coal reserve is estimated at around 2,797 million tones and the
heat generation capacity is equivalent to about 37 trillion cubic feet of gas. Moreover, there is ample potential for discovering additional coal mines if extensive exploration initiatives are undertaken all over the country. The government does not provide subsidies for imported coal. However, there is an implicit subsidy for domestically produced coal if it is used for electricity generation. Currently the BPDB gets coal for power generation at a price that is nearly 40 per cent lower than its market price for other uses.
Impact of energy subsidies on the economy of Bangladesh Large fuel subsidies make the country’s fiscal position highly vulnerable to changes in global energy prices. When global fuel prices rise steeply, as happened in 2008, the government faces a dilemma: it can either raise domestic fuel prices in line with global prices or increase subsidies to absorb the global price. While the first response can increase inflation in the short-term and is politically difficult to implement, the second distorts the economy and limits development options. Over-consumption of imported fuels resulting from subsidized prices leads to increased demand, which may contribute to deterioration in the country’s balance of payments and
increase its dependence on imported fuels. Also to sell imported fuel at lower prices in the domestic market results in large losses for the Bangladesh Petroleum Corporation (BPC), the national oil company that has a monopoly on importing and marketing fossil fuels in Bangladesh. BPC’s operating losses are, in turn, covered by loans from state -owned commercial
banks, direct budget transfers tran sfers and net lending by b y the government.
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Table 4: Operating losses incurred by BPC in recent years Year
Amount of loss (in million BDT)
2005 – 06 06
33,377.8
2006 – 07 07
26,438.8
2007 – 08 08
63,620.8
2008 – 09 09
266.23
2009 – 10 10
23,075.7
2010-11
88404.6
2011-12
160819.7
Source: http://www.newstoday.com.bd The government’s policy of subsidizing domestic fuel prices may have other negative
consequences, such as the smuggling of subsidized fuels to neighboring countries where prices are higher and adulteration of expensive fuels with subsidized fuels. Moreover, when subsidies rise quickly, the government may be forced to divert resources from other productive activities or resort to borrowing. Overall, the economy may be exposed to inefficiencies in both allocation and distribution of resources across different sectors and activities. The concern that reducing fuel subsidies would feed inflation depends partly on the energy product. For example, reducing the subsidy on kerosene is not likely to have much impact on inflation, whereas the same policy for diesel may have larger, short-term impacts on inflation through its effect on transport and other costs. In Bangladesh, the rationale for energy subsidies rests mainly on the argument that they help keep energy affordable, especially for low-income groups, and thereby play an important role in promoting equity and social development. Energy subsidies contribute to raising household incomes, both directly and indirectly. When households pay less for consuming energy, they
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have more disposable income to spend on other things. In addition, households benefit indirectly from energy subsidies since they can consume many other goods and services at cheaper prices, as subsidies reduce the energy input costs for these products to the producers, distributors, retailers and service providers. Conversely, if energy prices were to increase as a result of reduced subsidies, the direct impact on real income would be multiplied by indirect impacts throughout the economy as the costs of transportation, irrigation and other goods and services go up. The benefits of energy subsidies are distributed differently across fuel types. Kerosene is largely used by poor households (both rural and urban) for cooking and lighting. Whereas wealthy urban households consume the largest share of gasoline, the share of consumption of the major sources of energy by four household groups differentiated in terms of income (poor, lower-middle income, upper-middle income and rich) in Bangladesh. Obviously, a larger share is accounted for the industrial, commercial and other uses of energy such as transport and other non-household energy uses. Subsidies tend to encourage overconsumption and inefficient use of subsidized energy. Investment decisions may also be altered by changes in relative prices, discouraging energy diversification and creating disincentives for building energy infrastructure. The Bangladesh government’s priority is to develop the country’s large natural gas resources, but the lack of
domestic funding and constraints in applying cutting-edge technologies have severely hampered progress. Even though international oil companies are involved in exploring and developing offshore gas resources, Bangladesh has failed to attract adequate investments. The situation with independent power producers is similar, and has not led to a sustained expansion of the power sector. The development of coal resources also remains inefficient and lacks funding. Subsidized prices, in many instances, instances , fail to t o recover immediate costs, and the pricing system does not allow for fund accumulation to support expansion, development, and recover depreciation costs.
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Conclusion In the context of overall economic activities and patterns of livelihood, the large majority of the population in Bangladesh is dependent, directly or indirectly, on agriculture. In particular, rural livelihoods evolve with agriculture despite expansion of non‐farm activities and its contribution to economic growth. Food security, employment for the large section of the populace and reducing redu cing poverty p overty and inequality largely depend d epend on creating a vibrant and dynamic d ynamic agriculture sector. Although recent policy and programmatic interventions in agriculture by the government is welcomed by all, still there are areas which require immediate and careful attention for successful realization of objectives of programs. Policies related to agriculture credit and rice/procurement needs to be carefully reviewed if it is to deliver its ultimate objectives. Undeniably, marginal and small farmers are being benefited from several other subsidy related programs which clearly demonstrate the government’s equity concerns towards
the marginalized section of the farmer community. However, it is important to understand that ensuring growth and equity in agriculture do not solely depends of increased amount of subsidy or availability of agri-credit. Several other issues such as development of infrastructure, irrigation facilities, river flow, embankment, preservation of biodiversity, careful concerns for environment and ecology etc. are directly or indirectly related to the development of agriculture. While there is a clear need to support energy access for the poor in Bangladesh, current fuel and electricity subsidies are an expensive and ineffective means for doing so. The government is spending more than 4 per cent of GDP on energy subsidies — more than it spends on health and — more social welfare programs. Proper pricing of primary fuel and energy is important to conserve energy and to attract domestic and foreign private investments in the energy sector. Since the cost of electricity production is expected to rise in the near future due to the installation of highcost, liquid-fuel-based plants, it is prudent for the Bangladesh Energy Regulatory Commission to 18| P a g e
gradually raise power tariffs. Similarly, the prices of other fossil fuels should follow actual costs of imports in order to keep subsidies within acceptable fiscal limits. Although the poorest households do not receive the biggest benefits from energy subsidies, they will be disproportionately affected by rising energy costs. When reforming subsidies, the government should pay special attention to measures that reduce the negative impacts for the poor, improve energy access and provide support through targeted social assistance programs. Several issues act as strong impediments to implementing reforms, including the absence of strong political will, capacity to tackle vested interest groups and the administrative tools to provide targeted support programs for poor or vulnerable groups. Improving transparency in reporting the full amount of fuel subsidies (both direct and indirect) in relevant government accounts and raising public awareness about the true cost of subsidies and the options for reform, including how the government plans to reinvest that money back into the economy, will help to overcome these barriers.
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References
Ministry of Finance (MOF) - http://www.mof.gov.bd
Ministry of Agriculture (MOA) – http://www.moa.gov.bd
Bangladesh Bureau of Statistics - http://www.bbs.gov.bd
Power and energy sector road map: second update – June 2012
Bangladesh Economic Review (BER), 2011. Department of Finance, Ministry of Finance, Government of the People's Republic of Bangladesh, Dhaka.
A citizen’s guide to energy subsidies in Bangladesh -
http://www.bids.org.bd/files/ffs_bangladesh_czguide.pdf
National Report on sustainable sustainab le development – May 2012. Article: Proposals for agriculture sector - June 2012 http://www.thedailystar.net/forum/2012/june/proposals.htm
http://news.priyo.com/business/2012/06/29/pdb-bpc-top-soe-lose-54630.html
http://www.newstoday.com.bd
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