Subsidy on Agriculture and energy sector in Bangladesh

7/29/2019 Subsidy on Agriculture and energy sector in Bangladesh

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Prepared For: Prepared By:Course: BUS 530 Md. Rafiqul Islam Rony

Section: 02 ID# 1130181060 (MBA)

Instructor: Dr. Salehuddin Ahmed North South University

Date: December 19, 2012

Subsidy on Agricultural and

Energy sectors and its impact

on Bangladesh economy


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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.


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Table of Contents

Executive Summary iv

Introduction 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 for better allocation of subsidies in agricultural sector 9

Energy sector in Bangladesh 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


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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


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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. 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.

Bangladeshs 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 2012are 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

countrys fiscal position highly vulnerable to changes in global energy prices.


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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 countrys economy.


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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.

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.


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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

Agriculture subsidy

as % of total subsidy

54 64 52 52 48

Source: Ministry of Finance (MOF)http://www.mof.gov.bd

Figure 1: Agricultural subsidy during the five fiscal 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 sectors subsidy in the total subsidy

has come down to 48 percent compared to 64 percent in FY 2008-09.

0

2000

4000

6000

8000

10000

2007-08 2008-09 2009-10 2010-11 2011-12

4200

6717 69897662

9286

2250

42853600

40064500

BDTin

Crore

Year

Total subsidy

Agricultural subsidy
http://www.mof.gov.bd/http://www.mof.gov.bd/http://www.mof.gov.bd/http://www.mof.gov.bd/


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Figure 2: Agriculture subsidy as percentage (%) of total subsidy

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

0

10

20

30

40

50

60

70

2007-08 2008-09 2009-10 2010-11 2011-12

Percentage

Year

Percentage (%) of

agricultural subsidies


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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 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. Non-

urea 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.

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 farmers 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 Bangladeshs agriculture sector, which employs

nearly half of the countrys labor force. Bangladeshs 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 4 per cent of 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


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subsidies for the FY 2012are estimated at more than BDT282 billion, almost 90 per cent of the

total amountspent on all subsidies. Nearly 34 per cent of these subsidies are off-budget, such as

governmentloans for Bangladesh Power Development Board at favorable lending rates.

Table 2: Total Subsidies in Bangladesh during FY 2012 (July 1, 2011June 30, 2012)

Products Total cost

(billion BDT)

Total sales

(billion BDT)

Total subsidy

(billion BDT)

Power 79.04 70.59 8.45

Power (rental power plants) - - 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

Figure 3: Broad sectoral composition of public expenditure: Budget FY 2012

Education

12.40% Transport

6.90%Energy & Power

sector

5.10%

Health

5.40%

Agriculture

7.70%

Defence

7.30%

Social & Public

security

12%

Local Government& Public

administration

22.10%

Others

21.10%


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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

product

Aug

2000

Dec

2001

Jan

2002

Jan

2003

June

2004

Jan

2005

Jun

2006

April

2007

Nov

2011

Jan

2012

Kerosene

(BDT/L)

15.17 16.67 16.67 16.83 16.83 22.52 32.37 40.00 56.00 63.00

Diesel

(BDT/L)

16.22 17.60 17.60 19.71 19.71 22.0 28.00 40.00 56.00 63.00

Furnace oil

(BDT/L)

6.50 12.50 12.50 10.00 12.00 12.00 14.00 20.00 55.00 62.00

Natural gas

(BDT/1000cft)

62.87 62.87 65.99 70.00 70.00 73.91 73.91 73.91 73.91 79.93

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 201112. 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 Bangladeshs 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 lowermore likely 4 to 5 per cent over the 1976

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 from independent power producers to meet power shortages 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

BPDBs losses. As a result, the bulk price of per-unit electricity increased from BDT2.37 to

BDT2.61 (US$0.029$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 countrys 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. Bangladeshs 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 countrys 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 countrys 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. BPCs operating losses are, in turn, covered by loans from state -owned commercial

banks, direct budget transfers and net lending by the government.


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Table 4: Operating losses incurred by BPC in recent years

Year Amount of loss (in million BDT)

200506 33,377.8

200607 26,438.8

200708 63,620.8

200809 266.23

200910 23,075.7

2010-11 88404.6

2011-12 160819.7

Source:http://www.newstoday.com.bd

The governments 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
http://www.newstoday.com.bd/http://www.newstoday.com.bd/http://www.newstoday.com.bd/http://www.newstoday.com.bd/


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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

governments priority is to develop the countrys 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, fail to 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 nonfarm activities and its

contribution to economic growth. Food security, employment for the large section of the

populace and reducing poverty and inequality largely depend on creating a vibrant and dynamic

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 governments 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 subsidiesmore than it spends on health and

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 high-

cost, liquid-fuel-based plants, it is prudent for the Bangladesh Energy Regulatory Commission to


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19| 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 updateJune 2012

Bangladesh Economic Review (BER), 2011. Department of Finance, Ministry of

Finance, Government of the People's Republic of Bangladesh, Dhaka.

A citizens guide to energy subsidies in Bangladesh -

http://www.bids.org.bd/files/ffs_bangladesh_czguide.pdf

National Report on sustainable developmentMay 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
http://www.mof.gov.bd/http://www.mof.gov.bd/http://www.mof.gov.bd/http://www.moa.gov.bd/http://www.moa.gov.bd/http://www.moa.gov.bd/http://www.bbs.gov.bd/http://www.bbs.gov.bd/http://www.bbs.gov.bd/http://www.bids.org.bd/files/ffs_bangladesh_czguide.pdfhttp://www.bids.org.bd/files/ffs_bangladesh_czguide.pdfhttp://www.thedailystar.net/forum/2012/june/proposals.htmhttp://www.thedailystar.net/forum/2012/june/proposals.htmhttp://news.priyo.com/business/2012/06/29/pdb-bpc-top-soe-lose-54630.htmlhttp://news.priyo.com/business/2012/06/29/pdb-bpc-top-soe-lose-54630.htmlhttp://www.newstoday.com.bd/http://www.newstoday.com.bd/http://www.newstoday.com.bd/http://news.priyo.com/business/2012/06/29/pdb-bpc-top-soe-lose-54630.htmlhttp://www.thedailystar.net/forum/2012/june/proposals.htmhttp://www.bids.org.bd/files/ffs_bangladesh_czguide.pdfhttp://www.bbs.gov.bd/http://www.moa.gov.bd/http://www.mof.gov.bd/

Documents

Subsidy on Agriculture and energy sector in Bangladesh