Let energy subsidy reach the targeted poor

The 17th World Congress of the International Economic Association (IEA), held at the Dead Sea, Jordan, recently facilitated interaction among prominent economists for getting a global perspective on issues of global economic importance. About 650 participants from a large number of countries took part in discussions on issues covering global economic system, development and international economics, finance and banking, and post-crisis thoughts on economics and finance. The valuable discussion sessions of the congress offered knowledge base to draw several lessons for developing countries like Bangladesh.

The academic discourse of the IEA started with a panel session: 'The Dilemma of Subsidy Reform and Equity in Middle East and North African (MENA) countries'. The focus of discussion was on reform initiatives of energy subsidies in these countries. The session discussed energy subsidy reform and its underlying challenges such as achieving a more equitable system while avoiding inflationary effects in the MENA countries.

The speakers brought to the fore well-known arguments in favour of energy subsidies that include security of supply, economic benefits, employment and social benefits. There were also arguments that environmental improvement might also be facilitated by subsidies when used to reduce pollution and different other emissions, and to fulfill international obligations (like Kyoto Protocol).

It is well-known that energy subsidies are measures to keep prices for consumers below market levels and reduce costs for consumers and producers. These subsidies may be in the form of direct cash transfers to producers, consumers, or related bodies, as well as indirect support mechanisms, such as tax exemptions and rebates, price controls, trade restrictions, and limits on market access. These have been considered pro-poor in the context of developing countries since long.

However, now the arguments against energy subsidies are becoming more acceptable, as opined by the panellists in general. As found in some studies, the effectiveness of services in supporting vulnerable groups and reducing poverty has proved to be limited. Furthermore, these divert public resources from much-needed pro-poor investments in health care, education, and infrastructure.

Moreover, they have distortionary effects as they tend to encourage over-consumption, artificially promoting capital-intensive industries at the expense of labour-intensive activities. They should efficiently cater to the needs of the vulnerable and their size should be proportionate to national capabilities.

The countries of the MENA and a number of developing states are not in a position to afford these huge subsidies. For many developing countries, energy subsidies are expensive; they eat up national budgets and benefits end up going mostly to the richest citizens. Nevertheless, many governments continue to subsidise the use of fossil fuels. In recent years, some have even intensified their financial support for social reasons to compensate for the steep increase in international oil prices.

In the context of Bangladesh, energy subsidies receive a large share of government expenditure. Bangladesh started subsidising the retail prices of energy products following independence. Today with soaring global prices and rapidly rising demand for fuels, these subsidies take a heavy toll on government finances. The energy subsidy bill for FY2013 in Bangladesh is estimated to be six times more than 2010 expenditure, which is not easy to handle. The government had proposed 67 per cent reduction of subsidy allocation for petroleum imports in the 2014-15 budget. Considering the decrease of the amount, some may call this as a progressive step. However, this may not be that straight forward. However, it is really encouraging that the government has slowly started supporting the renewable energy sector.

In the budget for 2014-15 fiscal year, Tk 4.0 billion of 'special' fund to finance renewable energy-based power plants has been allocated. In this connection, it is to be mentioned that the Bangladesh Bank (BB) has undertaken remarkable steps in recent years to promote renewable energy sector as part of its green banking initiatives. The BB has introduced a refinance line for banks against their loans to environmentally beneficial projects like renewable energy generation, installation of Effluent Treatment Plants (ETPs) and  new energy efficient technologies at a concessional interest rate.

With regard to discussion in the context of energy subsidy in Bangladesh, it is time to assess who the true beneficiaries of the energy subsidy in the country are. Is it really pro-poor? If not, we need to initiate measures to benefit the needy with subsidy. The subsidy in the country is not unexpected. However, it must reach the target group. And considering the growing needs and environmental issues, more emphasis should be given to the renewable energy sector for ensuring long-term sustainability in the energy sector of the country.

Dr.Shah Md. Ahsan Habib is Professor and Director [Training], Bangladesh Institute of Bank Management (MIBM).

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