Every year, the government's spending on subsidies and incentives increases in the annual budget, despite instructions from the International Monetary Fund (IMF) to reduce these expenditures. In the upcoming budget FY25, the government now plans to cut subsidies from various sectors.
Economists argue that the poor need subsidies to cushion against economic shocks. They recommend increasing budgetary subsidies for food, agriculture, and other pro-poor sectors to protect low-income people from persistent inflation and economic instability. Reducing subsidies like the Open Market Sale (OMS) program would add pressure on ordinary and low-income individuals.
Another challenge is raising revenue to maintain and increase subsidies and incentives. Experts suggest cutting subsidies for electricity, the industry with the highest subsidy for FY25, by improving efficiency.
Data from the Ministry of Finance shows that the government has been very generous with subsidies across various industries over the years. These subsidies have become a crucial part of the government's economic strategy, but they come at a high and increasing cost to the budget.
According to sources from the Finance Division of the Ministry of Finance, Tk1,20,585 crore has been proposed for subsidies and incentives, representing 2.15% of the country's GDP. In FY24, the allocation was Tk1,10,672 crore.
The question now is who will benefit from the subsidies this year?
Food subsidies increase despite cuts in OMS program
The upcoming budget is expected to allocate Tk7,360 crore for food subsidies, up from Tk6,766 crore this year, according to sources from the Finance Division of the Ministry of Finance.
However, a detailed analysis of the government's Food Security and Employment Generation Program reveals that the subsidy for the low-cost food distribution program in the Open Market Sale (OMS) is being reduced by about Tk350 crore compared to FY24.
The government's spending on food imports is set to rise significantly due to the increase in the value of the dollar.
Next year, the cost to import rice and wheat will increase by Tk1,300 crore. To cover all expenses, the total allocation for the Food Security and Employment Generation Program in the next budget is expected to be Tk22,764 crore, about Tk600 crore more than the previous budget.
The government has been subsidizing rice by selling it at low prices to poor people through the OMS program. In the current budget, the allocation for this subsidy was Tk5,008 crore, which was later increased to Tk5,492 crore in the revised budget. For the next budget, the allocation for this subsidy has been reduced by Tk322 crore to Tk5,169 crore.
The Trading Corporation of Bangladesh (TCB) also provides subsidized food products, such as rice and edible oil, to one crore families. Around Tk14,000 crore may be allocated for these subsidies in FY25.
Industry-wise proposed subsidy plan
The government is expected to maintain the agricultural subsidy budget at Tk25,122 crore for the next fiscal year, matching the allocation from FY24.
The power subsidy allocation is likely to increase to Tk40,000 crore from this year's Tk35,000 crore due to the rising dollar value, despite multiple power price hikes and plans for further increases.
Subsidies for LNG imports are expected to rise to Tk7,000 crore from Tk6,570 crore in FY24. This increase is attributed to the strong dollar and plans for increased gas imports, even though international gas prices are stable.
Funds are also allocated as grants to various institutions, including private hospitals, charities, research institutes, and NGOs, classified as subsidies. An allocation of Tk12,000 crore is planned for this in the next financial year.
Incentives to see cuts
To prepare for the LDC graduation in 2026 and soften the blow, the government has already started reducing export incentives. But still money has been allocated as an export incentive in the budget.
Sources said, In FY23, allocations for export incentives were set at Tk9,025 crore but were reduced to around Tk8,000 crore in FY24. An allocation of Tk7,825 crore is planned for the next budget.
In addition, around Tk1,200 crore may be designated as an incentive for the export of jute and jute products.
On the other hand, to encourage expatriates to send remittances through banking channels, the government decided to give 2.5% incentive. Around Tk6,200 crore is likely to be allocated for this purpose in the next budget, same as the FY24.
So the incentive may hit Tk15,225 crore for FY25, according to sources.
Are subsidies a burden?
In a recent report Policy Research Institute (PRI) said that an extensive system of subsidies has become burdensome for the budget.
The subsidies were given mostly to industries like power, petroleum and other energy products, agriculture (primarily subsidized fertilizers), and for open market essential food sales at substantially lower prices for the poor.
The amounts of subsidies varied from year to year depending on energy and commodity price developments in the international market. As adjustments in domestic administratively regulated prices lagged behind the international market developments, the subsidies increased sharply when there were energy and commodity price shocks as happened in FY23.
Over the 12-year period through FY23, subsidies have increased by 833% and accounted for almost one fourth of the total tax revenue of the government, compared with the increase in revenue by 360% over the same period.
Pay and allowances is the other area where the costs are increasing rapidly. This has implications for both the current budgetary outlays and also for future through a projected rapid increase in pension and gratuity benefits.
Over the 12-year period through FY23, the pay and allowances increased by 406% although remained broadly stable but high at 34.5% of tax revenue. The related non discretionary expenditure on pension and gratuities increased faster than the increase in pay and allowances, increasing by 519% over the same 12-year period to Tk. 291.4 billion, equivalent to 9% of tax revenue.
Together with pay and allowances, the total nondiscretionary spending on pay, allowances, pension and gratuities already accounts for more than 43% of tax revenue in FY23.
What economist have to say
Dr ABM Mirza Azizul Islam, former finance and planning adviser to a caretaker government, stated that reducing food subsidies is not a healthy decision.
He emphasized the need to increase subsidies under social security programs, as inflation has pushed more people into poverty.
The poor people need subsidies to cushion against economic shocks, especially with inflation above 9%, he explained. He also highlighted the necessity to cut unnecessary government expenditures.
Ashikur Rahman, senior economist at the Policy Research Institute (PRI), told the Dhaka Tribune that the entire government revenue is currently consumed by growing wage bills, subsidies, and interest payments.
This forces the government to fund development expenditures through domestic and international borrowing, a strategy that is unsustainable given the rising interest rates. He stressed the need to rationalize spending on subsidies and interest payments, particularly in the energy sector.
Regarding the high subsidy plan for the power sector, Rahman noted that capacity payments for independent power plants are expected to exceed Tk30,000 crore in FY25.
He suggested that the Ministry of Energy review power purchase agreements with independent power plants to achieve significant savings on capacity payments and reduce power tariff subsidies.
The national budget for FY25, set to be announced on June 6, will be the first budget presented by Finance Minister Abul Hassan Mahmood Ali and the current government. The overall budget is expected to be around Tk7,97,000 crore, a 4.6% increase from the original Tk7,61,785 crore in FY24.