The ongoing energy crisis is increasing the fragility of Bangladesh's macroeconomics and is exposing the limitations of the policy framework, said Dr Debapriya Bhattacharya, convener of the Citizens Platform for SDGs, Bangladesh, and distinguished fellow of the Centre for Policy Dialogue (CPD).
He added that this situation is creating new risks to fiscal stability, external balance and long-term growth.
He made these remarks at a dialogue titled “Thinking about the First Budget of the New Government” organized at the CPD office in Dhanmondi, Dhaka on Tuesday. The dialogue was organized by the Citizens Platform for SDGs, Bangladesh.
Debapriya said that the current energy shock is taking place in a policy environment where the government's ability to respond effectively is limited.
In particular, he noted that some provisions of the US-Bangladesh trade agreement are limiting the country's energy import strategy.
According to him, sanctions coordination and the ‘non-market country’ clause have led to the US having to formally waive off imports from relatively low-cost sources, such as Russia. As a result, Bangladesh’s purchasing power is shrinking during times of global energy market volatility.
Bhattacharya further said that the energy crisis is simultaneously putting pressure on fiscal policy, external sector and monetary policy. The nearly Tk37,000 crore subsidy in the power sector is creating a complex situation with the reform commitments made under the International Monetary Fund (IMF) program.
“There is a clear inconsistency between fulfilling the IMF condition of rationalizing subsidies within the stipulated time and maintaining large subsidies at the same time.”
He said that the increase in fuel prices could lead to an additional import bill of about $4.8 billion per year, which is equivalent to about 1.1% of the country’s gross domestic product (GDP).
This risks widening the current account deficit. At the same time, the demand for foreign currency is increasing due to the increase in import costs, which can create devaluation pressure on the Taka.
The situation can be further complicated by the potential instability in the Gulf region. Because almost half of Bangladesh's total remittances come from that region.
Debapriya said that in the current situation, the government has to make difficult policy decisions. The government is facing a dilemma of whether to maintain the existing fuel tax structure to protect revenue or reduce it to reduce consumer pressure.
He said that prices have already been adjusted in some areas, such as jet fuel, to address the financial deficit of about Tk55,600 crore of the Bangladesh Power Development Board (BPDB). However, if the full impact of international prices is applied to the domestic market, there may be a risk of high inflation.
Debapriya Bhattacharya said that private investment has decreased and is currently at about 22.5% of GDP, which is the lowest in the last five years. Uncertainty and rising costs in the energy sector are discouraging private investment, which could hurt future economic growth.
He said that addressing the energy crisis requires policy measures that strike a balance between fiscal discipline, external stability and inflation control. He also warned that the energy crisis could escalate into major macroeconomic instability if not managed carefully.
