International Monetary Fund (IMF) has called for an increase in power tariffs in Bangladesh despite the country grappling with rising inflation and the economic strain following recent devastating floods. This move is part of the conditions for the disbursement of the next two installments under the IMF’s $4.7 billion loan programme.
The IMF’s directive comes at a critical time as Bangladesh’s annual inflation surged to 10.87 per cent in October 2024, up from 9.92 per cent the previous month. The escalation in inflation follows severe flooding in August 2024, which inflicted an estimated Tk 14,421.46 crore in damages and exacerbated the financial hardships faced by a huge portion of the population.
Chris Papageorgious, the chief of the IMF’s Development Microeconomics Division, leads a high-powered team set to arrive in Dhaka tomorrow. Their agenda includes reviewing nine key areas, notably the upward adjustment of power tariffs. The IMF aims to eliminate subsidies in the power sector within three years by aligning tariffs with actual supply costs.
Government Reluctance and Economic Pressures
Despite the IMF’s recommendations, the interim government has shown reluctance to increase power tariffs. Officials cite the dual pressures of high inflation and the economic toll of the recent floods, which have disproportionately affected the poor. The government’s hesitation is further influenced by the immediate impact a tariff hike would have on household and industrial energy costs.
In February 2024, the then Awami League government had already raised power tariffs to secure the next loan installments from the IMF when the inflation rate stood at 9.57per cent. However, with inflation now exceeding 10 per cent, the current push for another tariff increase has sparked a debate.
BPDB’s Performance
The IMF team will assess the operational and financial performance of the Bangladesh Power Development Board (BPDB) for fiscal year 2024 and projections for FY2025 and FY2026. The BPDB is projected to incur a net loss of Tk 4,809 million in FY2024-25 after receiving full subsidies, compared to a staggering Tk 89,979 million loss under existing tariffs.
Subsidies provided by the government cover gaps related to Independent Power Producers (IPP), rental costs, and power purchases from Adani. The projected subsidy for FY2024-25 is Tk 374,691 million, which is expected to decrease slightly to Tk 361,322 million for FY2025-26.
Unpaid Electricity Bills and Power Contracts
Unpaid electricity bills have accumulated to Tk 459,148 million, including Tk 85,327 million for power imported from India. The upcoming meeting on December 4 will address strategies to reduce these arrears and bridge the gap between electricity tariffs and the cost-recovery rate.
Additionally, the meeting will review several power projects contracts overseen by the national committee following the fall of the Awami League government. These projects include the 1600 MW coal-fired power plant at Godda, Jharkhand, India; a 1320 MW coal-fired power plant at Payra; a 335 MW dual-fuel power plant in Meghnaghat; a 195 MW gas-fired power plant at Ashuganj; a 612 MW coal-fired power plant at Banshkhali and the 583 MW gas-fired power plant in Meghnaghat.
Currently, the bulk power tariff is set at Tk 7.04 per kilowatt-hour, adjusted last February to reflect a Tk 5.11 per kilowatt-hour gap in supply costs. The retail power tariff stands at Tk 8.95 per kilowatt-hour following a 20 per cent price hike. However, officials have noted the challenges in further adjusting tariffs due to government policies aimed at containing inflation.
Government’s Cost Reduction Measures for FY2024-25
To mitigate financial pressures, the government has implemented cost reduction measures targeting a total reduction of Tk 10,548 crore, equivalent to a 10 per cent decrease in expenditure for FY2024-25. Key strategies include optimizing the fuel mix in electricity generation, aiming to save Tk 9,110 crore, and cutting late payment surcharges by Tk 543 crore contingent upon settling 50 per cent of outstanding electricity import arrears.
BPDB is also working to reduce internal costs by Tk 370 crore and plans to discontinue power purchase agreements (PPAs) with rental and quick rental power plants to save Tk 525 crore for FY2024-25.
Industry and Public Response
Shafiqul Alam, Lead Energy Analyst at the Bangladesh Institute for Energy Economics and Financial Analysis (IEEFA), highlighted the sector’s challenges, citing the heavy subsidy burden and revenue shortfalls.
“Raising power tariffs alone cannot solve the sector’s problems, especially with surplus capacity and expensive peaking power plants increasing average generation costs,” he noted.
Shafiqul Alam suggested reducing surplus capacity and integrating renewable energy sources as potential solutions.
The proposed tariff hike has also faced backlash from the Consumers Association of Bangladesh (CAB), which protested against the increase in power and fuel prices. CAB accused the government of protecting the interests of dishonest businessmen at the expense of the general populace.
Earlier in 2024, the Awami League government had planned to increase electricity prices four times annually over the next three years to eliminate subsidies in the power sector, aligning with IMF recommendations.
As Bangladesh navigates these complex economic challenges, the balance between necessary fiscal reforms and maintaining affordability for consumers remains a pivotal issue.
