With the Hasina Wajid government focusing on a $4.5 billion deal with the IMF, gas prices in Bangladesh were increased by up to 179 percent in four consumer categories with effect from February 1, as the world’s leading lender urged Dhaka to cut a range of subsidies and redirect the money to more targeted assistance for the poor.

However, four other consumer categories — household, fertilizer, the tea industry, and compressed natural gas — did not see any change in their rates but were bracing for multiple impacts from the price hike.

The gas price hike came barely five days after the electricity price was hiked by five percent a unit and the electricity demand charge by up to 42 percent, as the government, for the second time in less than a week, used its newly-granted power (which allows it to set all kinds of energy prices bypassing the regulator’s jurisdictions at any time) to this move without any public hearing.

Earlier in June 2021, gas prices across all eight consumer categories increased by an average of 23 percent.

Impacts especially on poor

The hefty increase in prices of gas meant for use in power generation and industrial production would increase living costs in many ways, economists and consumer rights activists said, making survival difficult, especially for the poor and small and medium-sized business entities, as the move itself is inflationary in nature.

And the proverbial solution provided by the IMF is going to the hit the poor hard as it does not take into account the socio-economic realities of the developing nations like Bangladesh. Reason? The cost of meals at hotels and restaurants would jump because of the gas price increase under the commercial category, the experts said, potentially leaving hundreds of thousands, especially those in cities, counting on cheap eateries, often at makeshift roadside shops, half-fed.

Yet, the experts said, these inconveniences would barely achieve anything, for they would not generate the dollars that the government needed to boost its import capacity to come out of the energy and power crises.

Move itself is inflationary

Just the day before the latest gas price hike, the state minister for power and energy, Nasrul Hamid, said that electricity prices would be adjusted every month by an executive order from now on, hinting at yet another round of hikes in electricity prices.

The electricity price increase has now become inevitable, an energy expert said, as the price of gas meant for use in power generation underwent the highest increase of 179 percent.

What did IMF actually say?

“A gradual reduction of fuel oil, electricity, gas and water subsidy is necessary to lower pressure on government spending,” IMF Deputy MD Antoinette Monsio Sayeh in an interview with Nikkei Asia while visiting the cash-strapped South Asian country. “These subsidies benefit rich people disproportionately more.”

The deputy managing director’s remarks show what the IMF expects as it weighs board approval for a $4.5 billion loan to Bangladesh.

She held a string of meetings with the prime minister, finance minister, central bank governor and other top officials to assess the country’s commitment to economic reforms before the loan is granted. The IMF Board will consider approving the loan on Jan 30, she added.

Bangladesh was the third troubled South Asian nation to approach the IMF last year – alongside Sri Lanka and Pakistan – amid a significant fall in foreign currency reserves and a swelling current account deficit. Forex reserves stood at $32.5 billion in January 2023, compared with $48 billion in August 2021, and are showing little sign of recovery despite some positive glimmers in the economy at the end of 2022.

Sayeh said the money saved by reducing subsidies could create fiscal space for helping the poor, from mitigating the impact of inflation to spending more on education and health. In addition, the additional resources could be directed at infrastructure. All this could help Bangladesh navigate its challenges and create more jobs, she argued.

“Subsidies take up a significant part of the budget,” Sayeh said, adding that Bangladesh also needs to increase efforts to generate revenue. She conceded that there may be some subsidy programmes the government needs to continue for the sake of poorer segments of society, such as in the agricultural sector, but she stressed that Bangladesh should not provide a subsidy “that benefits the rich.”

She said the IMF emphasized such points when it reached a staff-level agreement with Bangladesh back in November, including raising revenue and looking at policies that do not necessarily help the poor, such as value-added tax (VAT) exemptions and other perks benefiting privileged segments and some businesses.

Sayeh said Bangladesh had been doing well and was not in a crisis but had been facing external shocks induced by the Ukraine war when it sought preemptive lending from the IMF.

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