Bangladesh finds itself at a critical juncture in its power sector, grappling with the perennial challenge of balancing the cost of electricity production against the revenues generated from its sale.
The current scenario presents a stark reality: the production cost per unit of electricity stands at Tk 12 for the Bangladesh Power Development Board (BPDB), while it sold at a significantly lower rate of about Tk 8.25 per unit until January this year before the average price was adjusted upwards to Tk 8.95 in February.
The glaring gap between the production cost and the average price necessitates governmental intervention to cover the deficit.
As the government deliberates on the most prudent course of action, top policymakers were said to be at odds, divided between two distinct strategies.
On the one hand, there was the proposition to increase the power tariff further, thereby aligning revenues more closely with production costs. On the other hand, there was the alternative of issuing more bonds through the banking system, providing a financial buffer to offset the deficit.
However, the implications of each option are far-reaching and complex, impacting not only the immediate fiscal landscape but also broader economic indicators and long-term competitiveness. The prospect of raising electricity prices carries the looming threat of inflationary pressures, a concern that can’t be understated in a country striving for economic stability and growth.
An increase in the price of electricity would undoubtedly exacerbate inflationary pressures, presenting a formidable challenge to the government’s efforts to rein in rising prices through monetary policy tools such as interest rate hikes. The resultant inflationary spiral could erode purchasing power, diminish consumer welfare, and ultimately undermine the country’s economic stability.
Furthermore, the repercussions extend beyond domestic economic dynamics to encompass Bangladesh’s global competitiveness. A surge in electricity prices would inflict a severe blow to the competitiveness of local businesses, rendering them less competitive in international markets.
This erosion of comparative advantage across various product segments could have dire consequences for export-oriented industries, jeopardising Bangladesh’s position in the global marketplace.
Maintaining current electricity prices poses challenges for BPDB, risking operational capabilities and service reliability. Negotiating price cuts with power producers is hindered by entrenched interests and complex dynamics.
Power producers may resist reducing prices, citing financial obligations. The implementation of financial instruments like long-tenure bullet payment bonds while offering a mechanism to distribute the burden of losses over an extended period raises concerns about intergenerational equity and fiscal sustainability.
Passing on the financial strain to future generations through such instruments is not a sustainable solution and could exacerbate economic disparities in the long run. The prevailing economic and political circumstances in Bangladesh complicate finding viable solutions. Balancing immediate financial pressures with long-term stability remains a daunting task for policymakers.
Ultimately, the government faces a daunting task in navigating this complex landscape, balancing the imperative of fiscal prudence with the need to safeguard economic stability and competitiveness.
Whichever path is chosen, it is imperative that policymakers prioritise a comprehensive strategy that addresses not only immediate fiscal challenges but also long-term economic sustainability and global competitiveness. Failure to do so risks compromising Bangladesh’s economic trajectory and undermining its position in the global arena.
The author is director of LCAL.
