Frequent Power Cut Is Back

Frequent power cut is back As high oil prices ransack Subsidy reserved for electricity. Govt takes road to austerity.

Govt has recently decided to forbid all lighting decorations of key public and private installations . The decision complements earlier decision of obligatory closure of all shops after 8 p.m. Working hour cut is also on the table. This is an indication how soaring oil and gas prices in the international market make a dent in the govt pockets. Any price hike of fuel and gas in international market will increase the cost on subsidy and energy price, which will have a domino effect on everything.

Already across the country frequent power cut is back,invoking memories of bygone era. But government is not willing to allocate more subsidy to power generation. So loadshedding is the only solution.

In 2012-13,govt provided a total subsidy of TK 427.616 billion and oil subsidy accounts TK 135.58 billion. For three consecutive years,no subsidy was provided to Bangladesh Petroleum Corporation (BPC) as oil prices in international market were lower.Last year, govt provided a total of TK 530 billion subsidy on oil and energy¹. Of this,TK 280 billion was spent in the power sector, while TK 250 billion was spent on import of LNG. This year govt allotted a total subsidy of TK 840 billion and TK 160 billion was allotted to fertilizer production. Spike in LNG prices and rapid fall of Taka against US dollar augments the subsidy spending many folds. The current situation calls for a BPC subsidy of $2 billion².To deal with the issue,government has concentrated on fertilizer production as ensuring food security is getting top priority when a famine-like situation looms large. Meanwhile, more gas for fertilizer amid LNG supply shortage means less gas for power generation. Inflation battered people are not ready for paying more. Govt decided to reduce consumption during this summer and Monsoon time when demand for electricity is higher than any other time of the year. And the result is more loadshedding. The decision is also coincided with a moment when the country's current account deficit reached $15 billion,a record for the country,and a sharp drop in remittances which worked as cushion against widening trade deficit. And from July 12, govt is about to start negotiations with IMF for a credit of $4.5 billion as budget assistance. Time is ripe for taking measures of austerity. Govt hopes that by September situation will improve and its drastic measures may reduce electricity consumption by 2000 MW. I personally think people are in no mood for paying more prices for electricity and gas.Loadshedding at measured intervals for the moment is the only viable solution.

But what the govt is doing with this saved resources is no less important matter.Ahead of election year,we see that the govt is in spending mood. Signs are there. For instance, govt is mulling building culverts in part of the embankment cut by villagers to let the flood water go. If it continues to throw the money into gutters without ensuring any checks and balances then there is no meaning of this austerity.

Notes And References:

1. Bangladesh Economic Review 2019
2. “Govt Mulls Short Work Hours,Work From Home To Contain Energy Crisis”,Eyamin Sajid,Business Standard,July 07,2022. For more read at https://www.tbsnews.net/bangladesh/energy/govt-mulls-short-work-hours-work-home-contain-energy-crisis-455182

Oil Price And BPC Profit

Bangladesh Petroleum Corporation is perhaps the biggest public entity that has the largest turnover and receives huge amount of subsidy every year.This time I tried to take a look at the BPC profit/loss between 2001 and 2018. I also probed how the oil price,  crude oil spending, diesel and other petroleum  spending and dollar-Taka exchange rate shaped the annual BPC loss /profit in the given period.

During the period the oil price fluctuated , hitting the nadir of $28.17 /barrel to reaching the apex of $111.29/barrel. Meanwhile, Taka depreciated gradually over the period.

Between 2011 and 2014, when the oil price in the international market was sold on average above $105/ barrel, BPC's annual loss also reached its peak. In this period , BPC made an annual loss of Tk 7184.25 crore on average. It made the highest loss Tk 11790 crore in 2012. To make up those losses it heavily hinged on government subsidy. According to a study by Policy Research Institute,energy subsidies reached 1.1% of GDP in 2012-2013. During the same period, its annual subsidy on average was Tk 7146.36 crore. In this period it received the highest subsidy of Tk 13557.83 crore in 2013. From 2014 onward, oil price fell below $50 / barrel and BPC made profit since then. Between 2016 and 2018, it did not receive any subsidy from the government. In addition, it reached break even stage in December 2018, as widely reported by the press. It reported a profit of Tk 5268 crore in 2015, Tk 6342 crore in 2016, Tk 4399 crore in 2017 and Tk 3995 crore in 2018. I had a lot of trouble while gleaning information on BPC subsidy and profit/ loss.  Bangladesh Economic Review, source of my BPC data, provided data on BPC profit/loss till 2009 after that it reported annual subsidy BPC received. So I delved into press reports, independent studies done by public and private think tanks. BPC website did not come to any help in this regard.

As possibility of oil price crossing $100/barrel mark in international market looms large, BPC again steps into a situation of making a huge loss. This year prior to budget a plea of Tk 8000 crore energy subsidy was made to the government. I have a conviction that any depreciation will cause the government to spend more on BPC subsidy.  I also ran a VAR model using the data on crude oil spending, diesel spending, oil price, BPC profit/loss and USD-Taka exchange rate. To my dismay, I was not successful and the model did not give a better reading of the situation in the given period. Granger causality test between just BPC profit/loss and USD-Taka exchange rate yielded no causality between the two. However all the crude oil spending, diesel spending and oil price were introduced into the model later and I reran the VAR model. This time the model dropped the USD-Taka variable due to multicollinearity. Moreover the forecast graph shows during the given period the model was not good at reading the changes in oil price, crude oil spending and diesel spending.

So, I still hold the conviction that any depreciation of Taka against US Dollar will increase the spending on government subsidy to BPC. And any increase in energy subsidy will compromise the social security spending and development expenditure.