The government is drawing up a three-year roadmap to gradually cut subsidies in the power and gas sectors, aiming to ease the growing fiscal pressure.

The roadmap, covering FY26 to FY28, is being developed with assistance from the International Monetary Fund (IMF) and is expected to be finalised by September. An IMF technical mission visited Dhaka in May and has already drafted a plan.

According to the IMF, the strategy will be based on a realistic projection of electricity supply costs over the next three years. It will set out a clear timeline for tariff adjustments and specify protective measures for vulnerable groups. Subsidies in the power and gas sectors in the last fiscal year soared by nearly 80 percent and around 41 percent, respectively, according to finance ministry data.

"If a tariff adjustment is necessary [for cutting subsidy], social safety measures will need to be integrated to shield the poor"— Zahid Hussain ex-lead economist, World Bank, Dhaka office

The subsidies could shoot up further without timely government measures, the draft roadmap warns. It explores two main approaches to easing the subsidy burden: introducing a dynamic tariff policy and reducing production costs.

"If a tariff adjustment is necessary, social safety measures will need to be integrated to shield the poor," said Zahid Hussain, former lead economist at the World Bank's Dhaka office. "The entire tariff structure should be reformed to bring subsidy levels down to a minimum." Hussain, also a member of the national committee to review the power sector deals, said the three-year plan may also classify the primary beneficiaries of the subsidies.

According to the finance ministry, the revised subsidy allocation for the power sector in FY2024-25 was Tk 62,000 crore, of which Tk 59,600 crore was spent. The gas sector used Tk 8,500 crore out of a Tk 10,000 crore allocation. In FY2023-24, power sector subsidies amounted to Tk 33,000 crore, while gas subsidies stood at Tk 6,000 crore. Officials say the spike in the revised allocation last fiscal year was due to the clearance of arrears accumulated for years under previous administrations.

For the current fiscal year (FY2025-26), around Tk 37,400 crore has been allocated for power sector subsidies and Tk 10,000 crore for gas. Subsidies in the power sector were between Tk 7,000 crore and Tk 9,000 crore until FY2020-21, but have sharply increased afterwards.

Officials said the government is now looking at ways to reduce power production costs as a means to limit subsidy requirements. The initial plan aims to bring down production costs by around 10 percent, which would potentially save Tk 10,000–11,000 crore.

Zahid Hussain said that small steps have already been taken. These include lowering the service charge for furnace oil-based power plants from 9 percent to 5 percent. He also pointed to the need for a cost review of power producers and mentioned that the coal for Payra power plant is currently overpriced.

He added that starting operations at gas-based power plants like the one in Khulna's Rupsha would also help reduce dependency on more expensive fuels. "But the government needs to act fast," he said, noting that the price of the dollar has a direct impact on production costs as it affects dollar-denominated capacity payments. The recent fall in the dollar's price might reduce the cost, but the Bangladesh Bank's intervention to encourage exports and remittances did not let the price to decrease sharply, he said.

The central bank purchased $313 million from 22 commercial banks in an auction last Tuesday, reacting to the sharp drop in the US dollar rate.

Officials said the government is ramping up imports of liquified natural gas (LNG) to meet growing demand and increase power generation from gas-based plants, which remain cheaper than other energy sources except coal. Increasing coal-based power production is also under consideration, they said. The government is also reviewing power purchase agreements with high-cost Independent Power Producers (IPPs), aiming to renegotiate the prices.

After a meeting of the advisory council last Tuesday, Finance Adviser Salehuddin Ahmed told reporters that legal consultants would be appointed to review those deals.

Meanwhile, the IMF has made subsidy rationalisation in the power sector a key condition for the release of future tranches of its $5.5 billion loan programme. As part of the agreement, the Ministry of Power, Energy and Mineral Resources must adopt and publicly share a three-year roadmap to reduce the gap between generation costs and electricity selling prices to a fiscally sustainable level.

The plan must outline tariff reforms and safeguards for vulnerable groups, according to recently released IMF documents. In response, the government told the IMF it has already begun curbing generation costs by phasing out high-cost, fuel oil-based plants and boosting gas-based production.

It also said subsidies are expected to stay within the agreed Tk 37,400 crore cap for FY2024-25. Should costs rise beyond this ceiling, electricity tariffs may be adjusted, but only after all other cost-cutting measures have been exhausted.

News Link: Govt to cut power subsidies under 3yr IMF-backed plan