top of page

Reducing services sector costs

Oct 27, 2024

| Mostafizur Rahman | TNA

BANGLADESH is facing significant inflationary pressures, with the general inflation rate reaching a 12-year high of 11.66 per cent in mid-2024 (Bangladesh Market Monitor, July 2024, UN). Food inflation has surged even higher, hitting around 14.1 per cent due to a range of factors, including supply chain disruptions and global market volatility. This escalation in essential goods prices is heavily impacting household budgets, especially for low-income families who are disproportionately affected by rising food costs. To ease this financial strain, the interim government could take targeted steps to reduce service sector costs in key areas such as electricity, fuel, telecommunications, healthcare, and education. Lowering costs in these sectors could help households save more, offset the rising prices of goods, and ultimately support economic resilience.

 

Electricity costs


ELECTRICITY costs in Bangladesh are among the highest in South Asia, with the average residential rate around Tk 10.70 per kWh, compared to about $0.08 per kWh in neighbouring India (World Bank, 2023). The high costs are due to Bangladesh’s reliance on imported fuels for power generation, compounded by capacity payments, which are charges paid to power plants for available capacity regardless of actual electricity production. This system has resulted in financial inefficiencies, as these payments contribute to higher costs for consumers without providing any additional electricity supply. In 2023 alone, capacity charges made up a significant portion of the Bangladesh Power Development Board’s budget, with estimates suggesting nearly 25–30 per cent of electricity costs in the system were tied to these payments (Asian Development Bank, 2023).


Policy recommendation: Transitioning to renewable energy sources, particularly solar and wind, combined with a re-evaluation of capacity charges could help reduce electricity costs significantly over time. In India, substantial investment in renewables has allowed for more competitive electricity pricing without the need for excessive capacity payments, benefiting consumers directly. This approach aligns with the economies of scale principle, where increasing renewable energy capacity reduces per-unit costs and stabilises prices long-term. A case study in Vietnam found that reducing capacity charges by shifting to renewable energy and demand-responsive pricing lowered electricity costs by 15 per cent, a model that Bangladesh could follow (International Energy Agency, 2023).


Fuel prices


FUEL costs in Bangladesh remain notably high, with petrol prices at around Tk 114 a litre. In comparison, neighbouring countries like India and Pakistan offer rates closer to Tk 105 and Tk 95 per litre, respectively (Global Petroleum Prices, 2024; The News International, 2024). This disparity in fuel costs significantly impacts transportation and logistics expenses, further driving up the prices of essential goods in local markets. Bangladesh’s reliance on spot-market fuel purchases, rather than establishing a strategic reserve, increases its vulnerability to sudden global oil price changes. This dependency is further compounded by significant imports of liquefied natural gas (LNG) and liquefied petroleum gas (LPG), both of which are subject to volatile international prices.


Policy recommendation: For immediate relief in fuel costs, the government could temporarily reduce taxes and import duties on petroleum products, helping to lower pump prices in the short term. Additionally, negotiating fixed-price agreements for short-term LNG and LPG imports could shield Bangladesh from global price volatility, providing more stable rates during market disruptions.


But, for the long term, the government can follow:


Establishing a strategic fuel reserve: Creating a strategic fuel reserve could help smooth out global market fluctuations, providing a buffer during price hikes. Countries like Japan and South Korea have implemented similar reserves, reducing fuel price volatility by around 10 per cent even during periods of market disruption (International Energy Forum, 2022). This approach aligns with the price pass-through theory, where lower and more stable input costs for fuel would reduce overall consumer prices for essential goods, easing the burden on households.


Reducing LNG and LPG imports through domestic exploration: Bangladesh could consider reducing its heavy dependence on imported LNG and LPG by investing in domestic gas exploration. With an estimated 16 trillion cubic feet of untapped natural gas reserves, expanding domestic production could be cost-effective and lessen reliance on imports, which are often subject to international price swings (Petrobangla, 2023). The International Energy Agency indicates that domestic production typically reduces per-unit costs by about 15-20 per cent compared to imports, a strategy used effectively by neighbouring countries with local gas resources.


Cost-benefit analysis of domestic vs imported fuel sources: Studies suggest that producing natural gas domestically would cut fuel costs by up to 25 per cent, as transportation and logistics expenses are minimized. For example, Petrobangla’s exploration efforts in the Bhola gas fields have indicated that locally sourced gas could provide a cost benefit of approximately Tk 50 per cubic meter compared to imported LNG, offering significant savings potential if scaled (Bangladesh Energy Regulatory Commission, 2024).

 

Telecommunications and internet costs


HIGH taxes on mobile call rates and data packages in Bangladesh significantly impact accessibility and affordability, particularly for low-income users. Currently, mobile recharges incur a 15 per cent value added tax, a 10 per cent supplementary duty, and a 1 per cent surcharge, totalling 26 per cent in taxes on each recharge (Bangladesh Telecommunication Regulatory Commission, 2023). This high tax burden makes basic communication more expensive for consumers, which limits widespread connectivity and affects social inclusion.


The situation is similar for data costs, as regulatory fees and spectrum charges also contribute to high data prices. The average mobile data cost in Bangladesh is around $0.70 per GB, compared to $0.51 in Sri Lanka, driven by taxes and high operational expenses (World Bank, 2023; Ministry of Posts, Telecommunications and Information Technology, 2023).


Policy recommendation: Reducing charges and taxes on mobile recharge and internet could make connectivity more affordable, increasing internet accessibility for education, telehealth, and digital employment opportunities. According to network externality theory, as internet access becomes affordable, broader economic benefits arise, driving productivity, education, and job creation. A World Bank study found that every 10 per cent increase in broadband penetration in developing countries correlates with a 1.4 per cent rise in GDP, underscoring the potential economic impact of improved digital access.


Healthcare costs


HEALTHCARE costs constitute a significant part of household expenses, with 64 per cent of health expenditures in Bangladesh being out-of-pocket. This is higher than in India (48 per cent) and Sri Lanka (34 per cent) (World Bank, 2023). Reducing these expenses would allow households to allocate more of their limited budgets toward essentials like food and housing.


Policy recommendation: Targeted subsidies for essential medicines and treatments could reduce healthcare expenses for low-income families. This aligns with allocative efficiency theory, which suggests that resource allocation towards sectors with high social value, such as healthcare, generates broad economic benefits. For instance, Brazil’s healthcare subsidy programs reduced out-of-pocket costs by 30 per cent for essential services, a model that Bangladesh could replicate to improve household financial resilience (OECD, 2021). Lower healthcare expenses would enable families to divert funds to other pressing needs, alleviating the impact of inflation on overall living costs.

 

Educational expenses


Education costs in Bangladesh have steadily risen, with textbook prices alone increasing by approximately 20 per cent over the past five years (UNESCO, 2022). However, the financial burden extends beyond textbooks, affecting primary and higher education expenses, private tutoring, university tuition, and study abroad opportunities. Rising costs in these areas place significant pressure on families, particularly those with limited incomes or multiple school-aged children, limiting access to quality education.


Policy recommendation: Subsidising not only textbooks but also reducing examination fees, tuition fees for higher education, and private tutoring costs would alleviate a significant financial burden on families. This approach aligns with human capital theory, which holds that investments in accessible education led to higher productivity and long-term economic growth. According to an Asian Development Bank report, reducing education costs by just 10 per cent has been shown to increase school enrolment by approximately 4 per cent, representing a valuable investment in Bangladesh’s economic future.


Studying abroad has become an important goal for many Bangladeshi students seeking specialised knowledge and international experience. However, high costs associated with tuition, visa fees, travel, and living expenses place this opportunity out of reach for many. A report by World Education Services indicates that over 70 per cent of students from South Asia consider financial constraints a barrier to studying abroad. To address this, the government could offer partial scholarships for outstanding students, create partnerships with foreign institutions for tuition discounts, or establish bilateral scholarship agreements with key study destinations.


Expanding domestic scholarships and research grants would help students pursue advanced studies within Bangladesh, while increasing research funding would boost innovation and local expertise. Additionally, providing unemployment support for students in higher education could ensure that low-income students can complete their degrees without financial strain, promoting equitable access to education and skill development.


To further support economic growth and promote innovation, the government could establish an entrepreneurship fund aimed at young innovators and students interested in creating solutions to local challenges. Such a fund would provide seed capital, mentorship, and business development resources for student-led startups and social enterprises. This approach not only aligns with promoting innovation within Bangladesh but also encourages self-sufficiency and economic empowerment among graduates, helping to address unemployment and drive economic development.

 

A comprehensive economic relief strategy


The inflation-driven rise in essential goods prices has placed huge strain on households in Bangladesh, but targeted reductions in service sector costs could provide much-needed financial relief. By lowering expenses in electricity, fuel, telecommunications, healthcare, and education, Bangladesh could create a pathway to economic resilience, enabling households to save more and allocate their budgets more effectively. Through these strategic interventions, grounded in economic principles such as economies of scale, price pass-through, and network externalities, Bangladesh can support household financial stability as well as an inclusive and resilient economy.


News Link: Reducing services sector costs

bottom of page