The Risks of Heavy Reliance on Energy Subsidies in Bangladesh: A Call for Rational Reform
Md. Razib and Md. Tuhin Ahmed
Bangladesh’s growing dependence on fossil fuel imports and its continued reliance on government subsidies in the energy sector have emerged as significant threats to its macroeconomic stability. Despite mounting fiscal pressures and heightened global energy market volatility, the country has maintained a consistent upward trajectory in its energy subsidy allocations. In the budget for FY 2025–26, the government has earmarked BDT 37,000 crore for power and energy sector subsidies which is slightly lower than the proposed BDT 40,000 crore in FY 2024–25 but it is almost half lower than the revised BDT 62,000 crore in FY 2024-25. Though this reduction is so huge for single year, it remains uncertain whether this cut will be sustained, as the government may revise the subsidy upward again similar to the previous fiscal adjustment. In the FY 2017–18, the total government subsidies stood at BDT 12,120 crore, which had jumped to BDT 31,000 crore by FY 2021–22. More recently, the total revised subsidy allocation rose to BDT 1,33,000 crore in FY 2024–25 as the interim government paid most overdue payments across several sectors, indicating a staggering elevenfold increase in just eight years. The proposed subsidy allocation in FY 2025–26 has been remained almost unchanged at BDT 1,15,741 crore compare to the proposed budget of FY 2024-25.
A major portion of these subsidies consistently supports the power and energy sectors, driven largely by the country’s growing dependence on imported fossil fuels such as crude oil, diesel, furnace oil, coal, and LNG. The surge in global energy prices following the Russia-Ukraine war significantly raised the cost of fuel imports. Additionally, the devaluation of the Bangladeshi taka further compounded the financial burden of these imports, escalating the government’s subsidy obligations. The revised FY 2024–25 budget clearly illustrates this vulnerability, as the originally planned BDT 40,000 crore in energy subsidies had to be increased to BDT 62,000 crore to accommodate mounting arrears and rising import costs. This pattern underscores a fundamental problem: Bangladesh’s energy sector is structurally dependent on international markets, and any external price shock threatens to destabilize its economy.
Geopolitical tensions continue to heighten these risks. The current conflict between Iran and Israel raises serious concerns for the global energy market, particularly with the potential disruption of the Strait of Hormuz—a vital channel through which nearly one-fourth of the world’s fuel supply is transported. A temporary blockade of this vital route would result in a steep rise in crude oil and LNG prices. For Bangladesh, which relies heavily on imported fossil fuels for electricity generation, such a price spike would significantly raise the cost of production. This increase would ripple through the economy, affecting industrial output, transport costs, agricultural inputs, and consumer prices. Higher fuel and energy prices would also intensify inflationary pressures, raise the cost of living, and squeeze both public and private investment.
Moreover, escalating import bills would place tremendous pressure on the country’s already strained foreign currency reserves, potentially triggering further depreciation of the Taka. A weaker Taka, in turn, would increase the cost of all imports, feeding into an inflationary spiral that could be difficult to control. While the government has attempted to cushion the impact through subsidies, this approach is neither fiscally sustainable nor economically efficient. Blanket subsidies, especially in the power sector, often protect inefficient production systems and delay necessary reforms. The government continues to pay high capacity charges for underutilized power plants, leading to wasted expenditure that could have been allocated to more productive sectors.
The existing subsidy structure also suffers from distributional inefficiencies. A significant portion of energy subsidies benefits wealthier households and industries, rather than the low-income groups they are intended to support. This regressive outcome is a result of poor targeting mechanisms and weak institutional coordination. The continuation of such subsidies not only imposes a heavy fiscal burden but also limits the government’s capacity to invest in modern energy infrastructure, renewable sources, and social development programs. Despite these challenges, the FY 2025–26 budget reflects only marginal reforms. While the energy subsidy has slightly decreased to BDT 37,000 crore, LNG subsidies are set to increase from BDT 6,000 crore to BDT 9,000 crore, indicating an ongoing dependency on volatile international markets.
Bangladesh needs to start rationalize energy subsidy with a greater attention. Bangladesh must urgently adopt a medium-term roadmap to reform its energy subsidy regime that balances fiscal prudence with energy security and equity. This includes improving energy efficiency through better transmission infrastructure and energy audits, phasing out outdated and underperforming power plants, and renegotiating costly power purchase agreements with independent producers. There is also a need to diversify the energy mix by investing in domestic gas exploration and accelerating the shift to renewables. The government of Bangladesh should aggressively take renewable energy projects, especially solar and wind, to decrease higher reliance on imported fossil fuels. Although the Rooppur Nuclear Power Plant and Matarbari coal-fired plant promise to alleviate some pressure on imported energy, a broader strategy focused on cost-effective and sustainable solutions is essential. To finance gas exploration activities, the government would leverage public-private partnerships (PPPs), and attract international oil companies (IOCs) with attractive but fair terms. Successfully utilised PPP models and international collaborations can bolster domestic gas production and reduce import dependency. Furthermore, subsidies should be gradually replaced with targeted cash transfers to vulnerable households using digital financial platforms, ensuring equity while reducing fiscal waste. At the same time, the government must implement a transparent fuel pricing mechanism that reflects global prices while incorporating a buffer to manage shocks. Import-stage VAT on LNG and high taxes on solar equipment should also be revised to promote cleaner and domestically sourced energy.
Institutional reforms are equally important. Significant reforms in energy governance such as reducing corruption, improving transparency, and fostering competitive energy markets are vital in Bangladesh. Substantial inefficiencies and corruption within state-owned enterprises have contributed to inflating costs and diminishing effectiveness. Coordinated planning among the Ministry of Finance, Energy Division, BERC, and Petrobangla is necessary to streamline budgeting, monitor system losses, and implement reforms effectively. Without a credible and coordinated policy approach, Bangladesh risks perpetuating an unsustainable cycle of fiscal deficits, currency volatility, and energy insecurity. The country cannot afford to remain reactive in its energy policy, especially in an era marked by geopolitical uncertainty and climate transition risks. A proactive, well-targeted, and fiscally responsible subsidy reform strategy is essential to safeguard Bangladesh’s economic future.
In conclusion, while the government has taken some steps to address inefficiencies in the energy sector, such as reviewing power purchase agreements and exempting VAT on LNG imports, these efforts are not enough. The current path of high energy subsidy reliance exposes the economy to both internal and external shocks, strains public finances, and delays critical structural reforms. Bangladesh must move decisively towards rationalizing its energy subsidies—not only to ease fiscal pressure, but also to build a more resilient, equitable, and sustainable energy system for the future.
Author’s Biography:
Md. Razib, Research Associate at SANEM. Email: mdrazib329@gmail.com
Md. Tuhin Ahmed, Lecturer of Economics at Mawlana Bhashani Science and Technology University and Honorary Deputy Director at SANEM.
Email: tuhin.ahmed@mbstu.ac.bd