Bangladesh has achieved an impressive economic growth of over 6% per annum, even during the challenges of the Covid-19 pandemic. A reliable and affordable energy supply has contributed to this stellar performance, powering industries and keeping businesses running in recent years. Bangladesh has a growing supply shortage against a daily gas demand of 4800 MMSCFD. This supply crunch continues. The geopolitical conflict between Russia and Ukraine has exacerbated pre-existing supply chain disruptions created by the COVID-19 pandemic, culminating in a dramatic escalation of global energy prices. Furthermore, the recent Israel and Palestine war and Iranian retaliation to the attack by Israel threaten a negative impact beyond the region, especially in nearby South Asia. Bangladesh has close ties with Iran and Saudi Arabia. KSA is one of the largest sources of remittance and crude oil, and the involvement of Iran in the war erupts a new crisis in the region. This may further impact contracting remittance and supply of energy and crude price hikes. Since Iran is a major source of energy, an all-out war between Israel and Iran would further cripple the global energy market.
The implications of increasing energy prices on any economy are extensive, impacting various sectors significantly. As energy cost rises, businesses confront higher production expenses, potentially leading to price hikes for goods and services. Energy price hikes have become very frequent in recent years. In February 2024, the electricity price increased from Tk 0.88 for domestic use to industrial use to Tk. 0.97 per kWh. Before that in 2023, the government's significant increase in gas price, from Tk 5.02 to Tk 14.00 per cubic meter, marked a staggering 178.88% surge. This spike escalated average production costs by 15%, with captive power costs rising by 87.5%. The impact was severe on CMSMEs, the economic lifeline, whose gas price rose by 178.88%, threatening CMSMEs' development and growth prospects above all gas for fertilizer production linked with crop production. The unusual gas tariff on fertilizer production has extremely hurt the production affecting agricultural stakeholders. Moreover, the monthly revision of LPG and frequent liquid petroleum product price revisions (Octane, Petrol, and Diesel) are adding cost incidence to a certain extent on mass people deficient income groups get more shock of it.
In addition, electricity tariffs experienced a cumulative surge of approximately 15.7% during FY2022-23. Recently, the retail price of electricity has also gone up. Low-volume consumers saw their bills rise representing an 8.45% increase. The hike is larger while consumption gets larger. The electricity price for agriculture irrigation rose by 8.92% triggering likely scopes of food inflation.
In the industry, the rising energy costs and inconsistent supplies pose substantial hurdles for businesses, impacting operational efficiency and sustainability. Both flat-rate and peak-rate users in the small-scale sector experienced price hikes and the construction sector also saw a 9.07% surge in electricity prices. Adding to their woes, demand charges for both user groups rose by 20%.
The businesses, already burdened by elevated energy and raw materials costs coupled with currency depreciation, now face further strain on their financial stability and operational viability. These compounding factors require strategic adaptation to navigate effectively. While the price adjustments aim to reduce government subsidies, potential ramifications extend beyond immediate costs, the major concern is the potential for inflationary pressure. Studies suggest electricity price hikes lead to an increase in the Consumer Price Index (CPI). This, in turn, could significantly erode the purchasing power of households, particularly low- and fixed-income individuals, and other sectors like transportation invoking non-food inflation. The frequent tariff change in the energy sector is out of the guidance of the IMF in Bangladesh to bring some policy and institutional reforms.
Mainstream export-oriented industries grappled with severe challenges over the past year, including low foreign exchange reserve, low LC opening trend, high raw material prices, gas and electricity supply disruptions, and reduced export orders due to recession in the Western world. In Bangladesh, where agriculture and industry consume over 50% of energy, price hikes in electricity, gas, and diesel directly impact food prices and escalate production costs. Soaring energy costs and undue business concerns worsen smooth industrial sustenance, risking market loss and public discontent. High energy bills inflate production costs, hampering global competitiveness and potentially causing job loss and economic hardship. Energy-intensive sectors face threats to survival and competitiveness, impacting investment and employment retention.
Furthermore, rising energy costs threaten Bangladesh's vibrant energy-led export-oriented industrial sectors, declining the competitiveness of our exports in the international market. This could potentially lead to a decrease in export earnings, impacting foreign exchange reserves and, the balance of trade and hindering the development spree. Moreover, the depreciation of the Taka against the US Dollar by 25% has led to a significant increase, ranging from 10% to 20% in the overall price of imported and local materials. This depreciation has aggravated the financial strain of the private sector in many ways, by inflating business costs including import-oriented energy and fuel cost. Despite the escalating gas and electricity prices, entrepreneurs experience inadequate gas supply in their business premises. On the other hand, price hikes squeeze purchasing power, tightening budgets and disproportionately affecting vulnerable groups of people.
Natural gas that is 50% cleaner than coal and 30% cleaner than liquid fuel serves as a crucial transitional energy source for reducing greenhouse gas emissions. The industrial gas price surged by 178% in FY 2023, leading to losing competitiveness, employment, and profitability, and thereby affecting the overall economy with many adverse repercussions. The government aims to periodically adjust the electricity and energy tariff either upward or downward considering global price trends against the strong guidance of the IMF to reduce energy and other sector subsidies. This has been partly executed which may cause more miseries to the core energy sector stakeholders and hurt the economic competitiveness to some extent.
The gas tariff hikes two times in 2023 and several rounds of electricity tariff hikes have significantly affected both the cost of living and businesses. While the government aims to reduce subsidies, the price hike may not necessarily translate to increased revenue. Studies suggest that the higher electricity tariffs might lead to a decrease in overall consumption as individuals and businesses try to cut back on expenses. This could potentially lead to a reduction in government revenue from the energy sector, impacting investment scopes in key sectors. Nevertheless, the combined impact of rising energy costs, inflation, and potential job losses can create social unrest.
Due to climate change impact and pressure to keep the global temperature or warming within 2 degrees Celsius as per the decision of CoP, the transition for partial clean and green energy sourcing would add new costs and economic incidence to the traditional business ecosystem. This new renewable energy shift planning requires revisiting all business plans in industries and the private sector. This will surely reduce the contribution of SMEs and large businesses as the industrial ecosystem of the country is not equipped with renewable and green energy state.
AKM Asaduzzaman Patwary, Ex. Secretary, R&D and Public Policy Department, DCCI, Bangladesh
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