Economics of energy subsidy reforms in Bangladesh

As in many countries around the world, subsidies to energy in Bangladesh impose a significant fiscal burden, with benefits that disproportionately accrue to high-income households. Using a computable general equilibrium model, this study investigates the economy-wide impacts of the removal of direct subsidies in the electricity sector and indirect subsidy in natural gas in Bangladesh. The study finds that the removal of energy subsidies would be beneficial to the economy and would increase GDP. The magnitude of the economic impact depends on how the budgetary savings from the removal of electricity subsidy and the increased revenues due to the removal of indirect subsidies to natural gas are reallocated to the economy. Recycling the savings (or the new revenues) to fund investment would benefit the country most, followed by the case of utilizing them to fund cuts in income taxes, and finally to fund cuts in indirect taxes. While the reallocation of budgetary savings to households through lump-sum transfers is found inferior to other recycling options considered, it could be the preferred from the distributional perspective. However, further analysis is needed to confirm this.