The Socio Economic Impacts of Fossil Fuel Subsidy Reform in Developing Countries: The Case of Bangladesh

Abstract

Subsidies have become a crucial topic nowadays for many developing countries due to the fluctuations in international fuel prices. Many developing nations (both importers and exporters of fossil fuels) are trying to phase out subsidies due to the burden it exerts on the fiscal budget. Many attempts have been taken by these countries towards reform and successful results have been obtained by some as well. Bangladesh is a country that is heavily dependent on fossil fuel imports. Since it is a developing country, government highly subsidizes fossil fuels to ensure affordability as energy is vital for the development of any country. However, due to fluctuations in international oil prices it has become important for Bangladesh to think of subsidy reform as it is not logical to maintain the previous policies of fuel subsidies. Subsidies crowd out investments which could be used in other sectors like healthcare, education, purchase of machineries etc. Many developing countries like India, Indonesia, and Sudan have undergone subsidies reform over the past few years. Although some of them were not successful, some countries could effectively implement policies to ensure subsidy reform. Time plays an important factor along with the public understanding for any reform to be successful. Also, political consensus is vital for any such reform. Therefore, government has to plan out every step before implementing any policy and time should be allowed after informing the public about the change so that they can prepare for it. Transparency is also very important to build public support. Although subsidy removal has become important, reform is not easy. Subsidy removal often leads to high prices resulting in inflation. Therefore, countries like Bangladesh need to mitigate its effects on poor to avoid any economic or social unrest. Hence, it is a crucial time for Bangladesh to go for a reform and proper planning is required to do so. The lessons learned from other developing countries can help the policy makers of Bangladesh to make crucial decisions as they already know some of the negative effects (high inflation rate, currency depletion, public opposition, etc.) that may arise due to the reform thus they can take measure accordingly to mitigate that effect. Moreover, the lessons can be a guideline for Bangladesh that can be analyzed before the policy is implemented.