The Crisis Beneath the Crisis:Rethinking Fuel Subsidies in Bangladesh

The Crisis Beneath the Crisis: Rethinking Fuel Subsidies in Bangladesh

When the Conversation Shifted
The ongoing crisis in the Middle East has pushed Bangladesh to the edge of an energy crisis that it had nothing to do with but cannot escape. The Iranian attacks on Qatar's energy infrastructure have knocked out 17% of the country's LNG export capacity.¹ Bangladesh sources more than 70% of its LNG imports from Qatar, making it highly vulnerable to disruptions in Qatari energy exports.² Following the loss of Qatar's LNG export capacity, Bangladesh has been forced to secure replacement cargoes from the spot market at prices nearly double those recorded in December 2025.³ With 69% of its LPG also imported from the Middle East and one-fifth of global oil shipments passing through the increasingly unstable Strait of Hormuz, the scale of Bangladesh's exposure in this crisis is difficult to overstate.⁴ Fuel is not a peripheral concern for Bangladesh. The garment factories that earn the foreign currency, the irrigation system that feeds its population, the electric grid that keeps the industries running and the transport network that keeps the food prices in check rely on fuel as a critical yet volatile input. Faced with this reality, the successive governments have provided blanket subsidies to ease burden on consumers and maintain economic and political stability. However, a policy that offered stability was never designed to face a crisis of this scale. It rather carries a price that a budget can no longer quietly absorb. As global fuel market becomes volatile and fiscal pressures mount at home, Bangladesh needs to undertake structural reforms that reduces fiscal strain and prevents essential development fund from being crowded out by rising subsidy costs.

A Dependency That Has Been Deepening for Years
The current crisis came with a forewarning. In a long trend of exposure to global energy volatility, it has come at the worst possible moment. Between FY2020–21 and FY2024–25 Bangladesh's dependence on primary energy import sharply rose from 47.7% to 62.5%, a 14.8% increase in fossil fuel reliance in just four years.⁵ Far from being a marginal change, the structural shift has fed through into generation costs. Electricity production costs rose by 83% over the same five-year period, steadily widening fiscal deficits and expanding the subsidy burden the government must carry.⁶ What once required a manageable subsidy outlay now demands a fiscal commitment that is breathing down the neck of the national budget, leaving less room for essential spending.

The Growth Paradox of Imported Energy
The consequences are no longer confined to energy balance sheets. What began as an energy sector challenge has spilled over into a broader macroeconomic problem. The garments sector which accounts for 80% of Bangladesh's export earnings has seen factory production fall by 25–30%.⁷ This underscores the paradox of fuel-dependent industries : earning foreign exchange for the country while simultaneously contributing to reserve depletion. Every hour of load shedding in factories means less output, missed deadline and diminishing dollar inflows when Bangladesh needs reserves the most. The blanket subsidy system, while aimed at maintaining affordability, has done little to avert these disruptions; instead, it has redirected their financial impact onto the government budget rather than prices.

The Opportunity Cost of Blanket Subsidies
The fiscal burden of the current framework runs deeper than the subsidy bill itself. The subsidy bill captures only a fraction of the true cost; it does not tell the whole story. Blanket fuel subsidies are not a one-time expense but a recurring obligation. As global fuel prices rise, their cost increases automatically, placing ever-greater pressure on public finances. The growing subsidy burden leaves the Annual Development Program underfunded. Funding is gradually diverted away from infrastructure, power-grid expansion and social protection. In recent years, rising allocations for fuel, electricity and fertilizer subsidies have increased pressure on the national budget, leading to tighter fiscal space for development projects. ⁸ Money committed to keeping fuel artificially cheap is money unavailable for the investments that generate long-term productivity and employment. This trade- off does not merely slow development; it gradually erodes the state's capacity to build anything durable at scale.

The Macroeconomic Contradiction of Fuel Subsidies
he inflationary consequences of fuel subsidies are persistent and far more difficult to ignore than they initially appear. When the government finances subsidy obligations through central bank monetization of the fiscal deficit, rather than borrowing from financial markets, it effectively injects excess liquidity into the economy without a corresponding increase in the economy's productive capacity. The result is demand-pull inflation, as more money chases the same quantity of goods and services. Simultaneously, artificially low fuel prices conceal the true cost of transportation, agriculture, and industrial production, delaying rather than eliminating cost pressures. When subsidies are eventually reduced, businesses face a sudden rise in operating costs that is quickly passed on to consumers. A subsidy regime that simultaneously fuels inflation through monetary expansion while merely postponing cost pressures at the pump creates a dangerous contradiction at the heart of macroeconomic policy.

Cheap Fuel, Costly Macroeconomic Consequences
The external consequences of large-scale fuel subsidization are severe and mutually reinforcing. By keeping fuel prices artificially low, subsidies weaken the market signals that would otherwise encourage households and businesses to moderate fuel consumption, reinforcing Bangladesh's dependence on imported energy. Imported fossil fuels now account for approximately 59% of the country's trade deficit, which widened by 24% during the July–March period of FY2026 to reach $19.17 billion as petroleum import costs increased while export earnings weakened.⁹ To finance this growing import bill, the country drew down its foreign exchange reserves significantly, while the Bangladesh Bank repeatedly intervened in the currency market to stabilize the Taka within its managed float regime .These pressures contributed to a marked depreciation of the domestic currency, making not only fuel but virtually all imported goods more expensive. The result is a second-round inflationary effect that does not stop at energy prices, but works its way through the entire economy—from transport and production to the cost of daily essentials.

A Hard Sell for Investors
Fuel subsidies burn through public money to keep consumption humming, while starving investment, draining reserves, and scaring off capital. As import demand for fuel surges, more foreign exchange is sent abroad putting pressure on the current account and widening the external deficit. But the damage does not stop there. As reserves dwindle and currency depreciates, investor confidence begins to falter. What begins as trade imbalance, soon spills into the capital account, as investors grow wary of weakening external position and rising macroeconomic risks. Bangladesh turns away investment just at the very moment it needs capital most. International investors assess currency stability and fiscal stability as proxies for sovereign risk, meaning the likelihood that a country may face difficulties in meeting its financial obligations.

A Subsidy-Induced Growth Ceiling
Bangladesh’s subsidy regime has evolved into a self‑reinforcing fiscal trap, absorbing an ever-larger share of public resources through rising expenditures on power, energy, agriculture, and other transfers. In doing so, it crowds out investment in the infrastructure and human capital that are essential for sustained industrialization and long-term economic development. With a tax-to-GDP ratio of just 7.4% in FY2024–25, Bangladesh collects relatively little revenue compared to its development and fiscal obligations.¹⁰ As subsidies and interest payments absorb nearly half of the budget, public investment is increasingly crowded out, constraining the economy’s capacity to build the foundations for future growth.¹¹ So the tax base fails to deepen, leaving future governments with a chronically narrow revenue pool from which to finance ever‑larger subsidies and financial obligations. Growth is slowing and private investment remains subdued, so the state becomes even more reliant on borrowing and ad hoc incentives, pushing the economy toward a low‑investment, low‑productivity equilibrium that resembles prolonged stagnation rather than a sudden crisis.

Governance on Autopilot Constraints
For a new government inheriting this structure, room for maneuver is limited. A large share of the budget is pre-commited to salaries, pensions, interest, and politically sensitive subsidies.¹² At the same time, weak revenue administration and demands from external creditors and the IMF for fiscal consolidation and reform raise the political and social costs of any rapid subsidy retrenchment.¹³ In this context, the “new” government does not start with a clean slate but with a binding legacy of fiscal promises that make it extremely difficult to break the subsidy cycle. Breaking the subsidy cycle becomes politically and economically difficult, as doing so risks short-term social unrest and slower growth, even while the cycle itself reinforces Bangladesh's emerging growth ceiling. ¹⁴

Charting a Path Toward Smarter Fuel Subsidies
The choice of mechanism matters as much as the decision to reform. Announcing reform without a credible delivery mechanism is where subsidy restructuring most reliably fails. Evidence from comparable economies suggests that durable reforms requires a combination of price adjustment tools, administrative capacity, and political sequencing ,none of which works on its own. ¹⁵ This focus on delivery is particularly important in Bangladesh, where the subsidy regime has evolved from a temporary support measure into a source of broader economic distortions that reform must address.

To be effective, Bangladesh’s fuel subsidy reform must do more than reducing a budget line. The reform must also tackle entangled structural challenges that the current system has created or exacerbated over time. By artificially lowering the prices of fuel for all customers irrespective of their income levels ,the blanket subsidy regime has incentivized disproportionate consumption patterns. At the same time this system misdirects financial resources for essential development funds and left the government exposed to every external shocks without any adjust mechanism. Subsidy reform cannot be designed for normal times — it must be built to function under the kind of prolonged external shock the country is currently navigating. A credible reform agenda must fix each of these distortions in turn. It must redirect its support toward the households, farmers, and export-oriented sectors it was intended to prioritize in the first place, rather than extending the same relief to private vehicle owners and industries that are capable of adjusting.

Automatic Pricing Mechanism: Replacing Political Decisions with Transparent Rules
An automatic pricing mechanism (APM),at its core, is designed to prevent the buildup of subsidy liabilities by regularly aligning domestic fuel prices with trends in international markets instead of leading adjustments to political discretion. Instead of the government quietly absorbing the gap between international and domestic fuel prices through the budget, a pricing formula takes over—adjusting prices transparently and on a predictable schedule.After years of fiscal strain driven by fuel subsidies, Indonesia finally introduced an APM ,which successfully reduced the volatility of price shocks while preparing consumers for market realities. India's phased deregulation of petrol and diesel between 2010 and 2014 followed a similar trajectory, ending with a full decoupling of domestic prices from the fiscal framework and a significant reduction in budgetary uncertainty. In Bangladesh’s case, an APM would help contain the automatic escalation of subsidy obligations during global price spikes, which is feeding the fiscal deficit in real time.

In practice, governments under electoral pressure or facing public dissatisfaction would struggle to sustain automatic price adjustments, which can quickly undermine the credibility of the system.¹⁶ When inflation is already high, even regular monthly revisions can spark resistance if global fuel prices climb suddenly. At the same time, an APM does not automatically insulate low-income households from higher fuel costs, leaving the adjustment burden uneven in the absence of complementary support. Taken together, these issues indicate that the success of an APM hinges not only on how it is designed, but also on whether it can be insulated from political interference and supported with safeguards for vulnerable households.

Digitized Direct Cash Transfers (G2P): Protecting People Without Distorting
A government-to-person (G2P) cash transfer system offers an alternative way of protecting vulnerable groups while allowing fuel prices to reflect market conditions. Instead of subsidizing fuel for all consumers regardless of income, the government provides direct cash payments to eligible households, providing relief while preserving the price incentives that discourage wasteful consumption. Compared with universal fuel subsidies, direct transfers are better aligned with distributional objectives. Evidence from reform efforts indicates that reforms are most likely to endure when they rest on strong administrative institutions and reliable systems for delivering support to those who need it most. Experiences from Brazil and Iran illustrate the practical viability of direct transfer systems. Brazil’s Bolsa Família program demonstrated how targeted payments can deliver social protection at scale, while Iran’s 2010 reform showed that even large-scale subsidy systems can be replaced with direct cash payments. Bangladesh already possesses some of the foundations required for this transition, including widespread mobile financial services such as BKash and Nagad.

Effective G2P cash transfers depend on accurately identifying eligible households and delivering payments reliably, both of which remain challenging because Bangladesh does not yet fully have a complete and verified beneficiary registry with reliable income data.¹⁷ A key challenge lies in government's capability to manage targeting errors, particularly in cases where eligible households are excluded or ineligible ones included. Iran's reform, despite its scale, suffered significant in early years and Bangladesh's national household database would require substantial auditing and expansion. Rather than treating subsidy as overnight change, Bangladesh could use a gradual transition in which G2P transfers could be extended to clearly vulnerable groups: smallholder farmers, female-headed households, and registered garment workers below a defined income threshold. A gradual rollout offers room for trial and adjustment, helping policymakers fine-tune the system before it is implemented on a larger scale. By moving step by step Bangladesh can reduce the chances of vulnerable groups being left behind while giving people time to become comfortable with the new system.

The Lesson History Keeps Teaching: Reform Without Communication Fails
The history of subsidy reform is a history of communication failures. UNDP's analysis of global case studies identifies effective public communication is one of the critical enablers of successful reform.¹⁸ When governments have clearly communicated the rationale for change, highlighted the trade-offs in foregone development spending and allowed time for adjustment, reforms have endured. When they have not, the results have been ranged to unrest to violent political upheaval. The wave of civil unrest that swept across Chili, Bolivia, France, Iran and Lebanon in 2018 and 2019, each linked to fuel and energy pricing reforms — was not merely a reaction to higher prices; it was reaction to reforms public felt imposed on them without public communication or consent.

Two cases, sitting opposite spectrum of the, best capture the contrast between the successful and failed reform. In the 1990s the Philippine government paired energy pricing reform with public education, giving households and industries to adjust toward market mechanisms. By communicating persistently, the government were able to ground the political space for reforms. At the other extreme, the Haitian government removed subsidies overnight, with no prior communication, spiking a 46% in energy prices. The violent unrest caused by the decision was met with the government's resignation immediately after the announcement.

Bangladesh is already navigating elevated inflation, and a poorly communicable reform would be both economically damaging and politically destabilizing. Fuel prices affect far more than transportation cost, they effect food prices, household expenses and the operating costs of business across the country. Any attempt to reduce subsidies would be interpreted as threat to living standards unless the rationale is explained. Public communication is therefore is not simply about informing policy change. It is about building an understanding why continued subsidization is unsustainable and what benefit can be reaped through reforming the system. For Bangladesh, where fuel prices have historically generated public discontent, building public understanding before announcing reform is not optional but essential to success.

Footnotes

1. Iranian strikes on Qatar's energy infrastructure damaged two LNG production trains and reduced the country's LNG export capacity by approximately 17%, according to Qatar Energy CEO Saad Al-Kaabi. https://www.reuters.com/business/energy/iran-attack-damage-wipes-out-17-qatars-lng-capacity-three-five-years-qatarenergy-2026-03-19/
2. Mohiuddin“ LNG imports disrupted, electricity and energy at risk“ Prothom Alo English, March,2026 https://en.prothomalo.com/bangladesh/nk57aqlgcc
3. Reuters, “Bangladesh secures spot LNG cargoes as costs soar, seeks Indian oil,” March , 2026. https://www.reuters.com/business/energy/bangladesh-secures-spot-lng-cargoes-mideast-conflict-lifts-costs-2026-03-12
4. How dependent are we on Middle East oil, gas?” The Daily Star, March 2026. https://www.thedailystar.net/business/global-economy/news/how-dependent-are-we-middle-east-oil-gas-4126711
5. According to IEEFA, Bangladesh's dependence on imported primary energy increased from 47.7% in FY2020–21 to 62.5 percent in FY2024–25. https://ieefa.org/articles/renewable-power-generation-still-23-bangladeshs-fossil-fuel-imports-rise-148-four-years
6. IEEFA reports Bangladesh's average grid power generation cost increased from BDT 6.61/kWh in FY2020–21 to BDT 12.1/kWh in FY2024–25, an increase of approximately 83 percent. https://ieefa.org/resources/fostering-bangladeshs-energy-transition
7. A recent World Bank publication explicitly confirms this: Bangladesh’s ready-made garment (RMG) sector accounts for around 80–83% of total export earnings. https://www.worldbank.org/en/results/2026/02/26/diversifying-exports-for-better-jobs-in-bangladesh
8. Industry leaders reported that gas and electricity shortages reduced production capacity in Bangladesh's ready-made garment sector by approximately 25–30%, particularly in the country's main industrial hubs. https://thefinancialexpress.com.bd/trade/energy-crisis-cuts-production-capacity-by-25-30pc-bgmea
9. The Daily Star, “Subsidy burden set to rise for power, fertiliser,” June 2026. https://www.thedailystar.net/business/bangladesh-budget-2026-27/news/subsidy-burden-set-rise-power-fertiliser-4191526
10. Reported by The Daily Star, citing Bangladesh Bank's Balance of Payments data, the trade deficit widened by 24% to US$19.17 billion during the July–March period of FY2025–26, driven by higher petroleum import costs and weaker export earnings.
11. “NBR needs to collect Tk 2 lakh crore in three months,” The Daily Star, April 7, 2025 https://www.thedailystar.net/business/economy/news/nbr-needs-collect-tk-2-lakh-crore-three-months-3866021
12. World Bank analysis finds that rising debt servicing and subsidy obligations are constraining fiscal space and crowding out public investment.https://www.thedailystar.net/business/news/subsidies-interest-payments-rose-30-fy25-4050926
13. World Bank, Bangladesh Development Update (2024), and International Monetary Fund, Bangladesh Article IV Consultation Reports, both note that a large share of Bangladesh’s budget is pre-committed to wages, pensions, interest payments, and subsidies, leaving limited fiscal space for discretionary development spending.
14. Weak domestic revenue mobilization in Bangladesh, reflected in a tax-to-GDP ratio of only around 7–8 percent, significantly limits fiscal space and forces the government to prioritise recurrent obligations over public investment. World Bank, Bangladesh Development Update (April 2024).https://thedocs.worldbank.org/en/doc/f6dd176b982714b6e3b04d7ac672a0ab-0310012024/original/Bangladesh-Development-Update-April-2024-w-cover.pdf
15. IMF (2013), Energy Subsidy Reform: Lessons and Implications; World Bank (2010), The Economics of Energy Subsidies; ADB (2016), Fossil Fuel Subsidies in Asia: Trends, Impacts, and Reform Options — all highlight that subsidy reform is politically sensitive and often constrained by social and distributional pressures despite clear fiscal benefits.
16. Indonesia, India, Egypt, Iran, and Nigeria all show that subsidy reform only becomes durable when price adjustments are combined with compensation mechanisms, administrative capacity (e.g., targeting or transfer systems), and phased political sequencing; relying on any one element alone has repeatedly led to backlash, partial implementation, or policy reversal.
17. IMF (2013), Energy Subsidy Reform: Lessons and Implications; World Bank (2010), The Economics of Energy Subsidies; Victor (2009), The Politics of Fossil-Fuel Subsidies
18. International Growth Centre (IGC), Bridging Data Gaps for a Better Social Protection System in Bangladesh (2025) https://www.theigc.org/blogs/bridging-data-gaps-better-social-protection-system-bangladesh
19. International Growth Centre (IGC), Bridging Data Gaps for a Better Social Protection System in Bangladesh (2025). https://www.theigc.org/blogs/bridging-data-gaps-better-social-protection-system-bangladesh
20. United Nations Development Programme (UNDP), Strengthening Energy Governance Systems: An Energy Governance Framework for a Just Energy Transition (9 November 2023), available at: https://www.undp.org/governance/publications/strengthening-energy-governance-systems-energy-governance-framework-just-energy-transition