Home ›› 05 Mar 2023 ›› Editorial
Currency mismatch means a transaction in which the credit protection is denominated in a currency different from that in which the exposure is denominated. Thus when a country has dollar-denominated debt, the government should pay in dollars. The concept of original sin, a term in economics coined by Barry Eichengreen et al., refers to a situation where “ most countries are not able to borrow abroad in their domestic currency.” The original sin was a significant cause of economic distress in most developing economies. Many countries have been experiencing substantial financial pain due to the rapid accumulation of foreign currency-denominated debt in recent years. Examples of currency mismatches exist in Argentina, Chile, Pakistan, Indonesia, and Sri Lanka. The resurgence of currency mismatches and the Covid-19 pandemic is a stress test for monetary policy frameworks in many countries, including Bangladesh.
The Power Development Board [ PDB] is now in a web of currency mismatches evident from the recent price hike of five per cent on average, ignoring the Bangladesh Energy Regulatory Commission (BERC) procedures. The PDB continues to suffer huge losses while purchasing electricity from the private sector, denominated in the USD. Ordinary people are forced to pay the increased bill with rising prices of daily essentials. One plausible reason for the price hike could be compliance with the IMF's conditionalities of reducing power and energy subsidies. The subsidy is a by-product of this exercise because PDB buys power at high costs from privately owned power plants dependent on imported liquid fuels. Again, PDB is contractually obliged to pay rent (capacity charge) to power plants with idle capacity. The PDB has spent only Tk 90,000 crores on capacity charges from FY 2011 to FY 2022. Unfortunately, the unabated private sector power generation capacity could be a death knell to PDB when the revenue deficit, with even multiple price hikes, accumulates the losses. While electricity prices for consumers have increased 11 times in 14 years, losses and subsidies have not decreased.
A few statistics could spell the discrepancy among the generation costs; the average generation cost per unit of electricity in the private sector increased by 43 percent from Tk 6.61 to Tk 8.84 from FY 21 to FY 22, the PDB's power plants cost Tk 5.02 per unit, and state-owned power plants cost Tk 4.47. In contrast, private sector rental power plants cost Tk 9.80, and independent power producers (IPP) cost Tk 11.55. The PDB incurs losses by buying electricity from private sector IPPs and rental power plants in USD. The loss gets magnification with an increase in the power generation capacity; when the power generation capacity was 8,500 MW in 2012-13, PDB's loss was Tk 5,430 crore, the production capacity of 15,410 MW in 2017-18, PDB losses increased to Tk 9,310 crore. The current loss is over Tk. 28,000 crores with a production capacity of 23,482 MW. The government provides this money as loans or subsidies so PDB can pay private power producers. It is alleged that the government is working on a project to import electricity from India worth Tk. 6000 crores despite 40 percent of the idle power generation capacity that cost Tk. 10,000. The cost burden in foreign currency-denominated loans is increasing due to the construction of new power plants using foreign loans. The cumulative effect is frequently in hiking power and energy tariffs, severely impacting public life. Of the existing 154 power plants, public ownership with 58, two on joint venture, and the rest 94 in the private sector.
The PDB is the monopsony buyer of electricity from various public and private sources, with the per unit cost denominated in USD. The additional burden due to the currency mismatch may exceed Tk. 12,000 crores, this is due to the appreciation of USD by about 25 percent from Tk. 85 to TK. 106. The money receipts are in Taka, but the cost is USD. The government could consider paying the fixed asset bill in local currency. Even with the price hike, the growing subsidy payment could be a perennial feature in this exercise. The modalities hidden in the Quick Enhancement of Electricity and Energy Supply (Special Provision) Act 2010 are another loophole when lucrative contracts to local and foreign investors without competitive bidding could drain valuable foreign exchange.
Approximately 70 per cent of the cost is earmarked in USD as the exporters always prefer to sell a product in a hard currency free from jitters in the foreign exchange market. Indeed, project financing requires substantial foreign exchange for capital import, especially in the water and power sector. However, a portion of the project cost, mainly endogenous by nature, could be met by the local currency component and be denoted in local currency. The fixed cost component could be defrayed in local currency and could be a match with receipts. The total project cost of solar energy is denominated in USD, but the receipts would be in local currency. Again the denomination of land cost in USD could substantially increase the cost in the face of further appreciation of USD.
The writer teaches at BRAC University and BIDS as an adjunct Faculty in the Master's Programme in Economics. His can be contacted at mirobaidurr7@gmail.com.
