Bangladesh Must Restructure Energy Sector with Six Bold Reforms, PRI Says

Dhaka, July 27, 2026 — Bangladesh's energy sector has emerged as one of the most pressing macroeconomic challenges facing the country after years of mismanagement, with the spillover effects now extending far beyond the sector itself to threaten broader economic stability, according to a detailed policy analysis by Sadiq Ahmed, Vice Chairperson of the Policy Research Institute of Bangladesh (PRI). The analysis calls for an ambitious package of structural reforms to overhaul rather than patch the country's energy framework. ⚡

🏛 The problems in the energy sector have reached a point where they can no longer be treated as matters for the Ministry of Power, Energy and Mineral Resources alone. The Ministry of Finance and the Bangladesh Bank must integrate energy sector considerations into their broader macroeconomic and monetary policy frameworks, the analysis argues, given the sector's growing fiscal and balance-of-payments footprint.

📊 Three Alarming Spillover Indicators

💰 The spillover effects of the energy crisis on the wider economy are evident from several facts highlighted in the analysis. Three indicators stand out as particularly alarming:

📈 First, the energy import bill has surged dramatically — rising from $4.3 billion in FY2021 to $11.2 billion in FY2026 — because of growing shortages in domestic energy supplies and higher global prices. This pace of growth is unsustainable and could trigger a balance of payments (BoP) crisis if left unchecked, especially in a context where Bangladesh's foreign exchange reserves have already come under pressure.

💲 Second, the energy subsidy bill has ballooned — surging from Tk 142 billion (0.4 percent of GDP) in FY2021 to Tk 837 billion (1.5 percent of GDP) in FY2025. By comparison, the tax-to-GDP ratio stood at only 6.8 percent in FY2025, meaning energy subsidies alone absorbed around 22 percent of total tax revenue. Such a fiscal burden crowds out other critical public spending priorities.

👕 Third, energy shortages and higher prices have weakened export competitiveness, disrupted manufacturing and transport services, and contributed to slower GDP growth, weaker export performance, and lower private investment. The resulting economic slowdown has also been a major factor behind rising non-performing loans in the banking sector, as factories struggle to maintain production schedules and service debt.

🏭 Six Core Reforms Proposed

🤝 The PRI analysis argues that continuing with the crisis management and muddling-through approach of the past is not a sustainable policy option. Instead, the new government has an opportunity to undertake bold reforms that can restructure the energy sector for sustained progress. The challenge is to overhaul the sector rather than tinker at the margins.

📋 The core reforms recommended in the analysis include:

• 🔧 Deregulating the energy sector — to encourage greater private sector participation across the value chain
• 🏢 Corporatising all public energy entities — to improve accountability, efficiency, and financial performance
• 📝 Renegotiating IPP contracts — on commercial terms free from political influence
• 🧭 Depoliticising energy pricing — shifting pricing decisions to an independent regulator applying commercial principles
• 💰 Imposing hard budget constraints — on public energy entities, supported by a transparent subsidy policy
• 📜 Establishing a primary energy strategy — prepared by an expert group covering domestic sources and import trade strategy

🏢 Why Private Participation Matters

🌏 Since independence, the energy sector has remained heavily regulated, with the public sector dominating most stages of energy production and distribution. Although private participation has gradually expanded, particularly in electricity generation, the sector continues to be dominated by state-owned enterprises whose governance and operational performance have been the subject of sustained criticism.

📊 While this model may have served the country's needs in the early years after independence, today's economy is very different. Bangladesh now has a much stronger private sector operating in an increasingly sophisticated global economy. There is therefore an urgent need to open every stage of the energy value chain — from upstream exploration to downstream distribution — to private participation under a sound regulatory framework.

⚠ Public sector dominance has reduced efficiency, raised costs, constrained investment, and created opportunities for corruption. A vibrant private energy sector operating within a sound regulatory framework, as seen in many upper-middle-income and high-income countries, would improve efficiency, lower costs, and expand investment in the sector. The analysis describes this as the single most important reform needed to put the energy sector on a sustainable footing.

🏛 Corporatisation of Public Energy Entities

💼 The transition from a state-dominated energy sector to one led mainly by private suppliers will take time. In the meantime, public energy enterprises need urgent governance reforms to improve accountability, efficiency, and financial performance. The analysis recommends that these reforms should include:

• 🏢 Full corporatisation under professional management
• 🤝 Operational independence from government
• 📋 Greater autonomy over procurement, investment, production, sales, and employment decisions
• 💰 Hard budget constraints supported by a transparent subsidy policy

⚠ Separating government from day-to-day management and investment decisions is essential if corruption is to be reduced and operational efficiency improved, the analysis argues.

📜 Renegotiating IPP Contracts

⚡ Independent power producers (IPPs) have played a vital role in easing electricity shortages and supporting GDP and export growth over the past decade. However, a combination of overly optimistic demand projections and political interference in contract awards has created severe financial pressures because of excess generation capacity and the corresponding capacity payments.

⚠ The financial position of the power sector is no longer sustainable. IPP contracts should therefore be renegotiated on commercial terms, free from political influence, to reduce the burden of capacity payments on the public exchequer and restore financial discipline to the sector.

🧭 Depoliticising Energy Pricing

💲 Government control over energy pricing has contributed significantly to the weak financial position of energy entities, especially in the power sector, because prices have often been determined by political rather than commercial considerations. Although Bangladesh has established regulatory commissions for electricity and primary energy, government influence over pricing remains substantial in practice.

✅ A genuinely competitive private energy market will emerge only when pricing decisions are made by an independent regulator applying commercial principles, including production costs and a reasonable return on investment. Such reforms would also strengthen the finances of public energy enterprises by enabling cost-reflective pricing and reducing the need for ad hoc subsidies.

📜 A Coherent Primary Energy Strategy

🌏 The absence of a coherent primary energy strategy has been a major weakness of the sector. In an increasingly interconnected global energy market, where Bangladesh depends heavily on imports, a flexible and forward-looking strategy is essential. The current approach has been undermined by:

• ⚠ Unreliable estimates of domestic gas reserves
• 🌾 Weak policies to develop domestic energy sources, including renewables
• 🚢 Inadequate trade policies for imported energy
• 🔋 Limited private investment in energy exploration

📊 The result has been excessive dependence on imported LNG and other energy commodities, exposing the country to global price volatility and supply chain risks. One of the government's highest priorities should be to establish an expert group to prepare a comprehensive primary energy strategy that explores all potential domestic energy sources and the policies needed to develop them, formulates a trade strategy for energy imports built around strategic partnerships, and creates an enabling environment for private investment in domestic energy exploration.

📈 Implications for Bangladesh's Reform Agenda

🏛 The PRI analysis comes at a critical juncture for Bangladesh's macroeconomic management. With S&P Global having revised the country's sovereign outlook to negative on July 27, 2026, citing weak banking sector, fiscal constraints, and elevated external risks, the energy sector's structural weaknesses are increasingly being recognised as a key contributor to broader macroeconomic fragility.

📊 The six core reforms outlined in the analysis align closely with the structural reform priorities being emphasised by the IMF and other multilateral lenders as part of Bangladesh's ongoing $4.7 billion loan programme. Implementing these reforms would not only address the energy sector's immediate financial distress but also signal the government's commitment to broader structural transformation.

🌏 For Bangladesh's exporters and industrial consumers, energy sector reform is not an abstract policy debate — it is a critical determinant of competitiveness, production continuity, and cost structure. The $11.2 billion annual energy import bill and Tk 837 billion subsidy burden are ultimately borne by households and businesses through higher taxes, lower public investment in infrastructure, and the macroeconomic consequences of fiscal stress. Restructuring the energy sector, as the analysis argues, is therefore not just about energy — it is about restoring the foundations of Bangladesh's longer-term economic trajectory.

📜 Sadiq Ahmed is Vice Chairperson of the Policy Research Institute of Bangladesh (PRI). The original analysis was published in The Daily Star on July 27, 2026.