When the wheels stop turning: Why a power sector crisis can become an economic one

Bangladesh's economy is often discussed in terms of exports, foreign exchange reserves, inflation or GDP growth. Yet beneath these indicators lies a simpler reality: economies run on infrastructure.

The wheels of an economy are power, energy, ports, roads, telecommunications, banking and finance. If one wheel weakens, growth slows. If a major wheel fails, the entire vehicle risks coming to a halt.

Today, Bangladesh faces a danger that extends far beyond the power and energy sector. The growing accumulation of unpaid obligations to power producers, fuel suppliers and infrastructure investors risks triggering a chain reaction throughout the economy.

The issue is no longer merely about electricity generation. It is about economic stability itself.

Economists have long recognised that infrastructure is not just another sector. Nobel Laureate Robert Solow's growth theory demonstrated that productivity improvements are among the principal drivers of economic growth. Reliable electricity, transport and communications enable labour and capital to become more productive. When these systems weaken, productivity declines throughout the economy.

Bangladesh itself has lived through this experience.

Between 2006 and 2009, severe power shortages constrained industrial production, discouraged investment and slowed economic activity. Factories operated below capacity, businesses relied on expensive captive generation, and investors questioned whether adequate infrastructure would be available to support expansion.

Subsequently, the massive investments made in power generation helped transform Bangladesh's economic prospects. Export industries expanded, manufacturing capacity increased, employment grew and millions were lifted out of poverty. Reliable electricity became one of the foundations of Bangladesh's development story.

The lesson is clear: economic growth follows infrastructure investment, while economic weakness follows infrastructure neglect.

Today, however, a new risk has emerged.

When power producers, fuel suppliers and infrastructure operators are not paid on time, the consequences extend far beyond their balance sheets. Power plants must continue paying employees, lenders, maintenance contractors and fuel suppliers regardless of whether they themselves receive payment. LNG suppliers, i.e., Petrobangla, fuel oil providers and equipment manufacturers cannot indefinitely continue supplying services without compensation.

Eventually, liquidity begins to disappear from the sector.

The danger is what economists call the "Financial Accelerator", a concept developed by Ben Bernanke and Mark Gertler. A financial shock in one sector weakens corporate balance sheets. Banks become more cautious. Lending slows. Investment declines. Economic growth weakens. The resulting slowdown further weakens balance sheets and the cycle accelerates.

In simple terms, a payment crisis in the power sector can become a banking crisis, which can then become an investment crisis and eventually an economic crisis.

This risk should not be underestimated.

Power and energy projects are among the largest borrowers in Bangladesh. Domestic and international banks have financed billions of dollars of investment in power plants, LNG terminals, transmission systems and communications infrastructure. 

If project companies are unable to collect receivables for extended periods, debt servicing becomes increasingly difficult. Banks must then increase provisions and reduce lending capacity.

Less lending means fewer factory expansions, fewer industrial projects, fewer jobs and slower economic growth.

History offers a cautionary example.

Pakistan's power sector accumulated massive circular debt as power purchasers failed to pay generators, generators struggled to pay fuel suppliers, and financial stress spread throughout the economy. What began as a power sector issue evolved into a national fiscal and financial challenge requiring repeated government intervention and IMF-supported reforms.

The lesson from Pakistan is not merely about electricity. It is that prolonged non-payment in a critical infrastructure sector eventually affects the entire economy.

The impact is also felt through another economic channel: the circulation of money.

John Maynard Keynes emphasised that economic activity depends not only on the quantity of money but also on its movement through the economy. Money that is trapped in unpaid obligations cannot finance investment, employment or production. When large sums become immobilised, the velocity of money declines, reducing economic activity and slowing growth.

The consequences ultimately reach factories, workers and households.

Manufacturers depend upon reliable electricity and fuel. Investors depend upon functioning financial institutions. Exporters depend upon dependable infrastructure. Every productive sector relies on the smooth functioning of the power and energy ecosystem.

No country has successfully industrialised while simultaneously undermining confidence in its energy sector.

Energy security is therefore not simply an energy issue. It is a national economic issue.

The solution is neither complicated nor unprecedented.

Bangladesh may consider:

• Converting accumulated arrears into 7–10 year government-backed bonds.
• Establishing a structured repayment programme for power and energy sector obligations.
• Implementing predictable fuel cost adjustment mechanisms to prevent future accumulation of losses.
• Diversifying fuel supplies and reducing procurement costs through long-term contracts and expanded infrastructure.
• Encouraging private investment in LNG, transmission, storage and digital infrastructure.
• Strengthening investor confidence through respect for contracts, transparency and the rule of law.

These measures should not be viewed as support for individual companies. They are investments in economic stability.

The power and energy sector is not merely another industry. It is the engine room of the economy. When the engine slows, every other sector feels the impact. When the engine stops, the economy eventually follows.

The alternative is to discover, too late, that a power sector liquidity crisis has become an economic crisis.

Sketch: TBS

Muhammed Aziz Khan is the Chairman of Summit Group.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.