A case for curbing fuel subsidies in West Africa
Economists say that subsidies while aimed at promoting economic and social policies, causes distortions in the economy especially when it is on consumption. In West Africa, subsidies on fossil fuels are introduced by governments on the basis of rapid population growth, poverty levels and energy access for everyone. Where energy is available, it is often not affordable.
The cost of subsidies, the inherent waste and abuse in the system is making countries like Nigeria and Ghana rethink the policy. Sub-Saharan Africa has countries where entitlement programmes have long been justified by unequal access to energy and low standard of living.
Ghana began the process of removing subsidies in phases. It subsidizes $150million worth of fuel under a partially regulated downstream sector run by the National Petroleum Authority. In 2014, the government announced that it is allowing oil marketers fix pump prices starting from July of that year.
Following the announcement, the government reduced subsidies to $12.5 million in 2015 as part of a three year International Monetary Fund (IMF) aid programme aimed at restoring fiscal stability.
“The objective is to fully decontrol fuel pricing. It also means that the perennial burden of subsidy arrears on the government’s budget will come to an end,” said Emmanuel Buah, petroleum minister.
Ghana exports gold, cocoa and oil and until 2013 its economy was one of the fastest growing in Africa, but it has slowed sharply due to a fall in commodity prices and a fiscal crisis evident in a high debt-to-GDP ratio and a weakening currency.
The country also faces a severe electricity shortage with frequent power cuts that have hurt the economy and angered the citizens.
Nigeria also recently announced increase in the pump price of fuel from $.43 to $.73 in a move analysts say has set the West African country on the path of full deregulation of the petroleum downstream sector.
The country’s subsidy programme has been reduced to a conduit for corruption as it losses millions of dollars monthly through diversion of millions of litres of subsidized gasoline to Benin Republic through Seme border.
In 2012, the IMF said that 80 percent of petroleum products consumed in Benin Republic are smuggled in from Nigeria. The racket occurs both on artisanal and industrial scale. Modes of transportation include loaded fuel tankers, motorbikes carrying plastic jerry cans and cars in which backs seats have been modified to accommodate fuel tanks. Smugglers also use small boats in the coastal lagoons or sailing offshore, often towing groups of jerry cans tied together, or even larger barges.
Between 2006 and 2013, Nigeria reportedly spent over $5 billion on petrol subsidies. Much of these funds were fraudulent claims for petrol that did not get into the country.
“If you look at the reasons for fuel subsidy and the economic effects, the subsidy is very regressive because it is a cost on the whole economy. It takes resources away especially from the poor and rewards those who consume more fuel,” said Razia Khan, chief economist for Africa with Standard Chartered Bank.
However the current change in the retail price of petrol is a model of deregulation which offers a price cap that will allow investors make a profit. It comes with challenges but in the long run, experts say it is the stimulus needed to drive the economy and make available sufficient funds for developmental efforts.
Mauritius however, follows a different pattern in its subsidy arrangement. The State Trading Corporation of Mauritius regulates fuel prices to ensure their stability through a Price Stabilization Account. The prices are calculated using a formula that includes information on market prices, costs and profit margins.
Adjustments to fuel purchase prices are made automatically when purchase prices differ from the calculated prices to a certain fixed extent.
A tax on fossil fuels was introduced in 2008 and generates revenues used to subsidize solar water heaters and florescent lamps. Also, the government revised the Petroleum Product Excise Duty, which was increased by 10 per cent in the 2011 budget to Rs 10.8 (US$ 0.36) per liter for gasoline and Rs 3.3 (US$ 0.11) per litre for diesel. The excise duty was further increased to 15 cents per litre on all petroleum products, and per kilo of coal and LPG. The revenues generated are added to a fund to help finance green economy projects.
However, many countries are moving away from fuel consumption subsides because the practice is regressive in their effect. According to IMF estimates; 65 percent of total fuel subsidies in Africa benefit the richest 40 percent of households. Only 8 percent of the $410 billion in subsidies went to the poorest 20 percent of the population according to International Energy Agency – IEA 2010 estimates. This shows that inequitable distribution of subsidy benefits and inefficiency are embedded in subsidy programs, especially consumption subsidies.
Fuel subsidies encourage rent-seeking behaviours. In comparison with Nigeria, fuel prices are over 200 percent in other West African countries and this provides a strong incentive for marketers to smuggle petroleum products across borders. The wide gap between international prices and subsidized prices translates to larger rents from illegal oil marketing.
Consumption subsidies in an oil exporting country like Nigeria discourage private sector investment in refinery infrastructure because it is relatively cheaper to import finished oil products than to refine domestically, especially when the cost of refining is higher than landed import tariffs. Nigeria’s four refineries lie moribund because there is no incentive to fix them when the cost of fuel imports is cheaper than local refining.
“Common sense also dictates that the lower you make the petrol price the more of it we consume, especially the rich people with many cars and boats,” argues Atedo Peterside, Chairman of Stanbic IBTC.
More consumption of petroleum products encouraged by fuel subsidies could increase environmental problems by increasing petroleum consumption and associated greenhouse gas emissions. The IEA estimates that reducing subsidies by one-half in non-OECD countries could reduce greenhouse gas emissions for up to 12 percent by 2050.
West African countries are better served with a liberalized downstream sector that encourages investments in the sector. Rather than subsidies, improved governance, eschewing corruption and strengthening institutions, experts say provide much better options for assisting the under privileged.
ISAAC ANYAOGU