Oil prices have been on the rise since 2004.
Subsidizing oil products has been unsustainable in countries like Thailand, Egypt, and Indonesia who do not produce Crude oil.
Oil importers had all concluded that large fuel subsidies were unsustainable due to the constant increase in oil prices.
Some major oil exporters that imported refined products also decided to stop subsidies because years of subsidies had led to undercapitalization of their refining sector.
Ghana recently stopped its subsidy for fuel due the effect on its economy. Below is a summary of the effects (both negative and positive) of having fuel subsidy and the effect of its removal.
Various attempts to implement projects that would serve as immediate palliatives to the people in the past have mostly been failures (SAP, PTDF, etc).
References to some attempts by governments to soften the impact of subsidy removal can be found in this Note by Robert Bacon and Masami Kojima
FUEL SUBSIDY – HOW IT AFFECTS US
THE RICH – buy more subsidized fuel for their CARS and GENERATORS at low prices. Enjoy price stability regardless of the economic situation and global prices.
THE POOR – buy subsidized fuel for cooking (kerosene) at lower prices. Buy subsidized fuel (petrol) for GENERATORS at lower prices regardless of the economic situation and global prices.
THE MARKETERS – Enjoy profit coming from rapid sale of imported subsidized fuel at fixed prices without competition.
THE GOVERNMENT – Enjoys overwhelming support for its ability to keep prices and supply of oil products stable despite changing global economic conditions.
THE FOREIGN INVESTORS -Build and manages refineries with profit (assuming government pays them subsidies for their refined fuel)
THE PRIVATE SECTOR – buy fuel for GENERATORS and CARS at low prices.
THE RICH – Spend more money providing basic infrastructure that should have otherwise been provided by the government.
THE POOR – Has to bear the economic downturn arising from less money being available to the government to provide basic infrastructure and subsidies to other sectors.
THE MARKETERS – Make less commission on sales since fuel prices will be fixed (Assuming government pays subsidy only to refiners). Engage in corrupt practices in order to make more profit from subsidized fuel.
THE GOVERNMENT (PUBLIC SECTOR) – Truncates funds for other development activities into sustaining the fuel subsidy. Forced to cut costs in other sectors in order to sustain fuel subsidy when oil prices increase. Borrow money from external entities to stabilize the economy thereby increasing foreign debt. Increase in corruption in other sectors due to claims of insufficient funds for their activities. Failure to develop its own local refineries and other sectors. Be at the mercy of foreign investors at all times
THE FOREIGN INVESTORS – Unfavourable business conditions may arise if the government’s policy on subsidies and deregulation changes, hence most will rather mitigate such risks by not entering the country.
THE PRIVATE SECTOR – High cost of doing business due to failure of government to provide basic services like power supply and good road networks for transportation needed for business activities.
FUEL SUBSIDY – ITS REMOVAL
The majority of the people affected by fuel subsidy rely on fuel for two major purposes
- 1. Transportation
- 2. Power supply for domestic use (home lighting and running small businesses)
In order for the removal of subsidies to have a positive impact on the economy, the government needs to do one of the following.
- Conduct a Poverty and Social Impact Assessment with the objective being to find families that live below a certain poverty line and redistribute funds to them to enable them afford the high costs of fuel.
- Provide affordable services for Public Transportation, including good road networks, and Power supply that will be available to everyone.
Those who cannot afford the high price of fuel for their transportation and domestic uses would have an option of road or rail transport as well as affordable electricity at home.
The private sector would also experience faster growth and expansion as ease of doing business would have improved.
By providing the basic infrastructure (power supply and good transport networks), the Government would have sidestepped having to deal with creating tedious alternatives to internal subsidies for different products (e.g. an eighty percent subsidy for kerosene and thirty percent for petrol) which leads to adulteration and smuggling.
In addition the government will be seen as sensitive to the plight of the people and still enjoy the support that got it elected in the first place.
This would also curb corruption in the areas of distribution of the product as there would be no need for subsidies and the roundtrip problem anymore.