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| Kofi Buah, Energy Minister |
Crude oil is an internationally traded commodity with prices
determined by external forces of demand and supply. Governments of many
developing countries attempt to cushion the effects of crude oil price
fluctuations on their citizens particularly the poor by instituting social
intervention measures common among which is the subsidisation of refined
products.
A petroleum or fuel price subsidy is usually the variance
between the reference price and the actual (selling) price of the product.
Depending on the petroleum import/export position of the country, the reference
price would usually be the world market price plus the transport cost to border
(import price) or world price minus transport cost to border (export price) or
the marginal cost of domestic production.
The actual or selling price refers to the ex-pump prices at
which various products are sold to final consumers. The total amount of
subsidies paid by government is estimated by a summation of the product of unit
subsidy and total units consumed per product for all subsidised products. This
essay seeks to evaluate the feasibility of continued subsidisation of fuel
prices by the government of Ghana. Should fuel subsidies be removed?
Advocates of fuel subsidies cite several reasons in favour
of the continuous application of subsidies predominantly in less developed
economies. Key among these is the objective of curtailing the adverse
consequences of fuel price hikes on poor households and promotion of social
equity.
Research has revealed that although a significantly lower
percentage of subsidies benefit the poor, withdrawal of subsidies in Ghana has
witnessed a decline in real income for the poorest 20% of consumers by as much
as 9.1%, the highest among five countries studied (Coady et al. 2006). It has
also been argued that since evidence shows fuel price increases are followed by
rising prices of most products and services, subsidies could be used to reduce
inflationary pressures.
Fuel subsidy reforms have also been observed to encourage
poor households to switch to fuel wood thereby depleting forests and other
natural resources. Although not usually explicitly stated in the discourse on
fuel subsidies, the avoidance of labour agitations and political unpopularity
often underline the reluctance of governments to remove fuel subsidies. Many
more reasons than outlined in support of subsidies make it more expedient for
government to withdraw subsidies. The effectiveness of other social intervention
policies relative to fuel subsidies, achieving fuel consumption efficiency,
reducing government spending, mitigating the impact of climate change are some
arguments in support of subsidy reforms.
A number of studies have proven that other mechanisms of
achieving social equity are more effective (Coady et al. 2006; Bacon and Kojima
2006; Beaton and Lontoh 2010; Sumedh 2011). Alternatives that have been
identified include cash transfers, coupons, smart cards, vouchers, removal or
reduction of fees and charges on social services such as health, education and
transport. Beaton and Lontoh (2010) for example observed significant successes
with the implementation of cash transfer scheme in Indonesia in 2005.
In Ghana, the removal of subsidies has a potential to drive
transfers aimed at improving the Community Health Improvement Services (CHIPS)
and other healthcare services for the poor, „Capitation Grants and elimination
of fees for government basic and secondary schools and mass transport systems. Such
programmes have been proven to cover significantly larger proportions of the
poor population in developing countries in comparison with fuel subsidies.
Evidence from five countries including Ghana has suggested that between 75% and
85% of the total benefits from fuel subsidies accrue to the richest 60% of the
population.
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| Ghanaians queuing to buy fuel |
A separate simulation conducted for Ghana indicated that 65%
of transfers would benefit the poorest 40% of households compared to a
corresponding 40% for kerosene subsidies (IMF 2006; Coady et al. 2006). For
such alternative programs to achieve significant success, however, they need to
be underpinned by effective planning, organization and monitoring mechanisms
and prevent leakage of benefits to non-targeted groups.
Removal of fuel subsidies have also been regarded as a means
of attaining consumption efficiency. In cases where tax on products such as
gasoline and diesel have been used to cross-subsidise other products like LPG
and Kerosene, it has often resulted in inefficient substitution of kerosene to
adulterate diesel and gasoline. Empirical studies have also revealed that
households become less efficient in using subsidised petroleum products (Coady
et al. 2006).
Smuggling of subsidised products to neighbouring countries
where prices are relatively higher has tended to defeat the objectives of
subsidies. Under extreme circumstances, subsidies have led to acute shortage of
petroleum products as a result of the inability of government to reimburse Bulk
Distribution Companies (BDCs) as recently witnessed in Ghana in June 2014. Such
inefficiencies and buying of subsidised products for unintended purposes can be
avoided through the elimination of subsidies. High subsidies divert government
spending away from more productive and potentially more beneficial sectors.
This has consistently resulted in substantial budget deficits which could have
been financed by relatively effective petroleum taxes as demand for petroleum
products is inelastic. Subsidies have imposed a major drain on Ghana’s economy
as Tema Oil Refinery (TOR) debt reached 7% of GDP in 2002 whiles throughout
2004, 2.2 % of the country’s GDP was spent subsidising fuel in the run-up to
the general elections (Laan et al. 2010).
Conclusions from the discussions: It is evident that fuel
subsidies exert a huge burden on public expenditure but a greater chunk of the
benefits accrue to high income groups, a situation which defeats the essence of
subsidisation. Removal of petroleum subsidies would free the needed funds for
social equity programmes in health, education and transport albeit proper
planning, implementation and monitoring are essential prerequisites. These
programmes not only capture large proportions of the poor at lesser costs but
also address the inefficiencies associated with subsidisation and
cross-subsidisation. An independent price-setting regime should replace fuel
subsidies but as Laan et al. (2010) observed, this “can only be as robust as
the political will behind it”.
Author: Gyeyir M. Denis
Email: gdenismwin@hotmail.com
BA Economics/Entrepreneurship, MA Oil/Gas Management
