What's wrong using tax-payers' money to subsidize fuel?

Subsidies, which have become a permanent fixture in the Ghanaian economy are direct expenses borne by the government with the central aim of lessening the burden of the cost of living on the poor, who makes up about30 per cent of the national population.

Despite the heavy toll on the economy, the Ghanaian government continues to spend millions of dollars every year in making energy cheaper for its citizens by subsidizing the consumption of oil, natural gas, and electricity. The second quarter of 2014 alone saw government spent $85 million in fuel price subsidies.

The heavy toll on the national resource purse, along with mounting subsidy arrears, have reared up debates over whether subsidies are good or bad for Ghana's developing economy. The National Petroleum Authority later issued statement claiming to have scrapped subsidies but sources close to Business Day indicates government is still doing it under-cover.

The World Bank Group thinks the recent fall in oil prices is a golden opportunity for Ghana and other countries to end it, stating that, fuel subsidies are bad for social equity, economic growth, and for the environment. But they do it anyway--a kind of fiscal aberration that has lasted for decades. Some of the countries who declared to have stop subsidy are still doing it under-cover.

What's wrong to subsidize fuel?
The first problem is that not "everyone" benefits equally. In the average developing country, two-thirds of fuel subsidies go to the rich--they have the cars--and only three percent go to the poor--they rely on public transport, where it exists. Something similar situation happens with electricity and natural gas--who owns the larger houses?

For instance, the recent fuel crunch in Ghana was due in large part to the subsidies owed to Bulk Distributing Companies. Yet, over the past years, how much of these subsidies have actually benefited the poor?

“For petrol and diesel (not including kerosene), the share of subsidies that in effect accrues to the poor is a paltry 2.9%. These petroleum products are used as intermediary inputs for a wide range of activities, including transportation, and as such the share of the subsidies that indirectly reach the poor is likely to be marginally higher,” Franklin Cudjoe, the Executive Director of IMANI Ghana, a policy think-tank has said.

With regards to electricity, about 66% of the population has access to electricity. However only eight percent of electricity reaches the poor households as most poor households are not connected to the national grid. The major consumers of electricity are the industries, hence becoming the largest unintended beneficiary of electricity subsidies.

Marcelo Giugale, a Senior Director of World Bank said: “a typical oil-importing nation could easily double its budget for public healthcare if it did away with fuel subsidies.”

He added: “Not that the amount of driving, lighting, or heating done by the rich would change much if they had to pay the full cost of the energy they consume--they are just happy to pay less and pocket the difference.”

This points to the second problem with fuel subsidies: they are not very effective at spurring economic growth. Governments in oil-exporting developing countries lose, on average, the equivalent to three percent of Gross Domestic Product (GDP) in those subsidies.

Research from the World Bank Group suggests that a dollar spent on public infrastructure or on cash transfers to the poor generates more private investment and consumption than a dollar spent subsidizing gasoline or electricity.

“Letting the price of energy reflect its cost would generate large fiscal savings, which could then be used to stimulate the economy--an attractive proposition at a time when other tools, like record-low interest rates, have proven insufficient,” the bank stated in its 2015 oil prices update report.

The report continued: “making fuels artificially cheap is a sure--and shameful--way to accelerate the degradation of our natural environment. Think of climate change and rising sea levels, and think of local traffic and air pollution: they all worsen when prices at the pump are kept artificially low.”

The International Energy Agency, in its 2015 World Energy Outlook Report, estimates that removing subsidies to the consumption of fuel would, by 2020, cut carbon-dioxide emissions by seven percent--roughly the same as the current emissions of the European Union.

Why government not scrapping fuel subsidies fully?
So, if fuel subsidies are that bad, why haven't they been dismantled already? Because raising prices is never popular and can lead to major social unrest--as Nigerians found out in early 2012. But, with sound planning, lots of communication, and a mechanism to compensate the poor, it can be done--as Indonesia, Iran, Malaysia, and Morocco, among others, have shown.

In fact, the time has never been better to do it. The fall in international oil prices--from over $100 per barrel last year to just above $50 now--has made it possible to reach a new social contract on fuel prices.

“Fluctuating oil prices may be the new normal,” the World Bank has stated.

Consider this: if the Ghana government was a year ago selling oil products at half the international value--not an unusual case--ending the subsidy today would imply almost no increase in price for the consumer.

The key, according to Marcelo Giugale, a Senior Director of World Bank, is to do it openly and prepare public opinion for the days when oil prices rise again--something that the World Bank's macroeconomists expect by 2018.

“When that happens, political pressure to go back to subsidization will mount. That is why this reform must be accompanied by programmes to shield the poor from its impact,” he advised.

The good news is that, in most countries, those programmes already exist and expanding them is far less expensive than fuel subsidies. Bottom line: we can build fairer, richer, and greener societies and still save money--a win-win-win opportunity that comes around once in a generation. We should seize it.