Rich and poor to benefit from, Fuel subsidies

Article written by former Minister of Finance,
Ngozi Okonjo-Iweala for Financial Times.
The prop on petrol prices was hurting the
national budget. Globally, government
support for fossil-fuel subsidies will amount
to almost $650bn this year. The cost of
these subsidies far outweighs the benefits
and burdens the middle classes. Reforming
the system can make energy infrastructure
more efficient, shore up public finances and
allow more targeted spending on public
services.
The idea is not a new one. In 2009, the G20
countries and the Asia-Pacific Economic
Cooperation forum committed themselves to
cutting inefficient subsidies but progress has been
limited. But in the context of the decline in oil
prices, which benefits consumers, we have a
golden opportunity to deliver reform.
About 30 countries, including my own, Nigeria,
have already made efforts to phase out fossil-fuel
subsidies. In spite of the difficulties, it is well
worth the effort.
In 2012 in Nigeria we reformed petrol subsidies.
Conscious that the public might be concerned, we
ran an information campaign to explain how the
savings would be used to help everyone. Political
pressure, however, led to the policy being
introduced earlier than planned and, as a result,
the changescame as a shock to many. This led to
protests and the reform had to be partially rolled
back.
Despite this, we were right to act. Even phasing
out half of the subsidies was a substantial
achievement. Some $13bn worth of petrol
subsidies, including many fraudulent claims, had
burdened the national budget, and we were able
to redirect some of those funds. Within a year,
our programme to reinvest the savings meant we
could finish the renovation of a north-south
national railway, as well as introduce improved
maternal and childcare services in 500 primary
healthcare centres.
Using lessons learnt from Nigeria and other
countries we can put together a set of best
practices to follow. These include co-ordinated
communication, implementation and redistribution
efforts. Reform should also create a broad sense
of political ownership, especially in fiscally
decentralised countries.
One of the most common concerns about
removing subsidies is that it will hurt the poor.
But in reality the subsidies benefit high-income
populations and industry much more than low-
income households.
The International Monetary Fund has estimated
that more than 40 per cent of fuel price subsidies
in developing countries accrue to the richest 20
per cent of households, while 7 per cent of the
benefits go to the poorest 20 per cent.
It makes more sense to remove subsidies and
redirect cash into investments that go directly to
those who need it most. That was the aim of
Nigeria’s programme and it is being tried
elsewhere. In Germany and Poland, for example,
coal subsidy reforms were supported by cash
assistance for workers affected by mine closures.
Governments attempting reform should tell the
public well in advance of fuel price rises, and
clearly explain measures that will be taken to
support those affected. Ghana, for example,
successfully used radio broadcasts to publicise
an independent poverty and social impact
analysis of subsidies.
Most of the best reform attempts have been
staggered over time, rather than applied at once.
Angola, India and Peru, for example, are first
reducing subsidies for petrol, used mainly by
wealthier people, before reducing those for diesel
and kerosene, which are used by lower-income
groups.
The benefits extend beyond the economic. Done
correctly, phasing out subsidies will have the
added bonus of lowering greenhouse gas
emissions and reducing air pollution. In the
context of the current effort to secure a global
agreement of measures to combat climate
change, that is great opportunity. Governments
should seize it.
Credit: Financial Times