Eliminating fuel subsidies: Learning from the Ghanaians

It is now old news that Nigerians had a rude awakening on January 1st 2012 . The first day of a new year is often seen as a fresh start. Most people soberly reflect on the previous year, make resolutions they hope to keep, and are basically excited about the prospects and promises the new year holds.

But as we all know, 2012 started with a big bang. The fuel subsidy was removed and Nigerians woke up to the realization that what they had always perceived as their prerogative, was no longer an exclusive right. Instead of excitement, there was anxiety and uncertainty.

There are lots of reports about what transpired next: how people took to the streets to protest, how riots erupted in some cities, how some innocent Nigerians lost their lives, and so on. But there are just as many stories about how Nigerians, regardless of their economic class, religious or ethnic orientation, came together to protect each other and stand up to injustice and corruption. Nigerians asked questions and demanded answers. Political leaders and policy makers were compelled to explain to ordinary Nigerians, what happens with our revenue and who is responsible for the mismanagement of our resources.

While we are yet to get to the bottom of all this, I think the subsidy removal provided a great opportunity for open discussions about what is not working in our country. It enlightened a lot of people about government processes which prior to January 1st, they were totally unaware of. It has also stimulated substantial interest and reflection, especially within the policy research and analysis community, on how reforms can be introduced without causing undue hardship or unrest.

The African Development Bank has published a report on reforming the energy sector in Africa, using Nigeria and the fuel subsidy elimination as a case study. It also draws lessons from the Ghanaian experience on liberalizing the oil sector and removing associated subsidies.

Below are a few interesting excerpts from the paper, for those who can’t spend time going through the eight page document:

Many African countries are liberalizing their energy sectors, which not only encompass the reduction of fuel subsidies, but also the wider oil and power generating sectors. Fuel subsidies is the most contentious issue to address and this can trigger national strikes and civil strife.

Only a few oil producing Sub-Saharan African countries explicitly provide fuel subsidies:

Angola, Nigeria and Ghana.

Instead of subsidizing retail fuel, other African countries such as Cameroon, Tanzania and Uganda tax retail fuel. Their energy reforms are focused mainly on liberalizing the electricity and power generation sectors, which consumes a lot of fossil fuels. For end-users, this often means an increase in electricity prices as they will be charged market prices and production costs. The rationale behind this kind of reforms is to encourage additional private sector investments in the energy sector, while at the same time providing incentives for efficient use of energy by consumers.

The benefits of fuel subsidies are regressively distributed, with over 80% of total benefits accruing to the richest 40 percent of households (IMF, 2010). Ghana is one of the few countries that successfully reduced fuel subsidizes over the last few years.

The case of Ghana demonstrates that engaging the public is the key to success. In 2004 it was evident that international oil prices would remain high and continuing to provide fuel subsidies would be fiscally unsustainable for Ghana. The first step was to prepare the public for the reduction of fuel subsidies by undertaking a Poverty and Social Impact Assessment (PSIA) study which would reveal that the rich benefited more from subsidies than the poor. The results of this study were widely disseminated and discussed, which created broad based political support for removing fuel subsidies. A year later the government announced plans to increase fuel prices by 50% and this would coincide with an targeted anti-poverty programme. Moreover, it was equally important to demonstrate visible results of removing fuel subsidies to the wider public by eliminating school fees. Other areas of immediate improvements include the expansion of the public transportation network. Although trade union resisted the reduction of fuel subsidies, the public accepted the necessity of these reforms as there was a thorough debate in society and the results were immediately visible evident.

The key messages from the AFDB study are:

1. Nigeria needs to adopt a holistic approach to reform the oil and energy sector, for which removing fuel subsidies is just one element of a broader reform agenda. The agenda should also include introducing measures to mitigate the immediate impact of removing fuel subsidies on households, increase transparency around government processes and the oil sector, improve regulatory frameworks, and promote good governance by establishing the Nigerian Sovereign Wealth Fund and the future approval of the Petroleum Industry Bill.

2. Although some political resistance is inevitable, it is important to build broad based political support by discussing with the general public on the necessity and benefits of reducing fuel subsidies. This should be managed transparently and through dialogue with civil society organization and the wider Nigerian public. Such an inclusive approach is critical in the post “Arab Spring” world that demonstrates the power citizens have and can use to claim their economic rights, if reforms are considered unjust and unnecessary.

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