ISODEC DENOUNCES THREAT OF FUEL SUBSIDY
The Integrated Social Development Centre (ISODEC) has noted with grave concern attempts by the International Monetary Fund (IMF) to foist on the Government of Ghana a decision to remove subsidies on petroleum products and the seeming willingness of the government to embrace such policy. The IMF advice to the government is premised on the perception that fuel subsidies benefit the rich more than the poor, and therefore the need to re-allocate such subsidies to areas that will most benefit the poor.
The current IMF advice has revived this old topic of the cost and benefits of fuel subsidies, and we will hasten to point out that while the debate raged and gained much prominence in the 1990s, none of the proponents have yet provided convincing empirical evidence to support the view that fuel subsidies benefits the rich more than the poor.
We recall that in the 1990s, as part of the preparation towards deregulation, under which fuel subsidies were to be removed, the World Bank sponsored a Poverty and Social Impact Assessment (PSIA) study of the policy. However, for unexplained reasons the report was never made public for the purpose of open discussions on its findings. Our attempts to obtain a copy of the report were unsuccessful. It is only fair, we believe, and in the interest of our democracy, that Ghanaians were told what recommendations were made in that report, and be allowed to debate the adequacy or otherwise, of the recommended measures to counter the harsh effects of fuel price hikes within a deregulated environment.
Subsidy is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. It is usually given to remove some type of burden and is often considered to be in the interest of the public. It is also a way of protecting domestic industries, especially the strategic ones, and of cushioning the poor from the vagaries of the market. It is used all over the world, and there is certainly nothing wrong with it.
In the Ghanaian situation, we find that, subsidy on fuel offers us the opportunity to support various critical sectors of the economy, and in that process promote the well being of the citizenry. It offers support to agriculture, industry, water and electricity sectors. Prices are what they are for the goods and services offered by these sectors, partly because of petroleum price subsidy. Withdrawal of subsidy will therefore lead to higher fuel prices and would have undesirable economy-wide effects. It will mean higher transport cost for most workers, higher food prices, higher production cost for the manufacturing sector where boilers are used and where as a result of unreliable supply of electricity, generators tend to be used a great deal.
It could also result in higher cost of utilities such as water and electricity as fuel constitute a substantial component of their production cost.
The concern of the IMF and perhaps of the government, we believe, is that other unintended beneficiaries are reaping the benefits of the subsidy on petroleum pricing. Private vehicles are mostly the ones cited here, though we note that government machinery itself is a large consumer of fuel.
While we agree that petroleum exacts a huge proportion of the government’s foreign exchange earning we think it is important and fair to know how petroleum consumption is distributed among private transport, public transport, the industrial sector, the mining sector, the government sector and the power generation sector. We can only know who is benefiting most from the subsidies when we know what the consumption pattern is. Those who are categorical that the current situation generates inequitable outcomes, we insist, have the responsibility to prove that, this is the case.
Indeed given the fleet of government vehicles, and with the increased number of government ministers, deputies, and other assistants such as presidential staffers, members of government’s communication team etc we can reasonably infer that government is a major consumer of fuel in this country. If so, then the withdrawal of fuel subsidies will have a knock on effect on government budget and domestic debt, and we need to know what these effects are, and why the proponents of deregulation think that it will not balloon domestic debt and suck out future resources for poverty reduction.
One of the conclusions of a modeling project - “The Distributive Effects of Economic Policy” (DEEP), undertaken by ISODEC, is that the manufacturing sector is constrained by demand - not capacity or supply. On the basis of this conclusion, we need to know the potential impact of higher fuel prices on the cost structure of fledgling firms. Our guess is that unit costs will go up, exerting further competitive pressures on manufacturing. We have reason to believe that, Without a countervailing measure - e.g. tariff increases in non-food consumer imports, it is almost certain that the manufacturing sector will suffer even more.
What we are saying in effect, is that, without the government and its donors providing evidential justification the entire deregulation policy and the rush to implement it at this moment, has no credibility and is not entirely justifiable. It may simply seem a measure to fulfill a prior IMF commitment. If government goes ahead regardless of this boding, it will, we believe, pay a high political cost for it.
DR. STEVE MANTEAW
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