Date: June 1, 2012, 1:25 pm


FUEL SUBSIDY WITHDRAWAL WILL HAVE UNDESIRABLE EFFECTS -ISODEC


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.

A delegation of the IMF, which is in the country to carry out its annual review of Ghana's economy, asked the government on Tuesday to take a second look at the pricing of petroleum products, suggesting the removal of subsidies on the products.
But ISODEC argues that the withdrawal of subsidy will lead to higher fuel prices and can have undesirable effects for the economy. "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," ISODEC contends in a statement to the press issued in Accra on Thursday.  It concluded that "If government goes ahead regardless of this boding, it will, we believe, pay a high political cost for it."
A subsidy is a benefit given to groups or individuals usually in the form of a cash payment or tax reduction. It has also been described as a negative tax. A subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.

It is estimated that government currently spends about 45 million Ghana cedis to subsidise fuel prices every month. According to the head of the IMF delegation, Christiana Daseking, the levels are unsustainable and have serious implications for the economy, adding that the affluent in society benefits from the subsidies.
In ISODEC's view, however, subsidy is a way of protecting domestic industries, especially the strategic ones, and a way 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."
The last upward adjustment of petroleum price in Ghana came soon after Christmas, invoking strong criticisms of President J.E.A. Mills' government but perhaps not as much criticism as his counterpart in Nigeria. It was the latest round of badmouthing of the Ghanaian President by his opponents for failing to adhere to a December 2008 electioneering campaign promise of reducing petroleum prices "drastically." It is expected that the price of petroleum will again be a propaganda tool for political parties as Ghana heads for elections in December.

Petrol prices were slashed to GHC3.15 per gallon or GHC0.70 ($0.58) per litre in December 2008. Figures from the Organisation of the Petroleum Exporting Countries (OPEC) show that global crude oil prices had declined from around $100 to about $40 per barrel even though the OPEC Basket Price (a weighted average of prices for petroleum blends produced by OPEC countries) for 2008 stood at $94.45.
The OPEC average subsequently declined to $61.06 in mid-2009, around the same time that petrol prices were raised to GHC1.52 ($1.02) a litre (or GHC6.84 per gallon) by the state-controlled National Petroleum Authority (NPA).  Prices have since risen and petrol is currently selling at GHC1.70 ($0.85) per litre (or GHC7.65 per gallon), according to the NPA. Meanwhile, the OPEC Basket Price pegs crude at $105 per barrel but general crude prices have fluctuated, remaining above the $100 mark in recent months with crude price currently pegged at 107.35 per barrel.

In Nigeria, the Goodluck Jonathan government faced strong public opposition over the removal of subsidies in January following counsel from the IMF to do so. On January 1, 2012, the government raised prices from 65 naira per litre to 141 naira but a week of street protests and nationwide strike called by that country's trade unions forced President Jonathan to re-fix the price of petrol at 97 naira (or $0.60) a litre.
For Ghana, the IMF's worry is that the price of oil imports has witnessed a steady rise but the domestic price has, however, not been adjusted.

Ms Daseking calculates that the failure to raise prices is now creating cost of about GHC60 million (about $30 million) every month "which is very expensive and risks crowding out other important spending."
However, ISODEC argues that 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 promotes the well being of the citizenry."

The Centre gives the indication that it remains apprehensive about recommendations from the Fund for as long as it fails to provide empirically compelling data to prove that subsidies weigh more in favour of the affluent than 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 empirical evidence to support the view that fuel subsidies benefits the rich more than the poor," ISODEC observed.

It recalled that in the 1990s, as part of the preparation towards deregulation under which subsidies were to be removed from the fuel pricing formula, 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."
Apart from that, one of the conclusions of a modelling 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 not entirely justifiable. It may simply seem a measure to fulfil a prior IMF commitment," ISODEC submitted.
Even though the Centre acknowledges the concern of the IMF as well as the government that other unintended beneficiaries are reaping the benefits of the subsidy on petroleum pricing, especially private vehicles, it notes 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."
It further argued that based on 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., one can reasonably infer that government is a major consumer of fuel in Ghana.

"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," it said.

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