Tuesday, May 07, 2013

Fuel subsidies
By Editor
Mon 06 May 2013, 14:00 CAT

To subside fuel or not: opinion is divided on the merits of fuel subsidies. We have people supporting the government's decision to end fuel subsidies while others want them maintained.

A vital economic argument against fuel subsidies is that they inflict a heavy burden on government budgets, add to wasteful consumption in general. This, in turn, diverts much-needed resources from more pressing needs, such as health, education and infrastructure development.

Subsidies for fuel are problematic because energy is the backbone of any economy. An abrupt end to fuel subsidies, without putting alternative support programmes into place, would crush the poorest. And it only adds to the ranks of the poor.

Fuel subsidies are essentially the government buying fuel at market prices and reselling it to citizens at lower prices. Fuel prices are generally only possible when a country has windfall revenue in either resources or trade surpluses. Countries having scant resources and trade imbalances, however, run persistent budget deficits, reflected in consistently weakening currencies. They do this, of course, for political reasons.

Faced with a rising fuel import bill, numerous African governments are reviewing their energy subsidy schemes.

But deconstructing fuel subsidies is a cheerless job for any government. Private sector actors and trade unions complain of rising production costs and loss of export competitiveness, while consumers object to rising living costs. Populations are directly affected through higher prices for fuels consumed for private transport. The direct impact hits the poor through higher prices for all goods and services for which higher input costs are passed on.

Therefore, removing fuel subsidies is hardly a popular move, whatever the long-term economic merits might be. And it therefore requires a lot of political courage. It is not something that can be undertaken by a government that is politically weak. This is something that can only be undertaken by a government that is very popular. This is so because the effect of subsidy removal on all segments of society means few have the stomach to tackle this head-on.

But fuel subsidies are often regressive overall, with the greatest benefit accruing to the richest segment of the population. Fuel subsidies are a costly approach to protecting the poor due to substantial benefit leakage to higher income groups. In absolute terms, the top income quintile captures more in subsidies than the bottom.
Fuel subsidy reform doesn't unavoidably entail strikes and economic woes. Several Africa countries have drawn down subsidy schemes while implementing compensation mechanisms to protect the most vulnerable. A thorough debate can lead to a smoother reform process overall.

The potential benefits that the government is putting forward in support of its removal of fuel subsidies are worth pursuing.
Unlike many other African countries that are dependent on burning fuel to get electricity, we rely more on hydropower for our energy needs. So the removal of fuel subsidies does not greatly affect the supply of electricity to the population.

In fact, as the government argues, this will help increase investment in electricity generation and enable many households to have electricity in their homes. We have great opportunities for hydropower, and these should be exploited to the full. But this won't happen without sacrifice. We need to sacrifice now to reap the benefits tomorrow. If we work hard, we can soon do away with all those diesel-propelled hammer mills that we find in our rural areas.
The money that the government is going to save from the fuel subsidies should be channeled to power generation projects, and improvement of health and education facilities.

For close to five decades now, our fuel subsidies have failed to increase agricultural production and manufacturing output. Most of the fuel that the government subsidises goes to leisure, to gallivanting around, moving from one pub to another. It's a very small segment of that fuel subsidy that is really spent on production. We cannot continue with this type of expenditure if we want to see economic development in our country.

The money we are wasting on fuel subsidies can be better spent.
It is the same argument we hold on the subsidy of maize. We have many other foodstuffs like rice, cassava, sweet potatoes, soy beans, groundnuts, beans, which don't need much subsidy to increase production for local consumption and export. Maize has not always been our staple food. It is something that was foisted upon us just a few decades ago. It is not an economical crop to rely on. It doesn't make sense for the government to every year pump in more than US$300 million to subsidise maize production and maize consumption.

But those who are complaining about the removal of fuel subsidies will have a point if the money saved is spent on other useless things. We have seen fuel levy money being spent on useless things, on increasing bureaucratic expenditure.

But if every kwacha or ngwee saved in fuel subsidies is spent wisely on infrastructure development, the building of schools and hospitals, the Zambian people will have nothing to complain about. This will be money well saved and spent.

The removal of fuel subsidies by this government is, without doubt, a bold and courageous decision. It is easy to appease people with unsustainable subsidies and get their political support. But that does not necessarily mean all is well and the future will be bright. It is simply an irresponsible and dishonest act of passing the problem to the next generation of leaders.

It is also good that this government has not only taken a decision that appears unpopular, but it is also courageously and eloquently explaining its decision, its action. And the explanation is making sense. What remains to be seen is how this government utilises the money saved through the removal of fuel subsidies.

The argument that the removal of fuel subsidies will hamper competitiveness is a contradiction. The same people who have been arguing for the removal of maize subsidies are today defending the subsidy on fuel. Why?

Moreover, in reality, we have never been in a position to use energy as a comparative advantage.



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