Fuel subsidy: Is it an albatross on neck of governments, Monday, Feb, 18, 2013

In spite of the good intentions behind fuel subsidies in the country, the practice has gradually become an albatross on the neck of governments mainly because of the political connotation  that comes with it.

Over the years, parties in opposition have made political capital out of fuel price increases only to be hit by the realities when they come to power.

 

The historical trend indicates that since 1992, apart from 2009, there are always fuel price increase within the first three months after a new government takes office.

The statistics

In January 1993, the prices went up from ¢222 per litre to ¢355  (both in the old currency). Similarly in February 1997, consumers had to pay approximately ¢799 for  up from the ¢666 they paid in September 1996.

 

Petrol politics

In 2000, the New Patriotic Party (NPP) campaigned vigorously against what it described as unbearable price of petrol which at the time was sold at GH¢ 0.65.

 

The then candidate Kufuor symbolically raised a plastic container at one of the party’s rallies to make a case against the price.

 

However, barely six months after the NPP took office; it made a U-turn rallying Ghanaians to pay  realistic prices and subsequently, petrol was increased from GHc0.65 to GHc1.05.

 

In the heat of the 2008 elections, the NPP was caught between a National Democratic Congress (NDC) campaign promises to “reduce fuel drastically” and had to bend to reduce the prices at the risk of its implications for the economy.

 

The NDC was also caught in the NPP web of 2001 when just five months after taking office in 2009, a party which promised drastic reduction in fuel prices at the time (December, 2008 GHc3.80) was forced by market forces to increase it to GH¢5.00.

 

During the NPP administration, three failed attempts were made to remove fuel subsidies in 2001, 2003 and 2006.

 

In 2012, the NDC administration,  faced with the prospect of strike fuelled by the Trades Union Congress (TUC) and other civil society organisations, beat a hasty retreat on the removal of subsidies.

 

Successive governments over the years have always made cases for price hikes using the cost of subsidies as one of the reasons, but have woefully failed to tell the consumer how much they make as profits from the sale of the petroleum products.

 

Majority of Ghanaians rely on petrol, diesel and kerosene for both their domestic and business activities. Increases in fuel cost as a result of removing the subsidy means increase in cost of doing businesses (from petty traders to manufacturers and business service providers), which will eventually be passed on to the end consumer.

 

How much subsidy?

While from 2009 to 2012 the cost of subsidies was GH¢1.5 billion, NPA projections indicate that it will cost the public purse GH¢2.4 billion this year to subsidise fuel.

 

That is an average of GH¢200 million monthly and approximately GH¢6.7 million daily. Given that there is an estimated 1.2 million vehicles, including commercial ones, the government is spending approximately GH¢5.60 daily to subsidise fuel for each vehicle.

 

Realistically, without the subsidies, consumers will be paying approximately GH¢10.00 for premium instead of the current approximately GHc8.00. According to NPA figures, premium is currently being subsidised at 19 per cent, kerosene at 123 per cent, diesel at 20 per cent, LPG at 66 per cent and premix at 236 per cent.

 

According to NPA figures, subsidies led to increase of over 1,667 per cent under recoveries in year 2012 compared to 2010.

 

The rot

Many reasons have accounted for the high price of fuel in Ghana and among them is the inefficient operation of the Tema Oil Refinery (TOR). Tonnes of accumulated debt have to be paid so government had to impose a TOR debt recovery debt.

 

A queue at a fuel station days before the price hikes

Additionally the smugglers also have their way. Records indicate that the Upper East Region for instance is the third highest consumer of petroleum products in the country after Greater Accra and Eastern Region.

 

For proponents of fuel subsidy removal, the subsidy burdens government with unnecessary financial commitments while the intervention benefits unintended income groups, encourage wastefulness and corruption and divert scarce public resources away from investment in critical areas.

 

No case for subsidy removal

Allegations that the kerosene meant for the rural areas ends up in the hands of  corrupt fuel syndicates who use it to adulterate other gasoline for sale also abound.

 

Transport cost according to Ghana Statistical Service inflation data is the second largest contributor to inflation in Ghana. The first is food.

 

A reason for which ISODEC, the Alliance for Accountable Governance (AFAG), the Trades Union Congress and the Committee for Joint Action (CJA) are lacing their boots for a showdown with the government should it remove the subsidies.

 

A case for subsidy removal

But Mr Alex Mould, the Chief Executive Officer of the NPA, said the current situation was to remove the subsidies by the end of the year.

 

According to him,  the payment of subsidies on all petroleum products at the current level was not sustainable and should be abolished to save the sector from crisis.

 

Mr  Mould, therefore, called for an upward adjustment in the prices of petroleum products — petrol, diesel and LPG — to totally remove the subsidies on them.

 

Justifying  the removal of the subsidies, he said the recent 90-day hold-up in the payment of subsidies had a consequential delay in letters of credit payments, resulting in the delay for scheduled delivery of petroleum products onto the Ghanaian market.

 

Policy interventions

Largely, government decision to remove subsidies is influenced by many reasons including pressure from the Bretton Woods institutions – the International Monetary Fund (IMF) and the World Bank. Ghana’s mitigation measures for oil subsidy removals has in the past taken different forms.

 

In 2012, Christina Daseking, the Head of the International Monetary Fund (IMF) Mission in Ghana, urged West and Central Africa countries  to cut fuel subsidies because they were not effective in directly aiding the poor and they promoted corruption and smuggling. The government’s attempt to implement the advice was shot down by labour agitations.

 

The government in 2010 entered into a hedging contract to cover the period from October 2010 to March 2011, with the cost pegged at $90 per barrel compared to the current price of $95 per barrel.

In that year, the hedging covered only  50 per cent of the domestic consumption.

 

Fuel hedging is a contractual tool some large fuel consuming companies and countries use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract allows a large fuel consuming company to establish a fixed or capped cost, via a commodity swap or option.

 

 Large fuel consuming companies enter into hedging contracts to mitigate their exposure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes.

 

For the NPP, at the time it was pursuing the policy of subsidy removal, the government provided Metro Mass Transit, which charged moderate prices lower than the ordinary public transport. Primary school pupils also boarded such buses free of charge.

 

While the Bank of Ghana and the Ministry of Finance and Economic Planning are in support of the removal of the subsidies, critics of the policy believe the poor and the vulnerable would be the hardest hit.

 

The Bank of Ghana (BoG) had stated that it was crucial for the government to remove fuel subsidies in order to sustain the economic gains attained so far.

 

The acting Governor of the BoG, Dr Henry Kofi Wampah, has  argued that the current high subsidies on fuel were unsustainable and risky to the economy, warning that the pressure related to fuel subsidies, utilities and wage/salary settlements could offset the gains made in macroeconomic stability.

 

However, according to ISODEC, the withdrawal of fuel subsidies without any efficient mitigation measures would lead to higher fuel prices and could have undesirable economy-wide effects.

 

“It will mean higher transport cost for most workers, higher food prices, and higher production cost for the various sectors of the economy,” Dennis Nchor, a Policy Analyst at the ISODEC, said.

 

Increasing the price of largely used commodities is always unpopular and often politically sensitive.

People used to paying little for the fuel they use are likely to consider a sharp rise in its price unacceptable. Political crises have been triggered in the recent past by increases in the prices of energy.

 

The question now is: why does governments struggle to remove such policies? The answer is that the suffering from the removal is spread across all income groups. Everybody is better off from the removal of subsidies but at the same time everybody is worse off.

 

 This suffering is felt most by the poorest, who needs a safety net to survive the hardship that will be triggered by subsidies removal.