The prop on petrol prices was hurting the national budget. Globally, government support for fossil-fuel subsidies will amount to almost $650bn this year. The cost of these subsidies far outweighs the benefits and burdens the middle classes. Reforming the system can make energy infrastructure more efficient, shore up public finances and allow more targeted spending on public services.
The idea is not a new
one. In 2009, the G20 countries and the Asia-Pacific Economic
Cooperation forum committed themselves to cutting inefficient subsidies
but progress has been limited. But in the context of the decline in oil
prices, which benefits consumers, we have a golden opportunity to
deliver reform.
About 30 countries, including my own, Nigeria,
have already made efforts to phase out fossil-fuel subsidies. In spite
of the difficulties, it is well worth the effort.
In 2012 in
Nigeria we reformed petrol subsidies. Conscious that the public might be
concerned, we ran an information campaign to explain how the savings
would be used to help everyone. Political pressure, however, led to the
policy being introduced earlier than planned and, as a result, the
changescame as a shock to many. This led to protests and the reform had
to be partially rolled back.
Despite this, we were right to act.
Even phasing out half of the subsidies was a substantial achievement.
Some $13bn worth of petrol subsidies, including many fraudulent claims,
had burdened the national budget, and we were able to redirect some of
those funds. Within a year, our programme to reinvest the savings meant
we could finish the renovation of a north-south national railway, as
well as introduce improved maternal and childcare services in 500
primary healthcare centres.
Using lessons learnt from Nigeria and
other countries we can put together a set of best practices to follow.
These include co-ordinated communication, implementation and
redistribution efforts. Reform should also create a broad sense of
political ownership, especially in fiscally decentralised countries.
One of the most common concerns about removing subsidies is that it
will hurt the poor. But in reality the subsidies benefit high-income
populations and industry much more than low-income households.
The International Monetary Fund has estimated that more than 40 per cent
of fuel price subsidies in developing countries accrue to the richest
20 per cent of households, while 7 per cent of the benefits go to the
poorest 20 per cent.
It makes more sense to remove subsidies and
redirect cash into investments that go directly to those who need it
most. That was the aim of Nigeria’s programme and it is being tried
elsewhere. In Germany and Poland, for example, coal subsidy reforms were
supported by cash assistance for workers affected by mine closures.
Governments attempting reform should tell the public well in advance of
fuel price rises, and clearly explain measures that will be taken to
support those affected. Ghana, for example, successfully used radio
broadcasts to publicise an independent poverty and social impact
analysis of subsidies.
Most of the best reform attempts have been
staggered over time, rather than applied at once. Angola, India and
Peru, for example, are first reducing subsidies for petrol, used mainly
by wealthier people, before reducing those for diesel and kerosene,
which are used by lower-income groups.
The benefits extend beyond
the economic. Done correctly, phasing out subsidies will have the added
bonus of lowering greenhouse gas emissions and reducing air pollution.
In the context of the current effort to secure a global agreement of
measures to combat climate change, that is great opportunity.
Governments should seize it.
Credit: Financial Times
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