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Who benefits from fuel price subsidies?

Punam Chuhan-Pole's picture

Over half the countries in Sub-Saharan Africa subsidize fuel to protect consumers from high and volatile prices. But fuel subsidies are neither cheap nor likely to be sustainable (see the full analysis in the new Africa's Pulse). 

Data for 2010-11 show that fuel price subsidies consumed, on average, 1.4 percent of GDP in public resources: The fiscal cost in oil exporters was almost two-and-a-half times that in oil importers. In the face of high (and rising) world fuel prices, a number of countries have raised domestic prices to stem fiscal costs.  

For example, Ghana raised fuel prices by about 30 percent in January 2011. The Nigerian government removed the subsidy on gasoline this January, although a portion of the subsidy was subsequently reinstated.  With oil prices likely to remain elevated, fuel subsidies will continue to weigh on government budgets in Africa.

But who benefits from fuel price subsidies?  

Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich.  Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%. 

Potential distribution of gasoline subsidy to households by income group, % of gasoline subsidy

Source: Africa's Pulse, Vol.5, World Bank

LISTEN:
Shanta Devarajan, World Bank Chief Economist for Africa, talks to the Voice of America about economic growth in Africa and the impact of fuel subsidies (in French)

Comments

Submitted by Anonymous on
Could you explain why the cost of the subsidy is higher in oil exporting countries? Why are they subsidizing oil consumption? If they have oil to export, wouldn't that mean they have enough supply to sell it cheaply domestically?

Good questions. Two possible reasons for the higher cost of subsidies in oil exporting countries are: the greater extent to which oil is being subsidized in these countries; and a subsidy on oil incentivizes people and producers to consume more of the product, and this higher consumption increases the cost of the subsidy. Governments are often reluctant to pass on the full cost of rising fuel prices to their citizenry, because higher fuel prices negatively impact people’s real income and consumption and a country's economic production. True, oil exporters have oil. But the issue is whether the money saved from removing subsidies could be spent better--for example,in improving health, education or infrastructure services.

Submitted by kafula on
I find the analysis interesting. However, the analysis should have first looked at the impact of fuel rises on the cost of production in the private sector. The allocated subsidy can either be used in lowering the cost of fuel, consequently, feeding into lower production costs or the same money used for the subsidy can be channeled to government development projects. The argument should be whether the subsidy is more effective in implementing the government projects as opposed to helping alleviate the high costs of productions in the private sector. A subsidy on fuel can be good or bad depending on the relative effectiveness of the subsidy between the alternative uses.

Thanks for sharing your views. A universal subsidy is inefficient and not a good way to protect the poor from higher oil prices. One way to avoid misallocation of resources by the government is to transfer some of the oil revenue directly to the people. Let citizens decide how to spend these revenues. What do you think?

Submitted by Chimwemwe on
I don't know how much the research takes into account on the effect of the price of fuel and the costs of other goods and products in a country like Malawi. Here when the price of fuel goes up, the price of everything else rises. So the removal of the subsidy on fuel would make life for most Malawians (including the poorest) unbearable. Am not very conversant in matters of finance so forgive my ignorance in some of these matters. Maybe I would understand this argument better if I understand the implications of subsidy on things like taxes. In my understanding though, these subsidies do not only benefit those who purchase more fuel. They benefit everyone else.

Submitted by Erick on
I find this comment very interesting and it would be nice for it to receive further remarks. I believe we could all agree that a universal subsidy is highly inefficient; however, the proposition requires a deeper analysis given its suggested application in developing countries. I saw a similar situation unfolded in Bolivia at the beginning of 2011 (it is important to point out that even a government with socialist tendencies understood that it was the right thing to do). The Bolivian government decided to eliminate the subsidy, and almost immediately there was a sharp increase on the prices of transportation and the basic goods of the family shopping basket (not to mention many others). It was such a catastrophe that after a few days, the government had to retract and reinstall the subsidy. To make matters worse, the prices did not went back to their original levels registered before the well intentioned subsidy elimination. I think the challenge in this case, is how to effectively implement our well reasoned ideas in developing countries. In addition, it would also be helpful to discuss over the proposition of ideas for securing that the redistributed revenues among the citizens are truly compensating them, and that those citizens are in fact using them wisely (especially among the lowest income quintile). Thanks for giving way to the interesting conversation that the post has already generated.

In my country, Venezuela, the price of gas/petrol is less than $ 2 cents per liter, YES CENTS!, less than $ 8 cents per gallon and which signifies, when compared to the prices that could be obtained internationally, that a government, that calls itself XXI Century Socialism, pays about $ 50 dollars in cash, to each car each time it fills up the tank. Is this not a violation of the human right to expect some minimum minimorum economic rationality from its government? http://theoilcurse.blogspot.com/

Submitted by Mapi on
Reuters is reporting that Nigeria's lower house of parliament approved a report on Wednesday, April 25, 2011 recommending senior officials be prosecuted for their part in the corrupt fuel subsidy scheme that lawmakers said cost the country $6.8 billion over three years. The parliamentary investigation covering 2009 to 2011 found that petrol marketers, including state-owned NNPC, were taking subsidy payments for fuel that did not exist or was sold abroad - siphoning billions of dollars meant to ease the pain of high fuel prices into the pockets of corrupt officials and businessmen. You can see the full news report here: http://www.reuters.com/article/2012/04/25/nigeria-subsidy-probe-idUSL6E8FPE9I20120425

Submitted by Anonymous on
what are the economic implications of the fuel price increase on South Africa?

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