The World Bank Working Paper “Fuel Subsidy Reforms: Lessons from the Literature and Assessing the Price Shock for Different Sectors through an Input-Output Table in the Case of Angola” reviews the literature on this issue, discusses alternative policies to fuel subsidies, and provides scenarios that simulate cost and price shocks and fiscal savings for fuel subsidy reforms in Angola.
Oil prices have been highly volatile in recent decades due to geopolitical events, production fluctuations, and economic cycles. Prices quadrupled between 2003 and 2008, only to plummet and then oscillate again, peaking at $114 per barrel in July 2022. Today, prices remain volatile, largely due to ongoing geopolitical turmoil. This volatility has significantly impacted household living standards and production costs. In response, many governments introduced fuel subsidies, which rose from 5.4% of global GDP in 2015 to 7.1% in 2022. However, these subsidies often disproportionately benefit wealthier households while straining public finances, limiting investments in growth-enhancing physical and human capital. They also skew economic incentives, favoring fuel-intensive sectors and leading to a higher allocation of resources to these industries. Moreover, fuel subsidies encourage the over-consumption of fossil fuels, causing environmental damage and reducing incentives to invest in cleaner energy sources. Eliminating these subsidies could significantly reduce global carbon emissions, improve public finances, and enhance social well-being.
Given that fuel is a key input to economic activity, removing subsidies would alter the cost structure of specific sectors, with impacts on employment, competitiveness, and, ultimately, households’ welfare. Thus, a subsidy reform requires very careful planning. In agriculture and fisheries, the increase in production costs could trigger a nutritional crisis. Also, removing subsidies exacerbates poverty and inequality for poor households, and potentially causes social tensions. To mitigate these effects, subsidies should be gradually eliminated and paired with targeted support for specific producers, cash transfers for affected households, and public awareness campaigns about the benefits of subsidy reform.
Angola, a major oil producer, faced declining oil revenues since 2015 due to falling prices and reduced production. In response, the government cut spending on health, education, and social protection, while maintaining fuel subsidies as a key form of social spending. These subsidies, which amounted to 3.7% of GDP in 2023, have resulted in some of the lowest fuel prices globally. In June 2023 and April 2024, for the first time since 2016, the government raised gasoline and diesel prices by 87% and 48%, respectively, reducing subsidies by 40% and 9%. However, the depreciation of the domestic currency in mid-2023 has led to further increases in subsidy costs, refined oil being essentially imported.
We estimate the fiscal savings from a fuel subsidy reform in Angola by considering three scenarios.
First scenario keeps wholesale fuel prices as of June 2024.
Second scenario adjusts these prices to market levels by the end of 2025.
Third scenario is a more gradual scenario adjusting prices by the end of 2026.
In scenarios two and three, we assume that price adjustments occur twice a year, in April and October, starting in October 2024. We also assume the same percentage change in fuel prices in each scenario: in scenario 2, gasoline rises by 40% and diesel by 66% with each adjustment, while in scenario 3, gasoline rises by 23% and diesel by 36% with each adjustment. In the second scenario, the subsidy reform would save 1.3% and 2.2% of GDP in 2025 and 2026, respectively, relative to the first scenario. In the third scenario, fiscal savings would amount to 0.7% and 1.5% of GDP in 2025 and 2026, respectively.
Removing fuel subsidies in Angola will generate enough fiscal savings to compensate for increased production costs. Although the fishing sector receives a small share of subsidies, they account for 57% of its inputs. For road transportation, which receives 17% of subsidies, they represent 42% of its inputs. Our simulations using Angola's 2015 Input-Output table show that the fuel price hikes in June 2023 and April 2024 combined increased overall prices by 1.6%, with fishing and transportation costs rising by 5.9% each. Compensating these sectors would absorb only 29.6% of the fiscal savings. Fully removing fuel subsidies would increase overall prices by 5.2%, with fishing costs rising by 19.5% and transportation costs by 20%. Compensating these sectors would absorb only 30.2% of the fiscal savings. In the fishing sector, direct producer subsidies might be more effective than cash transfers due to limited forward linkages. In contrast, cash transfers to households might better alleviate the impact of higher transportation costs on consumer prices given the sector’s strong forward linkages.
Angola’s subsidy removal highlights the importance of timed, sequenced, and synchronized compensation measures in policy reform. The gasoline price increase in June 2023 led to social unrest, underscoring the need for clear communication. In contrast, the transportation tariff adjustments that accompanied the diesel price increase in April 2024 helped diffuse tensions in the transport sector, although it shifted the burden to society.
While reforms in other countries offer benchmarks, Angola faces specific challenges, such as extending the Kwenda cash-transfer program to remote areas and developing a comprehensive social registry. Fiscal savings from the reform would enable effective compensation, with targeted subsidies for fisheries and cash transfers to mitigate higher transportation costs being the most suitable approaches.
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