Subsidising Energy Prices In Ghana, Who Benefits?

“The question is “do the subsidies really benefit the target groups over the years?” The answer is big NO. The benefits end up going mostly to the richest citizens to the detriment of more productive ventures such as health, agriculture, education, infrastructure and more energy generation initiatives. I described them as wasteful venture that benefit only a handful of Ghanaians.”

Many were those who welcomed Ghana’s discovery of oil in 2007 with funfair and a sense of optimism. They contended that the perennial hardships as a result of increases of fuel prices would be a thing of the past. But some of us with energy background and understanding of the industry cautioned against that optimism since the Nigerian example was there to guide us.

Global petroleum prices are dictated by certain macro-factors for which various governments have no control over. The notable factors include growth of global oil demand, Increase in speculative transactions and the rise of risk premiums, decline in oil production capacities (peak oil), fears of supply disruptions and cost of oil production. However, more specifically in Ghana, the greatest impediments to the stability of the petroleum prices are the depreciation of the cedi and high inflation rate. The ripple effects of the increases in the fuel prices mostly compel governments to subsidise them.

When oil prices are increased, it triggers upward adjustments of all items in the market, including tomatoes and sachet water. It affects transport fares, prices of basic commodities and cost of production. In fact, every item in the market sees upward price adjustments, hence, the concept of subsidies introduced by various governments to cushion the underprivileged in the society.

The main purpose of the subsidies is to avoid inflation and cushion poor citizens from the negative effects of price increases. This implies that the subsidies afford the consumers an opportunity to buy fuel below its global market prices. It is, therefore, pro-poor policy to help keep poverty levels stable. Developing countries, including Ghana, introduce the subsidies to keep the prices of fossil fuels and utilities artificially low. Consequently, the prices of the basic commodities are kept very low for the very poor.

The areas of the Ghanaian economy that mostly receive huge subsidies are fuel and utility sectors. Giving their ripple effects of higher fuel prices, the various governments try to contain it by introducing the subsidies. The subsidies normally take the form of a price cap, preventing oil companies from charging too much at the filling stations. Or it can come as a tax break to domestic oil producers, which then usually passes on the savings. In both cases, the governments have to cough up huge sums of money to pay the difference.

The question is “do the subsidies really benefit the target groups over the years?” The answer is big NO. The benefits end up going mostly to the richest citizens to the detriment of more productive ventures such as health, agriculture, education, infrastructure and more energy generation initiatives. I described them as wasteful venture that benefit only a handful of Ghanaians. But many governments in Africa, most often than not, either end up not paying the subsidies or pay the subsidies to the benefit of the rich rather than the poor for which the intervention was targeted.

The richest groups in this country who own the huge amount of machines and cars get the biggest benefit of the energy subsidies while the intended groups such as the farmers and petty traders who do not own even a single motorcycle gets the smallest share of the fuel subsidy benefit. In view of this, the intended benefits of these subsidies are therefore described as regressive. It is, therefore, argued that cutting of the subsidies in the era of these economic challenges in Ghana would allow the government to spend more on infrastructural developments which are desperately needed.

This money could be used to build and fix the roads, bridges, schools, clinics and hospitals to befit our status as lower middle income country. Subsidies do not support the law of supply and demand depriving the country the needed investment in both alternative energy and fossil fuel exploration. For instance, government of Ghana subsidised fuel to the tune of 450 million cedis in 2011 alone. The current figure of the subsidies stands at GH¢1.8 billion.

These amounts could have been invested into other production ventures of the economy rather than preparing a “cocktail for the rich to party”. Furthermore, fuel subsidies encourage inter boarder smuggling of petroleum products between Ghana and her immediate neighbours (Togo, Cote D’Ivoire and Burkina Faso). Energy subsidies cost the government dearly depressing the already stressful national budgets in recent times. This could lead to more budget deficit in the country.

However, the subsidies on the fuel and utility prices should naturally find favour with the ruling NDC government that prides itself of being a centre-left government (Social Democracy). Normally, it might make sense to social democratic parties but frown upon by the capitalist oriented parties like the NPP. Unfortunately, in Ghana, the reality is that the ideological persuasions get blurred when it comes to subsidies due to political expediency. I call this “paradox of ideologies”.

Subsidies will continue to be part of governments’ decisions because getting rid of it implies more burdens and pain for citizens, a decline in popularity, and sometimes fear of civil unrest such as “occupy flagstaff house demonstrators”. In Ghana, several demonstrations were organised by the Committee of Join Action (CJA) in the past to register their displeasure against the “automatic adjustment formula” aimed at achieving full cost recovery in the fuel prices.

Regardless of the above short term benefits, it’s sustainability in the long run in Ghana has been questioned. The current economic challenges cannot support the subsidises in the energy sector. Fuel and the utilities are essential to the accelerated economic growth of Ghana. Hence, investment climate should be created for Bulk Oil Distribution Companies (BDCs) and Independent Power Producers (IPPs) to play their pivotal role in the economic takeoff.

More investments are needed but the investment climate is not conducive enough to attract them. To this end, subsidies become a major disincentive to various investment decisions. Available information from the Energy sector also made startling revelations of hooping subsidies in the electricity sector. It costs 20p to generate one(1) unit of electricity but it is only sold to the consumer at 13p. Does the government have the financial might to shoulder this yawning gap or it should be passed on to the consumers? To enhance the efficiency of the utility delivery in Ghana, the latter makes economic sense.

Again, government of Ghana owes the BDCs GH¢1.8 billion due to fuel subsidy but could only manage to pay $60 million to the Bulk Oil Distribution Companies. This release is to ensure there is enough fuel in the country. It is now abundantly clear that the fiscal burden of the energy subsidies in Ghana is growing too large for the government to bear. However, with oil prices likely to remain volatile, fuel subsidies will continue to influence various government budgets in Africa. The government should however, be mindful of the correlation between subsidies and inflation. Cutting subsidies itself could trigger inflation.

The managers of our economy have always used the energy subsidies as an effective tool to dampen inflation. Removal of subsidies will, therefore, trigger high wages and salaries since workers would always demand more pay to maintain their purchasing power, high cost of raw-material, overhead cost and transportation cost. Hence, gradual approach to the removal of the subsidies is crucial in Ghana. Higher fuel prices could engender higher inflationary rate. An abrupt end to fuel subsidies in Ghana would severely hit the poorest. Paradoxical situation or “catch-22” as the Americans would put it.

So managing and balancing between full cost recovery of fuel prices and its resultant inflation is very crucial. Ghana needs adequate planning, carefully designed mitigating measures and a good communications plan in order to remove the subsidies completely as a long term measure. In the medium to long term measure, the government of Ghana can effectively handle the spiral cost of fuel and utilities by dealing efficiently with the microeconomic variables such as the depreciation of the cedis.

The depreciation of the cedi has direct effect on the eventual prices of the petroleum products since they are priced, indexed and benchmarked in dollars. Currently, the exchange rate of the dollars is $ 1 to GH¢ 3. The Ghana cedi has already depreciated by about 30% to the US dollars in 2014. Analysts have the view that foreign exchange rate could get worst if the Bank of Ghana does not proactively take measures to stabilise the local currency.

Foreign exchange deficit has always been a big issue in the price build up of fuel prices in Ghana. But should lack of efficiency on the part of successive governments in managing the foreign exchange rate be passed on to the already over burdened Ghanaians? Stabilisation of the cedi is within the control of government, but the global oil price is not. The full cost recovery and the automatic adjustment formula in the energy sector have been made redundant due to the continued depreciation of the cedi.

As the debate of the subsidies continues, efficient implementation of them is required to the target vulnerable in the society. To achieve its desire results, the energy subsidies in Ghana should be made to benefit only the poor. Pre-mix oil that has been used by fisher folks along the coastal belt and the kerosene for the rural folks can be targeted for the subsidies.

Also, to discourage the use of charcoal for cooking, subsidy should be paid on liquified petroleum gas (LPG) by the government. Furthermore, the government should also introduce efficient public transportation system for the underprivileged to patronise. Such social economic interventions will help cushioned the target group from the effects of the price hikes.