Comment: Ten reasons why fuel subsidies must be retained

In the discussion about whether or not to eliminate fuel subsidy in Ghana, the Integrated Social Development Centre (ISODEC) believes a retrospective reflection on what necessitated us as a country to go in for fuel subsidy in the first place becomes relevant.

Also relevant is a reflection on whether or not the conditions that warranted the policy intervention have changed for good or bad and whether the removal of the subsidy will improve the situation or worsen it.

Below are ten reasons why Ghana should not eliminate fuel subsidy in the short term but must work gradually towards it:

  • Subsidies are ways of protecting the vulnerable Economic policy

    Decisions do not affect all of us in equal measure. You are hardest or least hit, depending on where you are situated within the economy. Subsidies ensure that the most vulnerable among the population don’t fall through the cracks which are the consequences of economic and social policy decisions.

  • Subsidies are a universal practice

    Ghana is not the only country providing subsidies to its people. Countries world over provide diverse forms of subsidies. In Europe, farm subsidies have been the most controversial, yet they have been maintained to shore up incomes of farmers.

    According to the Africa’s Pulse brochure, Vol. 15, in 2010-11, over half of all African countries had some subsidy in place for fuel products, and these subsidies consumed, on average, 1.4 percent of GDP.

    Nigeria’s fuel subsidy is as high as 4% of GDP. Attempts by the government of Goodluck Jonathan to remove petroleum subsidy last year was met with uncompromising resistance, forcing the government and the IMF to backtrack.

  • Subsidies are not entirely a waste as we are made to believe.

    Subsidies are taxes spent on taxpayers and so they are not a waste as we are often made to believe. The problem with subsidy however, has to do with unintended beneficiaries benefiting from the package. This calls for better targeting and not total withdrawal of the support.

  • Fuel Subsidy cushions workers from otherwise high transport fares.

    But for fuel subsidies, transport fares will be higher than they are now, taking up substantial percentage of the average worker’s monthly income. Fuel subsidy therefore puts money in workers’ pocket.

  • Subsidies help business to remain competitive.

    Fuel subsidy helps to keep production cost in check, and contributes to making the manufacturing and service sectors competitive. In an economy, such as Ghana’s, where the energy mix has tilted more towards thermal generation, any increase in prices of petroleum products will invariably generate corresponding increases in electricity and water tariffs, both of which are key elements in the production and service sectors. When that happens, employers will have to either cut back on their workforce as a cost saving measure or increase the prices of their goods and services, and in the process compromise heir competitiveness.

  • Subsidies keep food prices at affordable levels

    Because 98% of food consumed in urban centres is hauled by road transport, fuel subsidy withdrawal will certainly lead to increase in food prices. In such scenario, the percentage of the worker’s income spent on food will go up if wages remain what they are, leaving the worker poorer. Petroleum subsidy therefore puts food on the table of millions of Ghanaians.

  • Fuel Subsidy secures farmers income

    Farmers and farmers’ groups have time and again complained about rising cost of production – of fertilizer and other inputs. At the instigation of the World Bank, Ghana has removed agricultural input subsidies, leaving farmers at a disadvantage in an ever growing competitive world. Increases in road haulage fares as a result of fuel subsidy withdrawal will increase farmers’ cost of transporting their produce to market centres and in that process reduce their disposable income.

  • Subsidies make utilities affordable

    Two of the most essential utilities – water and electricity, depend a great deal on petroleum products. This is because while the bulk of Ghana’s power generation is from gas and crude oil, water is distributed to consumers by pumps that are driven by electricity and diesel power. Therefore, an increase in the prices of gas and diesel will spark off an automatic increase in electricity and water tariffs.

  • Providing safety nets through subsidies is part of the reason we elect governments

    Under the social contract, we elect governments to take care of our needs and welfare. This is why providing safety nets for the marginalized have become the business of responsible governments. This is how we are able to stabilize society and foster cohesion. Subsidies are therefore inevitable in carrying out the functions of government.

  • Not all those who drive are rich

    The assumption underlining government’s decision to withdraw fuel subsidy is that fuel subsidy benefits the rich more than the poor. The empirical basis of this assumption is that there are more privately owned than publicly owned vehicles in Ghana. This suggests that anybody who owns a vehicle is rich; but this can’t be entirely true. Many have been compelled to take loans to buy cars because of the non-existence of a decent and reliable public transport system. Driving now, has become more of a convenience than a luxury.

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