Business News of 2014-07-07

Fuel subsidy debate: Let’s bite the bullet – ACEP

To avoid a reoccurrence of fuel shortages, the petroleum downstream sector must be deregulated fully and government must stop absorbing the difference when prices go up, the African Centre for Energy Policy (ACEP) has said.

“Things cannot continue this way. The future is bleak and we must take the bold steps now,” the energy policy think-tank said in a press statement. “Subsidies are good to the extent that they are targetted and benefits are not regressive...Apart from the fiscal burden, subsidies can be poorly-managed and can lead to rent-seeking behaviour, naked corruption and gross abuse.”

Government is reeling under the weight of some GH¢1.8billion being demanded by Bulk Oil Distribution Companies (BDCs) as subsidy arrears.

To forestall this, ACEP said full deregulation can also be done with a price cap -- in which case a full pass-through policy is applied to the extent that the ex-refinery price does not exceed a predetermined benchmark price.

“Beyond this benchmark, government intervention in the market for petroleum products is justified,” it said, adding that during such extraordinary times government could remove taxes on petroleum products or introduce time-bound subsidies.

Government has been calling for a debate on the subsidies, which industry-watchers see as an indication that government could scrap the subsidies in spite of the political pressures.

“Government must stop absorbing price increases for fear of political upheavals. Thus, government must seek a bi-partisan consensus on the petroleum pricing regime,” said Dr. Mohammed Amin Adam, ACEP’s Executive Director

Indeed, the Bank of Ghana has said removal of the subsidies will help stabilise the macroeconomic environment and boost Foreign Direct Investment (FDI).

“Because we continue to subsidise the prices of petroleum products notwithstanding the cost involved, we are not able to achieve certain economic targets such as the budget deficit, trade deficit and even inflation. But all these things go a long way to determine how competitive we are for foreign investors," the bank’s acting Head of Research, Mrs. Grace E. Akrofi, said in June 2013.

The BDCs have themselves been asking for removal of the subsidies since government is unable to pay on time.

Lobbyist for the industry, Senyo Hossi, has been asking government to invest in mass transportation instead -- which will benefit the poor much more than the even subsidisation of petroleum products.

“From 2011 to 2013 we spent US$1.2billion dollars in subsidies. Can you imagine what that could have done for mass transportation? And when you invest in mass transportation it is not consumption like fuel. It is an investment; you are creating jobs, and you are getting people to be more productive,” Mr. Hossi told the B&FT.