Terkper reacts to subsidy debate

Minister of Finance and Economic Planning Seth Terkper has defended the government’s policy on energy subsidies in a response to calls for them to be eliminated due to escalating costs.

He said while the question of affordability must be asked, other factors such as the objective of the subsidies and the conditions under which they are provided or retained ought to be considered as well.

“Government has always had a policy on subsidies, and the policy has an objective- which is to alleviate the cost of living for low-income people,” he said.

Debate is currently raging over whether government should retain the subsidies, which have been growing with the increasing demand for, and cost of production of, the commodities. The National Petroleum Authority (NPA) says the cost of petroleum subsidies climbed by 167 percent to more than GH¢1billion in 2012, and Alex Mould, chief of the Authority, this week asked for them to be eliminated.

In 2012 the government also set aside GH¢179.7million for water and electricity subsidies, but the service providers say they have not been fully reimbursed for under-pricing their services and have begun pushing for prices to be increased.

Responding, Mr. Terkper said the policy on subsidies “has never been a perpetual thing”; and that it always takes into account the prices of the products, adding that the unusual developments in the economy last year caused the subsidies to be maintained.

“What happened last year was that we witnessed some factors, the principal one being the slide in the cedi, which required very drastic actions to correct the situation. So this was not a very ideal time to introduce another shock to the economy through fuel-price adjustments.”

Ghana’s cedi suffered deep losses in 2012 as markets bet against the government’s ability to maintain fiscal discipline in an election year. The currency dropped by 17.5 percent, its sharpest depreciation since 2008, causing the Bank of Ghana (BoG)- which feared a spike in inflation -- to tighten interest rates and limit credit growth.

In May last year, the International Monetary Fund (IMF) urged Government to withdraw the subsidies which were not only missing their targets but also crowding out expenditures in the priority areas of infrastructure, education and healthcare.

Mr. Terkper said the subsidies have always been targeted: “but it may get to a point where the targetting is no longer effective.”

He admitted that this is the case now, and said government is reviewing the policy as part of its 2013 budget deliberations.

“To the extent that we cannot have an endless subsidy, when the policy becomes ineffective we do the appropriate adjustment. A subsidy that is not targetted is less beneficial because people who in principle are not supposed to enjoy it capture the benefits,” he said.

According to the NPA, the current level of fuel subsidies range from 30 per cent of the full-cost-recovery price of petrol and diesel to 88 percent of the full-cost recovery price of pre-mix fuel, used by fishermen to power their boats.

The subsidies on Liquefied Petroleum Gas (LPG) and kerosene cover 55 percent and 72 per cent respectively of their actual market prices.

At this rate the government will need GH¢2.4billion- or more than 12 percent of its revenues -- to pay for fuel subsidies in 2013, the NPA said. The amount is more than the total fuel-subsidy spending- GH¢1.5 billion between 2009 and 2012.

Mr. Terkper said the rising cost will be an important consideration in the ongoing review, since the government purse is already feeling a squeeze from the relentless growth in spending on wages under the Single Spine Salary Policy.

The last review of petroleum prices was carried out in December 2011, but Government subsequently cut the increase by 20 percent in February 2012 following agitations by consumers and labour groups- which had said they preferred small, regular price adjustments to one-time, large increases.