Why the recent fuel price increase is not such a bad idea

By Frank S. Debrah

Recent decision by the National Petroleum Authority (NPA) to raise fuel prices in Ghana by up to 20 percent cent is being met with opposition from civil society and trade unions. The NPA asserts that its decision was necessitated by the Mills administration’s own decision to withdraw subsidies on petroleum products. As expected, the government is incurring the wrath of Ghana’s foremost union, the Trade Union Congress (TUC) and the Alliance for Accountable Governance (AFAG) – a political pressure group. Both the TUC and AFAG justify their opposition to the latest fuel price hike on the grounds that it will impose unnecessary economic hardship on Ghanaians.

Given how sensitive fuel subsidies are in Ghana, I’m probably one of the few Ghanaians on the surface of this planet who favours the Mills administration’s decision to touch this politically hot cassava, so I expect a few brickbats for this column. Before I say why the decision to withdraw fuel subsidies is not such a bad idea, I’ll like to clarify a few things. First, I’m neither the government’s apologist nor an opposition bootlicker. Second, I don’t deny the validity of the charges being levelled against the decision of the government. Infact, it is true that fuel price increase in a developing economy like Ghana can marginally spike consumer price inflation (CPI) thereby increasing the cost of living for ordinary folks.

Nonetheless, as bitter a pill as the new pump prices are, the current level of fuel subsidies is worse on government coffers; they are unsustainable; they create perverse incentives and distortions in the economy. According to reports, the government of Ghana is projecting to spend a whopping GHC 600 million this year alone on petroleum subsidies. Threading on this path is a one way ticket to hell. It exerts high fiscal cost for government, leading to an increase in public debt, and a squeeze on other government spending.

Why? In order to provide subsidies on petroleum products for example, the government of Ghana must borrow more money (from China), raise additional revenue (mostly through foreign aid), and/or reduce public spending (fail to pay workers on Christmas for example). This is how most government spending including fuel subsidies are financed. Don’t mention taxes because we all know what the revenue collection capability of the government is.

Yes, subsidies lower prices of fuel thereby freeing Ghanaians from having to adjust their purchasing behaviour to the cost of supply. But subsidies also provide a perverse incentive to over-consume and it almost always creates unintended but disproportionate benefit to high-income individuals rather than the poor. This is often the case because high-income individuals tend to consume more fuel than average citizens. If you have doubts, ask those driving around in luxurious private cars to pick up their numerous ‘apuskelekes’ across town whether they use more fuel than ordinary Kwaku Manu fighting for half a seat in a Kaneshie trotro. I could go on and on about the economically deleterious effects of fuel subsidies on the poor and the economy at large but time and space will not permit.

Sucking on the subsidy teats sounds like a sweet deal, except a few things. As we economists are fond of saying “there is no free lunch”. The money borrowed from China will have to be paid back with interest. Foreign aid requires a handshake with brother Obama and Mr. Cameron who will later return to serve you with a cold dish of say ‘gay rights’. And, as for government’s “mistake” in failing to pay the meagre but hard earned salary of my good-old-lady this Christmas, she might respond with the only gift that the Ghanaian constitution will give her next Christmas – a vote!

I will conclude this piece by saying that fuel subsidies reduce transportation cost but it does so at a greater cost to society and the government. Rather than being condemned, the Mills administration must be commended for taking such a bold action over this unpopular issue. However, where they failed, in my opinion, was their inability to effectively communicate their intentions to Ghanaians before the decision was made and implemented.

The Mills administration could have taking a chapter from the NPP’s playbook when the Kuffour administration announced a 50 percent price increase on fuel in 2005. Before the announcement, the NPP launched a poverty and social impact assessment (PSIA) for fuel; they embarked on a public relations campaign to explain the need for the price hike; and most importantly, they publicized mitigation measures such as immediate elimination of primary and junior secondary school fees and announced programs to improve public transport.

At the time of writing this piece, the government is now embarking on an emergency meeting to take a decision on how to cushion workers against the impacts of the latest fuel price increase – something they should have done before the fact. It may be too little too late. They better hope that there is no “kume preko” or “sieme preko” style demonstrations in the horizon!

Frank S. Debrah

School for International Studies

Simon Fraser University

Vancouver, Canada