Time for Change—Shifting Energy Spending in Africa
IMF Blog, March 28, 2013
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- Authors: Antoinette M Sayeh
- Published: March 28, 2013
Expenditure and distributional consequences
- Countries in sub-Saharan Africa have spent large amounts on subsidizing fuel and electricity; for both sources of energy combined, this averages around 3-4 percent of GDP.
- Most fuel subsidies are consumed by higher income groups.
- Electricity subsidies are even more skewed because a large majority of the poor are not connected to the grid.
- Subsidized fuel can be smuggled to higher-price neighboring countries, meaning benefits sometimes do not stay in the country.
- Oil exporters generally have higher subsidies because they are less likely to face financing constraints when international oil prices are high.
- Subsidy costs can be less transparent—sometimes appearing as lower profits of state oil companies rather than explicit budget costs.
- Removing subsidies will affect all income groups, since the poor receive some benefits, including from lower transport prices on food costs.
Growth and investment costs
- Subsidies distort investment decisions by both the public and private sectors.
- Failure of power companies to recover costs leads to a vicious circle of underinvestment: neglected infrastructure crumbles, frequent power outages reduce competitiveness and depress potential growth, and private investors are discouraged from expanding supply.
- Since the mid-1980s, per-capita energy production and consumption in sub-Saharan Africa have barely increased.
- Excluding South Africa, installed capacity for the entire region is still about one-third that of Spain.
- Without a significant increase in power generation capacity, sub-Saharan Africa will not be able to maintain current economic growth rates for the next two decades.
- World Bank simulations suggest that if electricity infrastructure in all sub-Saharan countries were improved to that of a better performer (such as Mauritius), long-term per capita growth rates would be 2 percentage points higher.
- In many countries, small-scale operations and reliance on expensive thermal systems or emergency power drive up costs.
- Countries with low-cost hydro or natural gas resources need to increase production and build infrastructure to invigorate regional trading through power pools.
- Energy subsidies directly crowd out other critical spending, including infrastructure and social services; for example, even after recent reductions, Nigeria’s government spends more of their outlays on energy subsidies than on education and health.
Environmental and competitiveness costs
- Subsidies encourage overconsumption of fuel products relative to other forms of energy, producing environmental costs.
- Subsidies undermine the competitiveness of renewable energy sources (hydro, solar) despite Africa’s considerable renewable resources.
Reasons subsidies persist
- Energy subsidies are an easy way for governments to transfer resources, especially when social safety nets are undeveloped.
- Politically vocal interest groups who benefit from subsidies resist reforms.
- The general population may distrust that savings from subsidy removal will be used for better social protection or growth-enhancing investment.
Path to reform — lessons and policy guidance
- Careful preparation and sequencing:
- Build public understanding of how much is spent on subsidies and who benefits.
- Build consensus over time; Namibia and Kenya required many years of preparation before successful reforms.
- Conduct strong public communications campaigns.
- Introduce compensatory measures for those most affected and demonstrate how savings will be used.
- Strengthen institutions:
- Example: Tanzania’s fuel subsidy reform included establishing a specialized regulatory entity to issue licenses, set technical regulations, keep the public informed about prices, and review market functioning.
- Go beyond tariff increases for electricity subsidy reduction:
- Tariffs in sub-Saharan Africa are already considerably higher than in other regions because of higher costs.
- Efficiency gains are possible through improved governance, lower distribution and commercial losses, and higher revenue collection rates.
- Low levels of public debt in many sub-Saharan African countries provide an opportunity for significant investment in cheaper sources of energy production.
Overall conclusion
- Energy subsidy reform is a critical policy challenge central to the future growth agenda in sub-Saharan Africa.
- A gradual approach may be appropriate given political and practical difficulties, but the payoffs from successful reform are huge.
- There is an urgent need to approach subsidy reform with renewed vigor—there is no time to waste.
Source: Time for Change—Shifting Energy Spending in Africa (Antoinette M. Sayeh, March 28, 2013).
Content in this bundle
- 改革的时间已到——非洲国家能源支出亟需变革; 作者：Antoinette M. Sayeh; 2013年3月28日
- 変革の時‐アフリカのエネルギー支出のシフトが必要な理由, アントワネット M. サイエー, iMF direct ブログ 2013年3月27日掲載
- Energy Subsidy reform--Lessons and Implications; IMF Policy Paper; January 28, 2013
- Время перемен — доводы в пользу переориентации расходов на энергоресурсы в Африке