When will countries ever learn how to do fuel subsidy reforms right?

  • Opinion by Alan Gelb, Anit Mukherjee (washington d.c.)
  • Inter Press Service

Demonstrators took to the streets, violently clashing with security forces called upon to maintain public order. They express their frustration not only with rising fuel prices, but also with the cost of living, lack of social services, crumbling infrastructure, corruption and political repression.

Faced with the prospect of a popular uprising, the government backtracked on reforms and reinstated subsidies, postponing tough decisions to a later date.

It is Kazakhstan in 2022. It is also Ecuador in 2019, Nigeria in 2012, Bolivia in 2010, Indonesia in 2005 and several other energy exporters who have tried to end, or at least reduce, fuel subsidies over the past two decades.

The list will grow significantly if we include the importers most exposed to the vagaries of international energy prices. What’s interesting is that the story unfolds almost exactly the same, and the consequences of action – and inaction – are also very similar.

For resource-rich countries like Kazakhstan, Ecuador, Bolivia and Nigeria, subsidized energy, especially from fossil fuels, is one of the few tangible ways in which citizens can feel entitled to a national resource.

Although the level of grants varies, at around $228 per capita or 2.6% of GDP in 2020, those of Kazakhstan are high but not the highest among exporters. In a situation where the government is generally perceived as repressive, incompetent and corrupt, food and fuel subsidies help contain the deepest grievances. It’s economically detrimental but politically expedient, a delicate balance that many countries have sought to manage over the past decades – with little success.

Our research has shown that there is a better way to reform energy subsidies. Providing direct cash transfers to offset rising energy prices can be a “win-win” solution. Simply put, Compensatory Energy Transfers (ECT) allow households, especially the poor and vulnerable, to absorb the shock and reallocate resources according to their needs.

By removing the trade-off between subsidized prices and market prices, TCAs can also reduce corruption, improve distribution and encourage efficient energy use. Countries such as Iran, India, Jordan and the Dominican Republic have been relatively successful in this type of reform, and their experience holds lessons for other countries who choose to go down this path.

Digital technology can significantly help identify beneficiaries, provide them with the necessary advice and information, and transfer payments directly to individuals and households. Three key enablers of ECTs are an identification system with universal population coverage, strong communications, and wide access to financial accounts.

Multiple databases can be cross-checked to verify eligibility standards and grievance redress systems can help reduce the exclusion of genuine beneficiaries. As shown, for example, LPG Subsidy Reform in India, countries can gradually tighten eligibility criteria over time to target the poorest sections of the population.

Finally, TCAs can provide the impetus for a more transparent and accountable grant management system, helping to improve public trust and support for the government’s reform agenda over the long term.

So why aren’t more countries following this approach? For a, most energy subsidy reforms are advanced in times of economic crisis. TCAs require political commitment, openness to engage in public dialogue, consensus building among stakeholders and powerful vested interests, implementation systems in place, and collaboration with different ministries , government departments and agencies.

Direct compensation is also more transparent than the often opaque systems of price subsidies that favor the rich, with their higher energy consumption, even if they are justified by the need to protect the poor.

ECTs are not simple solutions and often take time to set up. At first glance, it may seem simpler to simply raise energy prices overnight through an administrative order. But the payoffs are significant in terms of sustainability, economic outcomes, social cohesion and political stability.

The sooner countries take a longer-term approach, the better they will be able to manage the transition to a more sustainable system that supports those who need it most.

Kazakhstan is the first country in 2022 to experience popular unrest due to rising fuel prices. It certainly wouldn’t be the last.

Anit Mukherjee is a policy researcher at the Center for Global Development. Alan Gelb is a Senior Fellow at the Center for Global Development.

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© Inter Press Service (2022) — All rights reservedOriginal source: Inter Press Service

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