Emmanuel Noubissie Ngankam – Fuel Price Subsidies: Breaking the Deadlock

The externalities of Russia's invasion of Ukraine on the Cameroonian economy have, among other things, brought up to date the thorny problem of the relevance and sustainability of fuel price subsidies.

Fossil fuel subsidies have often been presented in hydrocarbon-producing countries as a social approach aimed at better sharing the rent drawn from the natural resources of these countries. However virtuous it may be, this approach has objective limits and could even amount to a scourge with harmful consequences for the whole of the community. Applied indiscriminately, fossil fuel subsidies could create market distortions, dangerously burden state budgets, encourage overconsumption, encourage corruption, generate externalities that are harmful to the environment, reinforce the social inequalities that they are supposed to correct.

In Cameroon, the concomitance of the resurgence of the debate on fuel subsidies and the second review of the program with the IMF gave free rein to a certain opinion according to which the imminence of the reduction or even the elimination of subsidies would be dictated by the bretton woods institution. Admittedly, this institution, which makes no secret of its orthodoxy, has opportunely recommended a certain number of reforms, including those of subsidies, but ultimately it is up to the authorities to make the right decisions based not only on rational and irrefutable data but also on a social consensus which remains to be sought.

“Is it reasonable and sustainable to devote nearly 13% of the state budget, 3% of national wealth (GDP) to fuel subsidies? »

According to the most recent data from the Ministry of Water and Energy (MINEE) and corroborated by the General Directorate of the Treasury, Financial and Monetary Cooperation at the Ministry of Finance, fuel price subsidies could reach 780 or even 800 billion CFA francs in 2022 against 480 billion provided for in the amending finance law recently adopted and promulgated. These subsidies would then represent approximately 13% of the State budget which, it should be remembered, is 6080 billion CFA francs, and nearly 3% of Cameroon's GDP (27.000 billion CFA francs). This level of subsidies could be put into perspective by relating it to a certain number of aggregates: in 2022, public investments financed from internal resources are CFAF 620 billion, external financing devoted to public investments is approximately 780 billion, salaries of about 1,100 billion CFA francs, the budget deficit excluding grants is projected at -787 billion and the deficit (including grants) is -645 billion. This level of deficit clearly indicates the State's inability to finance its operating expenses from its own resources, while at the same time an equivalent amount is devoted to fuel subsidies.

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In this situation of near-bankruptcy and extreme dependence on the outside and on indebtedness to meet current commitments, is it reasonable and sustainable to devote nearly 13% of the State budget, 3% from national wealth (GDP) to fuel subsidies?

To answer this question, the Government must have to decide on the basis of several possible scenarios, including radical options.

The first option is the status quo. This scenario can be described as suicidal in the sense that it would consecrate the bankruptcy of the State on the altar of fuel price subsidies. No offense to a certain opinion that predicts social chaos if the cursor were moved, maintaining subsidies at the current level is absolutely unrealistic and unsustainable. On closer inspection, this scenario of immobility and inaction presents high risks, not the least of which is the inability of the State to meet its commitments vis-à-vis importers of petroleum products. . The recent shortage should be taken as a serious warning.

At the extreme of the status quo, the second option which would be just as radical is the elimination of subsidies and the application of the truth of the prices at the pump. In this case, the consumer would pay a liter of gasoline at about 1035 CFA francs, diesel at 998 CFA francs and kerosene at 800 CFA francs. Such an equally suicidal scenario would carry the seeds of a social explosion, a general increase in prices and even a paralysis of the economy.

Between the two extremes, the State has leeway on which it should be able to act while implementing a number of support actions that we will discuss.

"The increase in prices at the pump and the maintenance of a sustainable level of subsidies could be accompanied by a reduction in certain taxes which affect fuel prices"

The third scenario would consist of revisiting the structure of the price of hydrocarbons and making trade-offs that would lead to the reduction (and not the elimination) of subsidies. One of the variants of this scenario would be for the State to determine the bearable level of subsidy in a context of crude prices above 100 dollars per barrel. By way of illustration, the amending finance law adopted last June had retained an envelope of 480 billion intended for fuel subsidies. Maintaining this option would lead to a 20 to 25% increase in prices at the pump. Gasoline would be sold at around 780 F CFA per liter against 630 F currently, diesel at 700 against 575 and kerosene at 450 against 350. As an indication, Senegal and Côte d'Ivoire have recently increased price at the gasoline pump going from 775 to 890 at the first and from 695 to 735 at the second.

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The increase in prices at the pump and the maintenance of a sustainable level of subsidies could be accompanied by a reduction in certain taxes which affect fuel prices. These include, among others, VAT, customs duties and the Special Tax on Petroleum Products which cumulatively amount to 278 CFA francs / liter for gasoline, 247 for diesel and 74 for kerosene. .

It goes without saying that this third scenario includes sub-variants that should be refined by setting up an automatic adjustment mechanism that would take into account the evolution of the price of oil on the international market. To this end, it should be recalled, in 2014, the Government increased prices at the pump by 15%, accompanied by an increase in civil service wages by 5%, that of the minimum wage by 28 % and the price of transport (taxi) of 33%. In 2016, a slight drop in prices at the pump was applied and since then these prices have remained unchanged, including in 2020, the year during which the drop in the price of a barrel on the international market induced a negative subsidy... that is to say say that the price of fuel at the pump was higher than the market price. This capital gain garnered by the State has largely offset the drop in the fee paid to the public treasury by SNH due to the drop in the price of a barrel.

"Designing a communication strategy aimed at both the general public and social actors"

Beyond the rationally untenable situation, the Government cannot do without adjusting prices at the pump, an adjustment whose success at the social and political level should be accompanied by a certain number of prerequisites.

The experience of countries confronted with such a situation reveals the obstacles or resistance to be overcome in order to achieve a successful subsidy reform.

In this register, the key element is Information and Communication. Resistance to reforms sometimes stems from a lack of information among populations or target groups. A communication strategy should be designed aimed at both the general public and social actors. We remember that the 2014 reform in Cameroon was preceded, among other things, by consultations with transport unions and an information campaign on the corrosive nature of subsidies. The stammering and stuttering that we have been witnessing for several months reveals a certain lack of preparation or even a lack of coordination. The vague announcements of the Minister of Trade, the Minister of Water and Energy, the Director General of the SCDP, the Director General of the Treasury or even the recommendations of the IMF, create a cacophony while urgent action by the Government is expected and the consumer feels trapped.

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“Out of 100 FCFA of fuel subsidies, only 16 goes to the poorest”

Moreover, it is important to answer the essential question: Who benefits from the subsidies? A study carried out in 2007 on Cameroon by two eminent economists, David Coady and Moataz El-Said shows that out of 100 FCFA of fuel subsidies, only 16 go to the poorest. In short, subsidies contribute to deepening inequalities in an already very unequal society.

Another fundamental concern is the credibility of the Government, the owner of the reform. Even when recognizing the magnitude and drawbacks of energy subsidies, the public may doubt the government's efficient use of the savings generated by subsidy reform and will therefore resist their elimination.

Beyond the price of fuel at the pump, the current situation offers the opportunity for the Government to carry out a large-scale reform affecting other sectors, in particular Public Enterprises, some of which are budget-hungry and live on the hook of the whole of the community. Need it be recalled that the outstanding debt of Public Enterprises as of June 30, 2022 is 876 billion CFA francs or 3,4% of GDP. Their profitability is fundamentally hampered by their inefficiency. To this end, should CAMAIR-CO and CAMTEL, which operate in a highly competitive environment, be maintained in their current state?

In any event, experience has shown that good reforms are made in a proactive and counter-cyclical manner, that is to say when the State has a substantial budgetary margin. However, in a period of deep crisis which borders on a stalemate as is the case at the moment, the Government cannot do without a reform of subsidies even if it could be painful in certain respects. CQFD.

Former Senior Official of the World Bank. Among other things, he was Resident Representative of the World Bank in Algeria from 2013 to 2016, a period during which this major oil-producing country had to face a severe subsidy crisis due to the fall in the price of fossil fuels. in the international market.

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