In Africa, governments are turning their backs on fuel subsidies

At the beginning of October, Nigerian President Bola Tinubu managed at the last minute to defuse a call for a national strike

In Africa, governments are turning their backs on fuel subsidies

At the beginning of October, Nigerian President Bola Tinubu managed at the last minute to defuse a call for a national strike. By announcing cheaper public transport and a temporary increase in the minimum wage for the lowest paid workers, the leader of Africa's largest economy tried to respond to the discontent that is brewing in the face of an ever more expensive daily life.

Fueled by the consequences of the war in Ukraine, this galloping inflation is also the setback of the spectacular reforms initiated by the head of state upon his arrival in power at the end of May: the liberalization of the naira (the national currency) and even more so the removal of fuel subsidies. The end of this system led to a tripling of the price of gasoline, which had an impact on the cost of transport, food and electricity.

Painful, the measure was nevertheless applauded by investors and the International Monetary Fund (IMF), while the country is weighed down by a debt whose repayment absorbs more than 90% of state revenue. Fuel subsidies cost nearly $10 billion last year (around €9.4 billion), a fifth of the federal budget and “four times the amount spent on health,” the IMF points out in its new report dedicated to economic prospects in sub-Saharan Africa. The institution welcomes the fact that, like Nigeria, several countries on the continent “have initiated significant reforms of energy subsidies in order to provide the necessary room for maneuver for development spending”.

“Some States no longer have a choice”

In fact, from Senegal to Angola via Ghana, Zambia and Congo, reforms have been announced or already implemented to readjust the price of petroleum products upwards. An often unpopular decision, but “the budgetary position of certain States has deteriorated so much that they no longer have a choice,” estimates Luc Eyraud, director of studies at the IMF’s Africa department.

While debt has continued to rise in recent years, countries are now trapped by the global rise in interest rates, which is sending borrowing costs soaring. Not to mention the oil bill, which skyrocketed in the first months of the Russian-Ukrainian conflict, including within oil-producing countries, which buy most of their refined fuel abroad.

Angola spent 1.9 trillion kwanzas (around 2.2 billion euros) last year on controlling fuel prices, or more than 40% of spending allocated to social programs, according to the IMF. This major hydrocarbon producer announced in June the gradual withdrawal of subsidies by 2025. Same timetable in Senegal, where the amount of aid associated with energy products represented more than 4% of GDP in 2022. In Congo-Brazzaville, classified as over-indebted and under IMF program, the government has resolved to reduce its aid by 30% between February and July. Last year, this budget item was equivalent to what the country spent on the entire health sector.

“Apart from the fact that these subsidies often cost several points of GDP to the detriment of other expenses, they have a very regressive effect because they benefit everyone, including and often disproportionately the richest,” insists Luc Eyraud.

But their withdrawal is generally distressing for the entire population. “This increases prices at the pump, but also the cost of public transport and food supplies, which are major expenditure items for poor households,” underlines Dominique Fruchter, economist in charge of West Africa at Coface. There is also an impact for small industries that operate using generators. In Nigeria for example, they are very numerous. »

Compensation measures

The IMF and the World Bank have long called for an end to these price regulation programs, while recommending that they be combined with compensation measures targeting the poorest. But the exercise can be very complex in countries that lack reliable data on their population.

In Nigeria, the official register of vulnerable households lists some 60 million individuals. The World Bank estimates their number at nearly 90 million people. And this could rise to 100 million, following the removal of fuel subsidies, if the government fails to properly support the most vulnerable segments of the population. In a report published in June, the institution urged the government to fully publish the amounts of future compensation, the eligibility criteria and the transfer mechanisms in order to allow civil society to monitor compliance.

“When we cut a subsidy, it can allow a significant saving, but also fuel a climate of mistrust in countries where transparency is not sufficient,” indicates Rabah Arezki, research director at CNRS and former chief economist of the Bank. African Development Bank (AfDB): “People ask: where is the money going? »

In Angola, five people were killed in June during protests following the announcement of the reform. “We are learning lessons,” assured Tuesday, October 10, on the sidelines of the general assemblies of the IMF and the World Bank, the Angolan Minister of Finance, Vera Esperança dos Santos Daves de Sousa. To the point of slowing down or even interrupting the movement? “Everything is open,” she said.

In Kenya, President William Ruto abolished fuel subsidies when he came to power in September 2022. While the country has been shaken in recent months by violent anti-government protests against the high cost of living, temporary aid has was restored in August. Proof that it is not easy to remove these price regulation measures with the stroke of a pen. “Today, forced by the economic situation, countries are making clear cuts,” summarizes Rabah Arezki. But it has already happened in the past that these subsidies were removed and then put back under the pressure of the uprisings. »