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Appendix 1: Survey of Fuel and Electricity Subsidies in Sub-Saharan Africa29

Author(s):
Trevor Alleyne, and Mumtaz Hussain
Published Date:
August 2013
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This apppendix summarizes the results of a survey on fuel and electricity subsidies in sub-Saharan African (SSA) countries based on the responses to a questionnaire circulated to International Monetary Fund (IMF) country desks in June 2012. The questionnaire comprised information on subsidies, price-setting policies, market structure, contingent liabilities, and recent trends for petroleum products and for the electricity sector. The appendix focuses on the quantitative aspects of the questionnaire, which covered 35 countries (about 80 percent of the countries in the African Department at the IMF). Overall, the survey data indicate that fuel and electricity subsidies are pervasive in the region, with important economic and social implications.

Overview

Price-setting policies. Figure A1 depicts the prevalence of three different categories of price-setting policies among SSA countries for petroleum products (left-hand-side panel) and electricity (right-hand-side panel). Most countries in SSA implement some form of administered pricing mechanism for electricity and fuel, most frequently ad hoc nonautomatic price setting schemes (dark red countries). It is important to note that even if the de jure pricing policy is based on an automatic formula (countries in yellow), in practice, these automatic mechanisms are frequently suspended in difficult times. Furthermore, it appears that policymakers are more reluctant to adopt market-based pricing policies for electricity. Even countries with liberalized markets for petroleum products such as South Africa and Uganda (green on left-hand-side panel) still opted to set electricity prices administratively.

Figure A1.Prevalence of Price-Setting Policies, June 2012

Source: Author’s calculations based on IMF African Department desk survey.

Explicit subsidies to petroleum products and energy in Sub-Saharan Africa. Figure A2 shows the prevalence of explicit subsidies for petroleum products (left-hand-side) and for electricity (right-hand-side). Subsidies for petroleum products are pervasive, with 21 countries (60 percent of the sample) adopting some form of explicit subsidy. Several countries subsidize specific products such as kerosene and liquefied natural gas (LNG), which are perceived to be disproportionately used by poorer segments of the population. Similarly, over 60 percent of the countries for which responses were available adopted policies to explicitly subsidize electricity prices.

Figure A2.Prevalence of Explicit Subsidies, June 2012

Source: Author’s calculations based on IMF African Department desk survey.

This classification is largely based on country desks’ responses to the questionnaire and reflects desk assessments on price-setting policies. When it was explicitly stated that the de facto price setting regime was ad hoc (despite the presence of a de jure automatic formula), this information is reflected in the figure.

Appendix Table 1.Sub-Saharan Africa: Post-tax subsidies for petroleum products and quasi-fiscal deficits of power sector(Percent of GDP)
Estimated Subsidies for Petroleum productsElectricity
Country2012

Estimates

based

on price

benchmark

method1
2011 Estimates

based on price

pass-though

method2
2011

Estimates

based

on price

benchmark

method3
Of which:

2011

Estimates for

Externality

Costs4
Quasi-fiscal

deficit for

power sector5
Angola4.01.52.50.81.2
Benin0.94.30.20.01.8
Botswana0.91.50.90.50.4
Burkina Faso0.25.60.30.11.2
Burundi0.70.30.00.0n.a.
Cameroon2.84.22.50.32.7
Cape Verde0.23.00.00.02.9
Central African Republic−0.13.60.00.0n.a.
Chad1.76.30.00.00.3
Comoros0.6n.a.n.a.n.a.n.a.
Congo, Dem. Rep.0.80.90.00.02.8
Congo, Republic of2.11.52.10.61.1
Côte d’Ivoire0.70.90.00.02.3
Equatorial Guinea1.23.21.91.2n.a.
Eritrean.a.n.a.n.a.n.a.n.a.
Ethiopia1.61.10.60.11.5
Gabon1.62.10.70.3n.a.
Gambia, The1.23.90.00.0n.a.
Ghana3.20.91.90.92.3
Guinea0.5−0.20.00.0n.a.
Guinea-Bissau0.11.50.00.0n.a.
Kenya0.83.30.50.10.8
Lesotho0.7-0.60.00.01.1
Liberian.a.−0.20.00.0n.a.
Madagascar0.76.20.40.11.4
Malawi−2.50.60.10.02.2
Mali0.53.80.20.02.4
Mauritius−1.01.10.00.0n.a.
Mozambique0.02.20.20.17.2
Namibia−0.6−0.70.00.00.8
Niger0.40.60.20.00.6
Nigeria3.44.22.00.51.5
Rwanda0.01.10.00.00.5
Sao Tome and Principe1.84.30.60.1n.a.
Senegal−1.14.90.00.02.5
Seychelles−0.7n.a.0.00.0n.a.
Sierra Leone1.22.80.50.13.5
South Africa−0.2−1.01.10.50.5
Swaziland−0.5−0.90.00.0n.a.
Tanzania0.11.60.00.01.7
Togo0.83.90.70.0n.a.
Uganda0.23.30.00.02.3
Zambia0.21.10.00.03.4
Zimbabwe3.3n.a.n.a.n.a.11.0
Sub-Saharan Africa1.41.51.20.41.4
Median0.71.60.10.01.7
Unweighted mean0.82.20.50.22.2
Oil exporters3.23.22.00.51.5
Median1.92.72.00.41.4
Unweighted mean2.23.01.50.51.5
Oil importers0.30.40.80.3
Median0.41.50.00.01.8
Unweighted mean0.42.00.30.12.4
Sources: Staff calculations.

In the price benchmark method, fuel subsidy (tax) per liter is obtained by subtracting the relevant cost-recovery benchmark price from the domestic retail price. Benchmark prices are computed by adding CIF fuel import prices, national margins and costs (e.g., transportation, distribution) and indirect taxes (VAT and excise taxes). For more details, see Box 1.

In pass-through method, subsidies are estimated by comparing the changes in domestic retail prices against the changes in international prices over a specific period. Box 1 provides more details about this measurement method, see Box 1.

International Monetary Fund (2013) discusses these estimates.

International Monetary Fund (2013) discusses these estimates.

The quasi-fiscal deficit is defined as “the difference between the actual revenue charged and collected at regulated electricity prices and the revenue required to fully cover the operating costs of production and capital depreciation.”Box 1 provides more details on the measurement methodology.

Sources: Staff calculations.

In the price benchmark method, fuel subsidy (tax) per liter is obtained by subtracting the relevant cost-recovery benchmark price from the domestic retail price. Benchmark prices are computed by adding CIF fuel import prices, national margins and costs (e.g., transportation, distribution) and indirect taxes (VAT and excise taxes). For more details, see Box 1.

In pass-through method, subsidies are estimated by comparing the changes in domestic retail prices against the changes in international prices over a specific period. Box 1 provides more details about this measurement method, see Box 1.

International Monetary Fund (2013) discusses these estimates.

International Monetary Fund (2013) discusses these estimates.

The quasi-fiscal deficit is defined as “the difference between the actual revenue charged and collected at regulated electricity prices and the revenue required to fully cover the operating costs of production and capital depreciation.”Box 1 provides more details on the measurement methodology.

Recent reform efforts. The survey suggests that the authorities have been actively engaged in energy sector reform in recent years (Figure A3). About 14 countries (out of 31 responses) have recently attempted to reform fuel subsidies. These efforts consisted mostly of changes to pricing formulas in order to increase the pass-through of international prices and reduce subsidies. The Nigerian reform efforts have been widely presented in the international media, but new formulas also were introduced in 2011 in Niger and Rwanda, among other countries.30 Twelve countries (out of 26 responses) have recently attempted to undertake reforms to reduce electricity subsidies. Uganda is particularly notable for introducing an automatic adjustment for electricity tariffs in early 2012 that effectively eliminated subsidies going forward.

Figure A3.Recent Attempts at Energy Subsidy Reform

Source: Author’s calculations based on IMF African Department desk survey.

Quantifying Fuel and Electricity Subsidies

Given the reluctance of policymakers to allow market forces to operate in energy markets, it is crucial to attempt to quantify the economic impact of regulatory policies. The survey aimed at gathering detailed information to quantify different subsidy categories, but data availability considerably limited the scope of the analysis.

For petroleum products, it was only possible to obtain a meaningful number of responses for estimates of tax revenue losses (when subsidies imply foregone taxes on products) and for overall direct subsidies (i.e., an aggregate of budgetary and off-budget transfers). These estimates are depicted in the upper panels of Figure A4. On average, both types of subsidies are about 1 percent of GDP. Nevertheless, there is significant variation across countries, because lost revenue is close to 2 percent of GDP in Sierra Leone, and direct subsidies can surpass 2.5 percent of GDP (Cameroon).

Figure A4.Fuel and Electricity Subsidies in Percent of GDP

Source: Author’s calculations based on IMF African Department desk survey. Latest available information used, which might span different periods from 2009 to 2012.

Data availability issues are even more pronounced for the electricity sector. Only two estimates of lost tax revenue were obtained (more than 1 percent of GDP in Côte d’Ivoire). The average estimate for direct electricity subsidies (for which a relatively larger sample was available) was 0.4 percent of GDP, but reached as high as 0.8 percent (Mali).

Figure A5.Estimated Contingent Liabilities in Percent of GDP

Source: Author’s calculations based on IMF African Department desk survey. Latest available information used, which might span different periods from 2009 to 2012.

Quantifying Contingent Liabilities

In addition to the direct costs discussed above, policy interventions in energy markets might also entail contingent liabilities for the central government linked to debt, arrears, or operating losses of state-owned enterprises involved in refining, generating, importing, and distributing fuel and electricity. The survey responses on this issue were very limited (at most three observations per fuel category, and between five and seven for electricity). For this reason, an aggregate measure of contingent liabilities was built to present the cumulative debt, arrears, and operating losses for relevant state-owned enterprises.

As far as petroleum products are concerned, responses for five countries were received. On average, contingent liabilities amounted to 0.5 percent of GDP, reaching up to 1 percent of GDP for a number of countries (namely, Ghana, Republic of Congo, and Burkina Faso). For the electricity sector, contingent liabilities were relatively higher, amounting to 1.7 percent of GDP on average and surpassing 7 percent in Senegal.31

Conclusions

Despite significant reforms efforts in recent years, fuel and electricity subsidies are still pervasive in sub-Saharan Africa. A survey of 35 countries suggests that direct and indirect costs of these policies are significant. While limitations in data availability do not allow for precise estimates, the survey results suggest that fuel subsidies typically amount to 1 percent of GDP in countries that set fuel prices, whereas direct electricity subsidies tend to be less than 0.5 percent of GDP. Contingent liabilities tend to exceed 0.6 percent of GDP (median values) for both fuel and electricity, although in some cases the build-up of liabilities has been much more significant.

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