Gabon: Selected Issues
Author: International Monetary Fund
Publication Date:
20 Jun 2006
eISBN:
9781451813999
Language:
English
Keywords:
ISCR; CR; price; fuel price subsidy; Gabon; refinery price; reference price; price-shifting model; fiscal cost; Fuel prices; Inflation; Consumption; Oil prices; CIF price
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Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. This chapter has sought to estimate the sustainable long-term non-oil primary deficit and the optimal adjustment path toward that level. The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. The reform of fuel price subsidies in Gabon is necessary to facilitate pro-poor economic growth.

Abstract

Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. This chapter has sought to estimate the sustainable long-term non-oil primary deficit and the optimal adjustment path toward that level. The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. The reform of fuel price subsidies in Gabon is necessary to facilitate pro-poor economic growth.

IV. Fuel Price Subsidies in Gabon: Fiscal Cost and Social Impact 35

A. Introduction

This paper looks at the impact of recent developments in international petroleum prices on fuel price subsidies in Gabon. While international fuel prices have more than doubled from 2003 to 2005, the domestic prices of petroleum products in Gabon remained frozen. The magnitude of these developments on price subsidies is quantified by comparing ex-refinery prices with estimated import parity prices (IPP). In addition, the social incidence of the subsidies is quantified using household survey data and a menu of policy options for reform is suggested.

The first main finding is that fuel prices in Gabon benefit from substantial subsidies. The total fiscal cost of the implicit subsidies is likely to reach 3.2 percent and 4.5 percent of non-oil GDP in 2005 and 2006, respectively (1.6 percent and 2 percent of overall GDP). These subsidies are not reported explicitly in the fiscal accounts but are instead netted against oil revenue. The largest fiscal outlays are on the subsidization of diesel (used in large-scale industries and for ground and maritime transportation) and jet kerosene consumption.

Secondly, the level of fuel price subsidization in Gabon is in the range observed in other developing and emerging market countries with fuel-price subsidies. Gabon’s estimated fuel price subsidy of 1.6 percent of overall GDP in 2005 is near the median of 2 percent of GDP observed in other countries for which data on subsidies were available. However, the almost four-fold increase in implicit subsidies in Gabon during 2003-05 is the largest out of the countries surveyed.

Thirdly, it is mostly higher-income households that benefit from the fuel subsidies. The top 10 percent of individuals received about one-third of the total subsidy. Meanwhile, the bottom 30 percent of individuals received only 13 percent of the subsidies, highlighting that fuel price subsidies are a very costly way to protect the real incomes of the poor.

The paper is structured as follows: Section B evaluates the magnitude of price subsidies at the ex-refinery level using estimated import parity prices, while Section C compares the degree of fuel price subsidization in Gabon with the size of subsidies in other developing and emerging market countries. Section D analyzes the social incidence of the subsidies, Section E discusses of policy options for mitigating the impact of reducing the subsidies, and Section F concludes.

B. The Magnitude of Fuel Price Subsidies in Gabon

For the purposes of this paper, a subsidy is defined as the difference between the reduced price of a good with government support and the price of the good in the absence of such support. The implicit price subsidy for petroleum product i in time period t (Sit) can then be defined as the difference between the reference “free-market price” (Mit) and the actual price times the volume of consumption (Cit):

(1)Sit=(Mit−Pit)Cit

At the core of the fuel price subsidies in Gabon are the ex-refinery prices of the seven petroleum products that have been frozen since 2002. 36 The sole supplier of these products to the domestic market is the majority-privately-owned refinery SOGARA,37 which purchases the crude oil required for its operations on the Gabonese market at an international market price. Due to the freeze on domestic ex-refinery fuel prices, in effect since 2002, the refinery sustains a loss when it sells the refined products on the Gabonese market. To quantify the loss, i.e., the value of the fuel price subsidy, a reference price (Mit) is computed every month by SOGARA using an import parity price (IPP) formula. The difference between the IPP and the frozen ex-refinery price multiplied by the quantity sold equals the monthly loss to the refinery for which it is compensated fully by the government. Payment is made in the form of crude oil delivered free of charge to SOGARA.

SOGARA calculates the IPP using the items shown in Table IV.1. The IPP is equal to the f.o.b. Mediterranean price reported in Platt’s (row 1), to which are added various import costs (transportation and financial costs, rows 3-6) and customs duties (rows 16-19). An equalization (cross-subsidization) fee is applied to super and JetA1, to cover discounts applicable on other petroleum products (row 33). Importantly, the IPP also includes a fee, called the “competitiveness differential,” of CFAF 15,000 per metric ton (row 31) that is collected on account of SOGARA’s production inefficiency.38

Table IV.1.

Calculation of Import Parity Price, June 2005

article image

Asphalt, butane, and fuel oil quantities are in metric tones (T). The rest are in cubic meters (M3).

Costs in this table are annualized by multiplying the June amount by 12.

The fiscal cost of the subsidies due to the ex-refinery price freeze is estimated to have reached 3.2 percent of non-oil GDP in 2005, and is expected to rise to 4.5 percent in 2006 (Table IV.2),39 as compared to total public spending on health and education of 2.2 and 3.1 percent of non-oil GDP in 2005, respectively. In contrast, in 2003, the estimated cost of the subsidies represented less than 1 percent of annual non-oil GDP. Two-thirds of the cost of the subsidies corresponds to diesel (Figure IV.1).40 The second largest share of the total cost of subsidies (15 percent) corresponds to jet kerosene, used for air transport. The third largest share (more than 7 percent) corresponds to super gasoline, used in private motor vehicles.

Table IV.2

Annual Cost of Implicit Fuel Price Subsidies, 2005-08

article image
Source: Gabonese authorities and IMF staff calculations and projections.

Projections for 2006-8 are based on the assumption that ex-refinery prices remain unchanged, international fuel prices evolve following WEO projections, and domestic fuel consumption expands at the rate of real non-oil GDP growth.

Total appropriations in the 2005 supplementary budget on wages and salaries, goods and services, transfers, and domestically-financed investment spending, in the education and health sectors, respectively.

Figure IV.1.
Figure IV.1.

Gabon: Fiscal Cost of Fuel Price Subsidies, 2005

(Percent of total cost)

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A004

Source: Gabonese authorities; and Fund staff calculations and estimations.

The cost of the subsidies is not reported explicitly in the fiscal accounts but is instead netted against oil revenue, i.e., the subsidies are implicit. This practice differs from the approach of other countries that enter the subsidization of fuel consumption explicitly under expenditure in the budget. In Yemen, for example, the cost of fuel subsidies is included in the budget and in the non-oil primary deficit that is used as a policy target variable.41 Fiscal transparency would be increased by making the subsidies—for which precise monthly data are available—explicit in the budget.

The finding of large subsidies in Gabon raises the question as to how much retail fuel prices would have to increase if ex-refinery prices increased to IPP levels. Data from the authorities on the taxes, fees, and margins included in the structure of retail fuel prices facilitate the analysis. Table IV.3 reports the increase in ex-refinery prices of super gasoline, lighting kerosene, diesel, and butane gas from their current to the IPP levels (as of end-March 2006) and how this would affect after-tax retail fuel prices, assuming no change in the size of tax rates and margins. For super, the retail prices would have to increase by 25 percent, from the current CFAF 475 per liter to CFAF 593 per liter, for diesel by 51 percent (from CFAF 370 to CFAF 560), and for lighting kerosene by 80 percent (from CFAF 249 to CFAF 447). This would bring retail prices close to those currently prevailing in Cameroon—at end- March 2006, the prices were CFAF 563, 524, and 356 per liter for super, diesel, and lighting kerosene, respectively.42

Table IV.3

Required Retail Price Increases1/

article image
Source: March 2006 data, Gabonese authorities, and IMF staff calculations.

Retail price increases consistent closing the gap between actual ex-refinery prices and the IPP based on the automatic adjustment mechanism.

C. Comparison with Selected Developing and Emerging Market Countries

The level of fuel price subsidization in Gabon is not unusual from a cross-country perspective. As reported in Table IV.4, several countries have responded to the increase in world oil prices by increasing explicit and implicit price subsidies on domestic fuels. In most of the surveyed countries, explicit subsidies tend to reflect the compensation of the national energy company for the increased difference between the ex-refinery domestic price and the world price of fuels, reported in the fiscal accounts. Mati and Thornton (2005) report that the size of subsidies (at different levels of government) in 11 countries in 2005 ranges from 0.2 percent (Argentina) to 9.2 percent (Yemen) of GDP, with a median of 0.8 percent of GDP. Regarding implicit subsidies, data were available for eight countries and are projected to range from 0.3 percent of GDP (Cameroon) to 9.9 percent (Azerbaijan), with a median of 2.0 percent of GDP. Gabon’s current projected implicit subsidy for 2005 of 1.5 percent of overall GDP is thus well within the range of shares observed in the countries surveyed. However, the almost fourfold increase in implicit subsidies in Gabon during 2003-05 is the largest out of the countries in the sample.

Table IV.4.

Fuel Price Subsidies in Selected Countries

(In percent of GDP)

article image
Source: Mati and Thornton (2005).

D. Poverty and Social Impact Analysis (PSIA) of the Fuel Price Subsidies

Who benefits from the fuel-price subsidies? The social incidence of the subsidies is calculated by simulating the impact of removing the subsidies on household real incomes across the income distribution using the 2005 Gabon EGEP household survey. The simulation involves raising ex-refinery prices to IPP levels, while keeping tax rates and margin levels unchanged. Table IV.5 shows the required fuel price increases, which averaged 54 percent at end-March 2006.

Table IV. 5.

Gabon: Required Fuel Price Increases, end-March 2006

(percent) 1/

article image

Increases in retail prices (all taxes included) for super, lighting kerosene, diesel, and butane. Increases in ex-refinery prices for jet kerosene, asphalt, and fuel oil.

The price of transport fuel is a weighted average of diesel (57 percent) and super gasoline (43 percent), based on SOGARA data on fuel use in Gabon.

Higher domestic prices for petroleum products would affect household real incomes through two channels: a direct effect from an increase in the prices paid by households for their direct consumption of petroleum products and an indirect effect from increases in prices of other goods and services (e.g., higher prices for food and transportation) consumed by households as producers pass on the higher costs of fuel inputs.

Calculating the direct effect requires information on the level of consumption of fuel by individual households in different parts of the national income distribution. The Gabon 2005 EGEP household survey contains reported expenditure by households on individual fuel products. A “first-order” estimate of the direct real income effect of fuel price increases can be calculated as follows. For each household one calculates the budget share of fuel expenditure items, i.e., fuel expenditures divided by total household consumption. Intuitively, poor households report smaller budget shares for transport fuel than do higher income groups. Also, poor consumers have larger lighting kerosene budget shares than do rich households. Multiplying budget shares by the required percentage increase in retail fuel prices (Table IV.5) gives a first-order estimate of the real income effect of the price rise, which assumes that fuel consumption stays fixed (Table IV.6).43

Table IV.6.

Direct Subsidies Per Capita by Welfare Level

article image
Source: Gabonese authorities (2004 EGEP household survey), and IMF staff calculations.

Transport fuel is a weighted average of diesel (57 percent) and super gasoline (43 percent), based on SOGARA data on fuel use in Gabon.

Identifying the magnitude of the indirect effect requires an estimate of the effect of higher fuel costs on the prices of other goods and services consumed by households. These price effects can be estimated using an input-output table of the economy showing the energy intensity of each sector and a price-shifting model of the effect of higher fuel costs on prices.44 The indirect real-income effect is then calculated by multiplying the household budget shares (from the EGEP survey) for the various goods by their estimated final price increases. Table IV. 7 reports the incidence of the both the indirect and direct effect for households at different points of the welfare distribution.45

Table IV.7.

Direct and Indirect Subsidies Per Capita by Welfare Level

article image
Source: Gabonese authorities (2004 EGEP household survey), and IMF staff calculations

Four main conclusions emerge from the social incidence analysis:

  1. Most of the subsidy goes to higher-income households. The top 10 percent of individuals received about one-third of the total subsidy. Meanwhile, the bottom 30 percent of individuals receive only 13 percent of all the subsidies, highlighting that fuel subsidies are a costly approach to protecting the real incomes of the poor.46 To the contrary, fuel subsidies are pro-rich in Gabon—a finding i.e. consistent with the analysis of the distributional effects of fuel subsidies in other countries.47

  2. Even an equal transfer to all households would be better targeted than most of the existing subsidies, since 30 percent of benefits would then accrue to the poorest 30 percent of households. The very poor targeting of fuel subsidies is not surprising; almost any universal consumption subsidy disproportionately benefits the rich since they, by definition, account for a relatively high proportion of total income and consumption. In Gabon, the top 10 percent of households consume more than 30 percent of all consumption in Gabon, while the bottom 10 percent of households consume only 2.5 percent of the total.

  3. The total (direct plus indirect) impact of increasing fuel prices to levels consistent with IPP would be an average of 6.3 percent of real per capita income (Table IV.7). This impact corresponds to an average retail price increase of 54 percent, and is consistent with the range observed in other countries (3-9 percent real income decline for average price increases ranging from 34-68 percent), as reported in Coady et al. (2006).

  4. The indirect effect, at 4.8 percent of real income, is larger than the direct effect. This finding reflects the fact that a substantial proportion of diesel and other fuel is used in the production and distribution of other goods and services.

E. Mitigating the Effect of Price Increases on the Poor

The escalating fiscal cost of the subsidies, and their pro-rich bias, suggests the need to reduce them. There is also a consensus in the literature that fuel subsidies are inappropriate on efficiency grounds, as they discourage producers from acquiring more energy-efficient technologies, so as to remain competitive in worlds markets.48 However, governments are often reluctant to allow fuel prices to increase due to the adverse effect that such price increases would have on the real incomes of poor households. Fortunately, as most fuel subsidies accrue to higher income households, it is often possible to eliminate the subsidies while using some of the budgetary savings to finance better targeted-programs to compensate the poor. This section suggests a number of short- and medium-term mitigating measures that could accompany an increase in fuel prices in Gabon, drawing on discussions with the Gabonese authorities, and on the experience of other countries, as discussed in Coady et al. (2006).

Short-term measures

  • Electricity “social” tariff reductions. Given that electricity is an important source of energy for poor households and its cost is closely correlated with fuel prices, reforming the level of electricity prices can mitigate the effect of higher average tariffs on poorer households with access to electricity.49 In Gabon, the privately-owned electricity provider, Société d’énergie et d’eau du Gabon (SEEG), already offers lower “social tariff” for electricity consumption below a certain “social limit.” The lifeline tariffs could be reduced, with the government compensating the SEEG for the resulting losses, or with higher tariffs for larger-scale users. 50

  • Water “social” tariff reductions. Similarly, existing lifeline tariffs for water provision by the SEEG could be reduced. A rural electrification campaign could further enhance the effectiveness of such targeted lifeline tariffs. Providing utilities free of charge to selected households for a limited period of time was implemented recently in Gabon—during the electoral campaign of late 2005, the government paid for the free provision of water and electricity for one month only to all households with a September electricity bill of less than CFAF 50,000.51

  • Geographic targeting. Concentrating extra social expenditures on households living in the poorest rural areas can result in a much higher proportion of the expenditures reaching poor households. For example, savings from reducing the fuel price subsidies could be used to provide more funding for health centers and dispensaries in rural areas.52 User charges for education and health services can be reduced or eliminated in the poorest rural and urban areas. Public works programs—such as rural road network maintenance—can be temporarily expanded. Such programs not only protect household real incomes but can contribute to expanding the social human capital of poor households. Developing the economy’s stock of human capital can, in turn, contribute to stimulating growth in the non-oil economy.

Medium-term measures

  • The budgetary savings can also be used to expand investment in public infrastructure, based on the priorities in the recently completed PRSP. The PRSP carefully assesses the incidence of poverty in Gabon using the 2005 EGEP survey and identifies pro-poor health and education development projects. In line with the PRSP priorities, savings from reducing the subsidies could be used to fund rural electrification campaigns and the greater provision of public transport. Expenditure informed by the PRSP can be expected to benefit the middle classes as well as poor households, which can help generate political support for the energy pricing reforms. In addition, investments in the transport and energy sectors could contribute to improving energy efficiency and thus reducing the vulnerability to oil price shocks.

  • To allow businesses to adjust to higher energy costs, and to allow time to implement better targeted programs consistent with the PRSP, eliminating the subsidies gradually would be appropriate. In export-oriented industries, firms may be unable to pass-through the higher energy cost. Phasing the subsidies out over three to four years could allow such firms, e.g., those in the forestry sector, to catch up with the fuel-efficiency levels of competitive firms in countries without fuel price subsidies.53. However, there is an obvious trade-off in terms of lower budgetary savings. In addition, one might maintain kerosene (used for lighting) and butane (cooking gas) subsidies for a year or two while reducing subsidies on diesel and super gasoline. This could give time to develop better targeted programs. However, price differentials between kerosene and diesel should not be maintained over the medium term as the products are substitutes.

F. Conclusion

This paper evaluates the fiscal cost and social impact of fuel price subsidies in Gabon. The results suggest that the total fiscal cost of the implicit subsidies is likely to reach 3.2 percent and 4.5 percent of non-oil GDP in 2005 and 2006, respectively. These subsidies are not reported explicitly in the fiscal accounts but are instead netted against oil revenue. In addition, the fuel subsidies are strongly biased towards higher-income households. The top ten percent of the income distribution benefit from one-third of the total subsidy, while the bottom 30 percent of the distribution benefits from only 13 percent of the subsidy.

The reform of fuel price subsidies in Gabon may therefore be necessary to release resources for critical social services for the poor, and to facilitate pro-poor economic growth. At the same time, increases in prices of basic commodities such as lighting kerosene and butane cooking gas may be associated with real income losses for the poor. Therefore, these effects need to be mitigated or eliminated by phasing out the subsidies gradually, and reorienting expenditure towards targeted programs and growth-enhancing infrastructure spending. The current period of strong economic growth could offer a useful window to mobilize support for a reduction in the fuel-price subsidy. Increasing transparency by reporting the subsidies in the 2006 supplementary budget, educating the public about the size and impact of the subsidies, and depoliticizing petroleum prices by using a pre-announced formula-based adjustment path, would further help to muster support for reform.

References

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  • Coady, David, Moataz El-Said, Robert Gillingham, Roland Kpodar, Paolo Medas, and David Newhouse, 2006, “The Fiscal and Social Costs of Fuel Subsidies: Evidence from Bolivia, Jordan, Mali and Sri Lanka,” PSIA Review Paper, Fiscal Affairs Department(Washington: International Monetary Fund).

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  • Gupta, Sanjeev, Marijn Verhoeven, Robert Gillingham Christian Schiller, Ali Mansoor and Juan Pablo Cordoba, 2000, Equity and Efficiency in the Reform of Price Subsidies (Washington: International Monetary Fund).

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  • International Monetary Fund, 2005,“Republic of Yemen: 2004 Article IV Consultation—Staff Report, Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Yemen,” Country Report No.05/111 (Washington: International Monetary Fund).

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  • Thornton, John, and Amine Mati, 2005,“Developments in Domestic Fuel Prices, Taxes and Subsidies in Selected Countries,” Note to Management (unpublished), Fiscal Affairs Department(Washington: International Monetary Fund).

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35

Prepared by Moataz El-Said and Daniel Leigh (both FAD). This paper has and benefited from comments by Rina Bhattacharya, David Coady, Robert Gillingham, Sanjeev Gupta, Amine Mati, Roger Nord, David Newhouse, Joseph Ntamatungiro, Anton Op de Beke, Jan-Peter Olters, Rolando Ossowski, Fred Sexsmith, Mauricio Villafuerte, and participants at seminars organized by the Ministry of Finance of Gabon in Libreville on February 17, 2006 and by the Fiscal Affairs Department on May 9, 2006.

36

Super gasoline, diesel, lighting kerosene, butane gas, jet kerosene, fuel oil, and asphalt.

37

SOGARA is owned by the Gabonese government (25 percent), Total (49,25 percent), Mobil, Shell, ChevronTexaco, Agip, (6.25 percent each), and others (7 percent). Because domestic demand exceeds SOGARA’s output, the refinery satisfies the domestic shortage by importing the products.

38

The “competitiveness differential” was originally intended to allow SOGARA to make a modest profit assuming it kept control of its costs. The authorities had intended for the competitiveness differential to gradually be reduced as SOGARA’s throughput increased and as it reduced its administrative expenses. However, maintaining the competitiveness differential has been necessary due to the refinery’s production inefficiency.

39

Data for 2005. Projections for 2006-08 are based on the assumption that ex-refinery prices remain unchanged, international fuel prices evolve following WEO projections, and domestic fuel consumption expands at the rate of real non-oil GDP growth. Upward revisions to WEO projections in May 2006 are not incorporated in these projections. With the revised WEO assumptions, the subsidies are projected to reach even higher levels during 2006-08.

40

More than 80 percent of the total cost is due to subsidies on diesel, super, lighting kerosene, and butane, the prices of which are frozen at the retail level (as well as at the ex-refinery level).

41

See the IMF Yemen Country Report No. 05/111. The rationale for including subsidies in the non-oil primary balance is that they represent a controllable expenditure item that affects aggregate demand. If the world price of fuel changes, the government can choose how much of the price change to pass through to domestic prices.

42

On March 15, 2006, the retail prices of these three fuel products in Gabon were increased by 7 percent in response to a negotiated increase in retailer margins (ex-refinery prices remained unchanged).

43

This overestimates the real income effect, since, in practice, households can reduce this impact by substituting away from fuel. For a discussion of the theoretical foundations of this approach in the context of price and tax reforms, see Ahmad and Stern (1984, 1991), Newbery and Stern (1987) and Deaton (1997).

44

For a detailed presentation of the price-shifting model used for the case of Gabon see Coady and Newhouse (2005). An multiplier approach yields the cumulative effect of an increase in fuel prices on the prices of goods and services in the other sectors of the economy. The procedure takes into account both first-round effects (e.g. the impact of higher fuel prices on transport prices), and higher-order effects (e.g. the impact of an increase in transport costs on food prices). The input-output (IO) coefficient matrix used was obtained from the Gabon office of statistics based on 2001 data.

45

There can also be other indirect effects, for example, through lower employment in sectors that use petroleum products as inputs.

46

The official poverty rate is 33 percent according to the 2005 World Bank Gabon Poverty Assessment (also based on the 2005 EGEP household survey).

47

See Coady et al. (2006) for an overview of the distributional impact of fuel-price subsidies in Bolivia, Jordan, Mali and Sri Lanka.

48

See Gupta et al. (2003), for example.

49

The SEEG 2004 Annual Report suggests that SEEG power plants use diesel fuel, gas (butane), and fuel oil (fuel lourd).

50

The WB PA reports SEEG electricity coverage as follows:60 percent of all households directly connected; 20 percent use neighbor’s line; 3 percent use their own electricity generator. In urban areas, 93 percent of households use electricity for lighting, but only 35 percent of households in rural areas.

51

Note that this temporary measure during the electoral campaign appears to have had a strong pro-rich bias. Analysis using the EGEP survey indicates that, of the total amount spent by the government on free utilities, 22 percent reached households in the top 10 percent of the population. Half of the total amount reached the top 30 percent of households. Meanwhile, households at the bottom 30 percent of the income distribution received only 15 percent of the free utilities subsidies.

52

For a detailed review of experiences with different targeting mechanisms, see Coady et al.(2005).

53

See Coady et al. (2006) for a discussion of formulae that can be used to smooth the price adjustment.

Other IMF Content

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Cover IMF Staff Country Reports
Gabon: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2006: Issue 232
Publisher:
International Monetary Fund
ISBN:
9781451813999
ISSN:
1934-7685
Pages:
88
DOI:
https://doi.org/10.5089/9781451813999.002
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    Gabon: Fiscal Cost of Fuel Price Subsidies, 2005

    (Percent of total cost)

Gabon: Fiscal Cost of Fuel Price Subsidies, 2005

(Percent of total cost)