Republic of Congo: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
16 Sep 2015
eISBN:
9781513574448
ISBN:
9781513574448
Language:
English
Keywords:
ISCR; CR; firm; public expenditure; cost; price gap; retail price; petroleum product price; fuel price subsidy; entry distribution price; reference price; border import price; Energy subsidies; Price structures; Sub-Saharan Africa
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Republic of Congo: Selected Issues

Abstract

Republic of Congo: Selected Issues

Fuel Price Subsidies in the Republic of Congo: Evolution and Options for Reform3

Energy subsidies are estimated at about 4 percent of non-oil GDP in 2014. The current low international oil prices have virtually eliminated the subsidies on diesel and gasoline, thereby providing a window of opportunity to rationalize the subsidy regime with limited effects on current retail prices. Alleyne (2013) shows that while energy subsidies can benefit all segments of the population in sub-Saharan Africa, the main beneficiaries are the better off. Moreover, eliminating the subsidies would affect the poor because energy consumption represents a large share of their total consumption. For this reason, reforms to energy subsidies should be carefully designed, with consideration given to measures to mitigate social impacts such as conditional cash transfers to target vulnerable households.

A. Background to the Current System

1. Congo is a net oil exporter with the state-owned national refinery (Congolaise de Raffinage - CORAF) meeting about 80 percent of domestic demand for oil products. Imports of refined products are mainly for diesel, imports of which amounted to about 26 percent of total domestic diesel consumption in 2012 (International Energy Agency - IEA). These are sourced by the state-owned Societé Nationale des Pétroles de Congo (SNPC) through Kinshasa, Democratic Republic of Congo (DRC).

2. The Congolese authorities did not follow through on implementing a 2005 automatic pricing formula that adjusts pump prices to internationally traded prices. The main features of the current fuel pricing regime in Congo were established in 2005. However, this formula has never in fact been applied and regulated retail prices have been set by ministerial decree. By 2008 the gap between international prices and the regulated retail prices was estimated to have resulted in an implicit subsidy of 5.6 percent of non-oil GDP.

3. Administered retail petroleum product prices were revised upward in September 2008 in the face of the spike in international oil prices and have since remained unchanged. The current price regime establishes regulated retail prices for diesel, gasoline, kerosene and a range of other fuels. The price at which petroleum products enter the distribution chain (the entry distribution price) is given by subtracting specific transport costs, distribution margins, in addition to VAT, from the regulated retail price (Table 1). This system has limited the pass through of oil price increases with the cost continuing to be borne by the budget. The never applied formula, in contrast, aimed to modulate the entry distribution price in line with border import prices. This has not been applied, however, primarily reflecting concerns about the social impact of high energy prices on poor households.

Table 1.

Current Retail Fuel Price Structure

(CFAF per liter)

article image
Source: National authorities.

4. Retail prices are broadly in line with those in the rest of the CEMAC region with the notable exception of CAR, where prices are significantly higher. Other than in CAR, regional prices for the three main products in terms of market demand (diesel, gasoline and kerosene) do not show wide divergence (Figure 1). Prices in Congo are somewhat lower than the overall CEMAC average, although this largely reflects the impact of the high CAR prices on the overall regional mean. In neighboring DRC, however, prices for are also significantly higher. For diesel, the average price in DRC in 2014 was 73 percent higher than in Congo (Figure 2). This may present incentives to illicit cross-border trade.

Figure 1.
Figure 1.

Retail Price in CEMAC and DRC, 2013

(USD per liter)

Citation: IMF Staff Country Reports 2015, 264; 10.5089/9781513574448.002.A002

Source: IMF staff estimates.
Figure 2.
Figure 2.

Retail Diesel Prices in Congo and DRC

(CFAF per liter)

Citation: IMF Staff Country Reports 2015, 264; 10.5089/9781513574448.002.A002

Source: National authorities.

B. Patterns of Consumption in the Congo Domestic Market

5. Demand for oil products is dominated by road transport (diesel and gasoline) which accounts for 74 percent of domestic fuel use. Residential use (LPG and kerosene) and aviation (jet kerosene) account for the remaining fuel use in the country (Figure 3). Since 2005 diesel usage has grown by 173 percent, reflecting increased private and commercial vehicle usage. The growth in gasoline, meanwhile, has been more muted, reflecting its higher price and its use primarily in private vehicles accessible only to higher income groups.

Figure 3.
Figure 3.

Oil Products Consumption

Citation: IMF Staff Country Reports 2015, 264; 10.5089/9781513574448.002.A002

Source: IEA.
Figure 4.
Figure 4.

Consumption of Main Oil Products

(In kilotonnes of oil equivalent)

Citation: IMF Staff Country Reports 2015, 264; 10.5089/9781513574448.002.A002

Source: IEA.

C. The Evolution of the Domestic Subsidy Regime and Fiscal Implications

6. In the period leading up to the 2008 reform, high international oil prices resulted in a growing wedge between domestic and international prices. At their peak the price gaps for kerosene and diesel are estimated to have been comfortably in excess of USD1.00 per liter (Figure 5). As a result, the total amount of the subsidy in 2008 is estimated to have increased to about CFAF 105 billion (USD 233.5 million) which amounted to 6.7 percent of non-oil GDP.

Figure 5.
Figure 5.

Domestic and International Prices Over Time

(CFAF per liter)

Citation: IMF Staff Country Reports 2015, 264; 10.5089/9781513574448.002.A002

Sources: IEA and national authorities’ data and IMF staff estimates

7. The 2008 reform was initially successful in containing the subsidy but, its impact has dissipated over time. The reform of retail prices in September 2008 led to an increase in diesel prices of 38 percent and kerosene by 18.5 percent. This led to a narrowing of the price gaps which was subsequently reinforced by the decline in international prices in the wake of the global economic slowdown. As a result, the net subsidy is estimated to have turned negative in 2009, before continuing to grow again as international oil prices recovered (Figure 6).

Figure 6.
Figure 6.

Total Fuel Subsidy

(Percent of non-oil GDP)

Citation: IMF Staff Country Reports 2015, 264; 10.5089/9781513574448.002.A002

Sources: WEO database and IMF staff estimate

8. By the end of 2014 price gaps for the mainstays of domestic consumption had narrowed significantly. The decline in international oil prices in the second half of 2014 resulted in a narrowing of the price gaps across the range of products consumed on the domestic market. In the first quarter of 2015, price gaps for diesel and kerosene remained close to historical lows but their role as the mainstay of domestic consumption nevertheless results in a projected subsidy for these two products together amounting to 0.8 percent of non-oil GDP for the year. This is offset by a negative price gap for gasoline (i.e. regulated prices above international prices) which is projected to amount to 0.3 percent of non-oil GDP in 2015. The overall narrowing of price gaps presents an opportunity to reform the system and consider applying the price smoothing formula. This would reduce, or even eliminate, the need for fiscal outlays to cover price gaps going forward.

9. Price gaps and subsidies are projected to re-emerge more strongly as international oil prices recover. Projecting international prices in line with WEO assumptions sees the return of significant price gaps from 2016 onwards. Assuming consumption growth in line with non-oil GDP projections, this would result in overall subsidies rising steadily to once again exceed 4 percent of non-oil GDP by 2020 (Figure 6).

D. Distributional Impacts

10. A key consideration in assessing the impact of any such future reform is the distributional effects. IMF staff estimates drawing on household per capita income data from the 2005 household survey suggests that except for kerosene, the benefit incidence of the subsidy regime prior to the 2008 adjustment in petroleum product prices was skewed in favor of the highest income quintiles. Depending on the specific product, the top two quintiles received between 62 percent and 81 percent of the benefits of the subsidy. In contrast, the bottom two quintiles received between 8 and 20 percent of the benefits. Even in the case of kerosene, where the lowest two quintiles received 35 percent of the benefits of the subsidy, the highest quintiles benefitted more with 42 percent of the benefits. Thus, reducing or eliminating fuel subsidies is likely to improve the progressivity of public spending, since high-income households consume more petroleum products. This is consistent with Alleyne (2013) which shows that subsidies in SSA countries have tended to provide benefits to all segments of the population, but mainly the better off. Nonetheless, the poorest household would also be impacted negatively from a removal of energy subsidies because energy consumption represents a large share of their total consumption.

E. Reform Options

11. The volatility in international prices since the 2008 reform suggests that a price smoothing formula would limit fiscal exposure and improve transparency. Under current circumstances, with international prices now very close to the regulated retail price, the application of a price smoothing formula would not imply significant social costs. Moreover, the benefits of the subsidy regime have been demonstrated to be skewed in favor of higher income households, though poor households will also be adversely impacted because of the high share of energy in their total consumption.

12. Fiscal savings could be used in more efficient, poverty-focused programs. To put this in perspective, the estimated fiscal cost of fuel subsidies in 2014 (4.1 percent of non-oil GDP) amounted to 119 percent of the Ministry of Health’s allocation for recurrent expenditure. Alternatively, such an amount could cover a cash transfer payment equivalent to the estimated basic minimum household food consumption to about 14 percent of the population. In other words, any efforts to reform energy subsidies should be well-designed and take into consideration the impact on vulnerable households, including from interventions in the form of conditional cash transfers and subsidies for public transportation.

13. Congo and CEMAC countries in general could benefit from policy convergence in fuel prices. This would require a coordination of fuel pricing and taxation. Better coordination at the CEMAC level would also help to counter the resistance to automatic pass-through of international to domestic fuel prices.

14. The implicit producer subsidy to CORAF should also be made more transparent through an explicit budgetary allocation. The current approach of covering CORAF’s inefficiencies through the adjustement economique could be eliminated with the shortfall in CORAF’s revenues made up through a transparent budgetary subvention.

Methodological Issue: Assessing the Reference Price in Pre-Tax Subsidies

In this analysis the consumer subsidy is defined as the difference between the reference price and the price paid by fuel consumers. The approach taken here is to assess the pre-tax subsidy. Thus, no allowance has been made to incorporate an efficient taxation element, reflecting both revenue objectives and correction for negative externalities, in the reference price. Incorporating such elements into the reference price to give the post tax subsidy would lead to an increased gap between the regulated consumer price and a higher estimate of the subsidy.

The reference price for each fuel product is derived using the methodology set out in the fuel pricing formula contained in Regulation 2005/699 that has never in fact been applied. The updated estimates of the reference price take IEA data for monthly spot prices at Rotterdam3 for individual fuel items and adjust these for transport and distribution costs. These reference prices are compared to the regulated retail prices contained in the relevant decrees that have fixed such prices since 2008. This comparison provides a price gap per liter of each individual fuel item which is then applied to the corresponding consumption figures to provide the value of the subsidy.

Projections of consumption are made by applying forecast non-oil GDP growth to all fuel products. Price gaps for 2015 are an average of data to March 2015; thereafter they are based on projected international prices using WEO crude oil price assumptions.

3 In some cases Singapore is used due to data availability.

References

  • Alleyne, T. 2013. “Energy Reform in Sub-Saharan Africa, Experience and Lessons.” African Department Report No. 13/2, International Monetary Fund, Washington.

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  • Energy Statistics of non-OECD Countries, International Energy Agency, 2011.

3

Prepared by Guy Jenkinson (AFR).

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Cover IMF Staff Country Reports
Republic of Congo: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 264
Publisher:
International Monetary Fund
ISBN:
9781513574448
ISSN:
1934-7685
Pages:
36
DOI:
https://doi.org/10.5089/9781513574448.002

Retail Price in CEMAC and DRC, 2013

(USD per liter)

Retail Diesel Prices in Congo and DRC

(CFAF per liter)

Oil Products Consumption

Consumption of Main Oil Products

(In kilotonnes of oil equivalent)

Domestic and International Prices Over Time

(CFAF per liter)

Total Fuel Subsidy

(Percent of non-oil GDP)