Tuesday, May 28, 2013

Removing fuel subsidies and scaling-up social protection in Ghana

A number of countries around the world are faced with the increasingly high costs and regressive nature of fuel subsidies but are struggling with their reform given likely negative impacts on well-being. In Ghana, the government recently removed the majority of the subsidy on fuel and scaled up its funding to social protection, including a tripling of the budget allocation to the national cash transfer programme.

Analysis proves that subsidies on petrol are regressive, with 70% of direct benefits accruing to the wealthiest quintile on average in Africa, while less than 3% of direct benefits are received by the poorest 20% of households*. Conversely, we know that many direct social transfer programmes are far more pro-poor - Ghana's national cash transfer programme (LEAP) is one of the better targeted with 75% of its benefits reaching the poorest two quintiles.

As national debate mounted after the elections, and the preparation of the 2013 budget was underway, Ghana's new government chose to remove the majority of the subsidy on fuel (petrol and diesel in particular), thereby avoiding a cost to the budget of well over
 1 billion USD in the year.

The subsidy reform was quite sudden, occurring less than two weeks before the annual budget was finalised, and no national studies on the reform's impact had been carried out. As a result, UNICEF led the core team of partners to look at the possible impact and what response might therefore be needed.

A rapid and preliminary assessment of the national household data by the World Bank, showed that although the subsidies were regressive, any increase in the cost of fuel and related purchases such as transport and food would still have an important impact on the expenditure and therefore well-being of the poorest groups. The real income loss for the poorest group following subsidy removal is around 7% - a considerable amount for people living below the poverty line. As a result, the
  reform will impact on Ghana's national trajectory to reduce poverty.

UNICEF then estimated a range of different cost scenarios for scaling-up the national cash transfer programme, concluding that it should be expanded to reach around 150,000 households by the end of 2013, twice its coverage in 2012.

At the same time, we coordinated a series of high level meetings to discuss the need for a government response to the fuel subsidy reform.

The outcome was an increase in the government budget for the national cash transfer programme, from an expenditure of 4 million USD in 2012 to an allocation of 15 million USD in the 2013 budget.

However, even with a doubling of the cash transfer programme's coverage, it will still only reach less than 8% of Ghana's poorest people. Clearly, even in addition to other social protection programmes that are in operation, much remains to be done to strengthen the national social protection system and continue LEAP's expansion to protect the poorest from such shocks and persistent poverty.

Focal point: Sarah Hague