Is subsidy coming back through the back door?
In April 2014, when the government agreed to seek financial and technical support from the International Monetary Fund (IMF) to stabilise the economy and bolster growth, one of the things that worried Ghanaians the most was the impact of the three-year programme on subsidies.
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These fears were properly grounded, given that subsidies generally helped to cushion the majority poor from bearing the full brunt of price increments on basic necessities such as fuel, water and electricity.
After closing the 2012 fiscal year at GH¢809 million, subsidies on petroleum products, water and electricity firmed up to GH¢1.2 billion in December 2013, cementing fears that the government’s support to the vulnerable in society was proving a hurdle to its own fiscal position.
This large expenditure item on subsidies justified the fears and the hesitation of some civil society groups in welcoming the IMF back again into the country’s balance of payment management.
It is also because the IMF is a fierce opponent of subsidies in developing countries in that they will insist the government scrapped that and would have dire consequences on the poor majority.
The easier route, therefore, was to scrap it or at best cut it down in order to help streamline public expenditure and close the widening fiscal deficit.
For the IMF, this was the best decision for the country. For the government and the beneficiaries of these subsidies, however, it was a painful measure that could have wider ramifications on the popularity of the government among the electorate.
But as it later turned out, the government had to choose between two difficult options – either remain with its Homegrown Policies, which allowed it some latitude to manoeuvre as far as public expenditure was concerned or agree to an IMF deal with its glaring implications on public spending.
The latter won and the scrapping of subsidies was successfully implemented, starting with the downstream petroleum sector, where subsidies had already combined with under recoveries to threaten the operations of bulk oil distributors and their partner banks.
Removing subsidies on water and electricity followed later. This helped to reduce the bulk of money the government spent on subsidies. In 2014, subsidies totalled GH¢475.7 million but dropped steeply to GH¢25 million last year. It is now estimated to end this year at GH¢50 million, majority of which is being channelled to social services, mostly for the poor and vulnerable.
The scrapping of subsidies has now been incorporated into the $918 million Extended Credit Facility (ECF) programme, which started in April 2014 to end in 2017.
The recent announcement by the Electricity Company of Ghana (ECG) that the government was cushioning the cost of power for power consumers with a GH¢300 million subsidy is ,therefore, vague and very worrying.
With 2016 being an election year, expenditure of this nature need to be properly scrutinised to help avoid a repeat of what happened in 2012 when the fiscal deficit jumped from four per cent in 2011 to 11.5 per cent on the back of election year pressures.
Why the need for clarity?
The latest GH¢300 million subsidy was vague because it failed to state whether the government or the power companies were going to bear the extra cost accruing from the new decision.
This meant that how the money will be treated in the budget – if it were to be borne by the government – or show in the books of the power companies (if they were to take responsibility for its implementation) is also not known. Either way, the country stands to lose more than gain from this decision.
As the country struggles to resuscitate the power companies from an estimated $1.5 billion debt owed to their financiers, asking them to absorb new subsidies will be fatal to their performance in the future. Forcing them to take up such a bill will mean that their revenue base, which is already threatened by mounting arrears from metropolitan, municipal, departments and agencies (MMDAs), will be subdued further.
The result will be a weaker balance sheet for the utilities that will not be able to support new attempts at securing finances to improve generation and distribution.
In case the government absorbs the GH¢300 million, be it subsidy or forward payment for power, it will mean the government has to find extra funds to take care of it. This is so because it was not budgeted for in the budget. Its introduction at this stage could, therefore, have adverse effects on the budget, which is already under pressure from election year promises.
The way forward
While it is obvious that the government will step up its social protection initiatives in an election year, there is no need belabouring the point that any such move must be done in consonance with the budget.
After squeezing through 2012 and 2014, another round of fiscal consolidation should be the last thing the country should go through, especially after an election. That can only be avoided if unbudgeted expenditures such as the GH¢300 million to be used to cushion consumers between zero units and 50 units of power are avoided. Instead of using these resources to subsidise power for just six months, the government could use that amount to procure more fuel for the various thermal plants, which are virtually underfiring as a result of lack of resources to purchase fuel.
This way, the government can strategically nip in the bud the monstrous return of the erratic power supply. This can be an equal positive point earner in the eyes of the ordinary voter.