By IMFBlog

November 27, 2017

Versions in  中文(Chinese); Español (Spanish), Français (French), 日本語 (Japanese)

Universal fuel and energy subsidies have been prevalent in sub-Saharan Africa, but they have substantial drawbacks (photo: Reuters/Newscom).

Reforms in some mostly oil-exporting countries, along with lower international fuel prices since 2014, have reduced the size of fuel subsidies in sub-Saharan Africa, and they need to do more  given the recent rise in international fuel prices.

Universal fuel and energy subsidies have been prevalent in sub-Saharan Africa, but they have substantial drawbacks. They tend to benefit the rich rather than the poor, foster fuel overconsumption, and crowd out more productive government spending.

Our Chart of the Week shows the fall in oil prices between June 2014 and early 2017 was partially passed on to consumers in oil importing countries of the region; oil exporters, like Angola, increased domestic fuel prices. An IMF survey of fuel prices in the region suggests that, over that period, the ratio of changes in retail fuel prices relative to changes in international fuel prices (expressed in local currency) was negative in oil exporters (−19 percent), as they increased fuel prices, and positive in oil importers (62 percent) but less than 100 percent as they only partially transmitted the lower global oil prices.

Fuel prices in the region are mostly set by governments, either on a discretionary basis or by automatic adjustment formulas. Only about one-third of sub-Saharan African countries allow automatic adjustment of retail prices, while the rest set prices administratively. This pricing structure has historically translated into relatively low pass-through to changes in global oil prices.

A successful reform to domestic fuel and energy pricing requires a comprehensive strategy. Country experiences suggest the following key elements of a reform: (1) a communication campaign; (2) phased and gradual price increases; (3) targeted social spending or essential investment to mitigate the impact of the reform on affected households and firms; (4) introduction of an automatic pricing formula; and (5) accompanying measures to improve the efficiency of state-owned enterprises and service delivery.

For more information, read our latest Regional Economic Outlook for Sub-Saharan Africa.