Why Energy Subsidy Removal Beneficial, but after some Pain: How other African countries succeeded

By Mwansa Chalwe Snr

The New Dawn government will be removing energy subsidies – fuel and electricity – with effect from 2022. The removal of energy subsidies is a complex undertaking, politically sensitive and requires building strong public support. Although the government has already made the decision, it is important that the public gets both sides of the story in terms of the pro and cons of the decision, from an objective and apolitical point of view.

For a start, Zambians should not be misled by those opposed to the decision, for political reasons especially, that Zambia is the only African country to embark on energy reforms. There are a number of African countries that have taken the route already and successfully at that. Zambia could learn something from their experiences. The countries in mind include: Namibia, Kenya, Ghana, South Africa, Uganda, Tunisia, Nigeria, and Egypt.

The current debate on the removal of energy subsidies has been rather confusing to ordinary Zambians at best, and dishonesty at worst. In addition, it has been highly politicized such that the public have not been properly educated about the consequences of the decision – the immediate negative impact, the immediate benefits and the long term potential benefits. This article will try to lay out facts as they relate to the decision that the government has made, from an informed perspective. And as is normal in economics, the views expressed are based on a caveat: ceteris paribus (other things being equal).

The Negative impact of Subsidy Removal

There is no question that the removal of energy subsidies will have immediate negative impacts on the economy in the short to medium term. It is no secret that businesses and households will be immediately negatively impacted in a number of ways when energy subsidies are removed.

In the case of businesses, generally their cost of doing business will go up as energy forms a substantial part of the cost of production or service. This means that their profitability will be reduced, their plans for growth o expansion may be shelved, and in order to reduce costs, some may consider reducing their labour force. And energy intensive industries will be the worst affected because their competitiveness will be undermined.

Businesses will pass on the increased of cost of production or service to consumers. Consequently, the cost of living for households will go up as most essential commodities’ prices will rise. The poor are the most likely to be more adversely affected, as costs of their basic needs which includes food stuffs and transport will go up.
As the for the economy as a whole, it is likely that there will be a general reduction in economic activities in the short term ,an increase in inflation with its consequential multiplier effects such as increases in interest rates. There is also a likelihood of job losses as result of the decision to remove energy subsidies.

Although the removal of subsidies will come with the aforementioned negative consequences, there are potential benefits, both in the short and long terms. The public needs to be made aware of the potential benefits of the removal of subsidies, so that they can make an informed decision as to which one, is the lesser evil.

Benefits of Subsidy Removal

The first compelling argument in Zambia’s case for energy subsidy removal, is that subsidies were reinforcing and perpetuating inequality because they mostly benefit upper-income groups, who are the biggest consumers of energy. The majority of Zambians are not benefiting from energy subsidies; the argument goes. Energy subsidies are not, therefore, a rational method of allocating the country’s scarce resources because they merely benefit a small section of the population and the Multinational Corporations like Mining companies, who are the major consumers.

“The Treasury is using about US$107 million per month or US$1.3 billion per year on fuel and electricity subsidy. What is even more interesting is that more than 60% of fuel and/or electricity in Zambia is consumed by the mines with only less than 2% of the two products being consumed by the ordinary and vulnerable people who are genuinely supposed to be subsidised. This means that  the mines are being subsidised by US$780 million every year in fuel and electricity while the ordinary and vulnerable Zambians are only getting a subsidy of a partly US$26 million per year”, Secretary to the Treasury, Felix Nkulukusa wrote in an Op-Ed.

The second expected benefit from the removal of electricity subsidies, is the elimination of load shedding. The argument is that the current electricity price is not attractive to private investors. Subsidized prices make it unattractive for the private sector and ZESCO to invest in the electricity sector to expand their production. The removal of subsidies will open up the sector to more players and this will promote efficiency in the sector which will result in more supply and therefore eliminate the never ending shortage of power and the dreaded load shedding. This is a very compelling argument to most Zambians, given the terrible inconveniences and loss of production that has been experienced over the years due to power shortages. It is also hoped that in the long term, the prices may even come down due to oversupply.

The third expected benefit from the removal of subsidies is the positive impact on the kwacha value. The current cheap Zambian energy has encouraged excessive and reckless consumption, which has to be met with more imports. Imported fuel and electricity places a heavy fiscal burden on the country. The fuel bill, it has been argued, does have an effect on the country’s balance of payments, the value of the kwacha and the consequential imported inflation. The removal of subsidies, therefore, will result in savings in foreign and support Zambia’s balance of Payments. exchange

Fifth, Zambia has established a Ministry of Green Economy and Environment. The Government’s intention and vision is to turn Zambia into a green economy. A green economy is one in which the production of goods and services is done with negligible levels of pollution of land, air and water. There is a link between subsidies, consumption of energy, and climate change. Subsidies aggravate climate change by worsening local pollution and congestion by boosting energy consumption. Subsidy reform, therefore, will play an important role in helping to reduce CO2 emissions and offsetting climate change. It follows that the removal of energy subsidies by New Dawn government does constitute some policy consistency in its quest to build a green economy. The removal of subsides will encourage households, businesses and investors to invest in renewable energy. Zambia will consequently have a better energy mix than we have now.

How to succeed removing Energy Subsidies with Public Support

The removal of energy subsidies is not an easy task. It requires proper planning, properly designed mitigating measures and a good communications strategy. There are many countries in Africa, and outside the continent, who have succeeded and reaped the benefits of doing so. When one studies their experiences, there are a number of common measures that they undertook that contributed to their success. The outline of some of these measures are listed below and the Zambian government is well advised to learn from them.

First and foremost, it is imperative that the government implements measures meant to gain public support for the programme. And in order to gain public support, it is important for the government to clearly articulate the long term objectives. These objectives should include the need to improving the quality of services, the freeing up of resources for other needy sectors such as education, health etc. There is also a need to engage stockholders by consulting them and inviting them to participate in the reform process to reduce resistance to tariff increases. It is very doubtful whether the Zambian government has sufficiently engaged in this process of gaining public support and consulting important stakeholders. However, it is not yet too late to do so.

The second factor that should be considered in subsidy reform, is the need to spread out and sequence out increases in tariffs. The phased increases approach allow time for households and businesses to adjust their consumption of energy. It also give government the time to expand and strengthen the social safety nets. However, it should be noted that phasing of price increases depends on a particular country’s circumstances. There is, therefore, usually a trade-off between the objectives of achieving budgetary savings and softening the impact of reforms on households. In Zambia’s case, the indications seem to suggest that the UPND Alliance administration does not intend to go the route of spreading out the removal of subsidies. The Minister of Finance and Development Planning is on record of having said that they intend to implement certain measures which are way above what the International Monetary Fund (IMF) is demanding. He further said there is no provision for subsidies in the 2022 budget. The recent statement by the IMF that Zambia is going to take bold economic reform steps, seems to suggest that they could have been possibly referring to the “big bang” removal of subsidies by the New Dawn government. The intention of the fast pace of reform could be to maximize the budgetary savings in the short term. The strategy seems to suggest that of sustaining pain in the short term, but gaining with a booming economy by election date in 2026.

The third ingredient of a successful energy reform is a good communication strategy. The experiences of other countries have shown that a well thought out and aggressive communication strategy is a prerequisite to a successful energy reform programme. The successful implementation of the subsidy reform programme requires the formulation of an aggressive promotion strategy. It is a necessary condition to win the hearts and minds of the public. When designing such a communication strategy, it is important to assess the winners and losers from the energy subsidies removal so that appropriate messaging is formulated. This is a very important step. There is also a dire need for the government to be transparent. The communications strategy should not just entail informing the public about the potential benefits of the removal of subsidies but also the short term costs that the various stakeholders will be faced with. It is particularly important to disseminate information on the size of subsidies with subsidy expenditures compared to spending on other priority areas. The planned increases in outlays such as health, education, social benefits as a result of additional revenue freed up as a result of subsidy reform, should be particularly be emphasized. The aforementioned factors have underpinned the success of most subsidy reforms in many African countries, as well as some countries outside Africa like the Philippines, Armenia and Turkey.

In Zambia’s case, so far, there has been tit bits of communication about the energy reforms. There are some statements that have touched on some of the above issues, but it’s all been in an ad hoc fashion rather than well-coordinated and thought out. The overwhelming impression one gets is that there is an absence of a formal communication strategy by the UPND Alliance administration to market the energy reforms to the public. The government has simply not been aggressive enough to educate people about the impending removal of energy subsidies. They have been criticized for not adopting an aggressive communication strategy to educate the public about the removal of subsidies by experts and some media houses like News Diggers.

“We have noticed that no one in government is being sincere with people regarding the consequences of the decision to remove fuel subsidies. Our leaders are jumping to the fruitful end of the programme and trying to down play the immediate impact,” News Diggers wrote in an editorial of 8th December, 2021.

One of the most critical ingredient in a successful subsidy reform is the implementation of mitigation measures for the vulnerable population. There is need for the government to ensure that the poor are protected when removing energy subsidies. There are countries that adopted the targeted cash transfers which are given to beneficiaries to purchase the amount of and type of energy that suits their needs or to buy other goods and services. When cash transfers are not feasible, consideration should be given to other practical programs.

The last ingredient of a successful subsidy reform is improvements in efficiency and de-politicization of the sector. In Zambia’s case, there is a need to restructure State Owned Enterprises like Zesco and Indeni in order to ensure that there are improvements in their efficiency and a reduction of their fiscal burden on government. These reforms could be done through setting performance targets and the introduction of competition in the sector to improve their performance. As part of the de-politicization process of the energy sector, there is need for implementing an automatic price mechanism. The responsibility for implementing the automatic mechanism should be given to an independent body.

Conclusion

There is no question that the government was caught between a rock and a hard place in implementing the subsidy reforms. However, good management at household, firm and national level entails making brave informed decisions rather than emotional or politically expedient decisions. And purely on the basis of facts available, and the pro and cons of the two alternatives, the rational decision is to removal energy subsidies. The decision will certainly be painful in the short term, but beneficial in the medium to long term. It is, therefore, recommended that the government’s energy reforms should be supported by the public. However, on basis of my international experience in media as a consultant, I would advise the Government to provide for a marketing communications budget. They need to hire a marketing communications company or an Advertising Agency to design a promotion strategy so as to win over public support. Also, as part of the communication strategy, President HH is well advised to use his bully pulpit, to explain among other things: the subsidy removal, the IMF program and the accusation by his critics that he lied because he has failed to fulfil critical campaign promises, by making an end of year address to the nation.

Although I do support the removal of energy subsidies, I do not support the removal of agriculture subsidies. In my view, if IMF is making it as one of the conditions for the bail out, then it smacks of hypocrisy on their part. This is so because the IMF major shareholders: the US and Western Europe, subsidise their farmers. The Common Agriculture Policy of the European Union (EU) is a case in point. We should never let anyone play with our food security just like nobody plays with theirs. Our Farmer Input Support Programme (FISP) can be improved but not eliminated, because in my view, it is sacrosanct. The Programme has made Zambia food secure since the late President Levy Mwanawasa, a farmer himself, like the current President, introduced it. There is empirical evidence that shows that growth in agriculture is four times more effective in the reduction of poverty than non-agricultural sectors growth. The FISP policy has reduced poverty tremendously without question. IMF, please do not touch FISP in your intervention, otherwise your Programme will become unpopular and bring back the 1980/90s Structural Adjustment Programme (SAP)’s bad taste in Zambians’ mouths.

The writer is a Chartered Accountant and Author. He is a retired international MSMEs Consultant and an independent financial commentator. He is also an Op-Ed Contributor to the Hong Kong based, Alibaba owned, and South China Morning Post (SCMP). Contact: [email protected]