Thursday, June 27, 2013

BoG calls for complete withdrawal of fuel subsidy

The Bank of Ghana (BoG) has joined the clarion call on government to stop subsidising the prices of utilities and petroleum products, explaining that the removal of subsidies will help stabilise the macroeconomic environment leading to a rise in foreign direct investments (FDIs).

While noting the short-term effects of subsidy removals on prices, especially on lorry fares and consumables, the Central Bank said the positive impact of the action on key fiscal variables such as the exchange rate, budget deficit and inflation far outweighed the anticipated negatives, hence the need for a complete withdrawal of subsidies.

The acting Head of Research, Mrs Grace E. Akrofi, advanced the bank's position at a seminar on fuel subsidies in Accra.

The seminar, organised by the Institute of Financial and Economic Journalists (IFEJ) in collaboration with the African Business Media (ABM), brought together officials from the BoG, the National Petroleum Authority (NPA), think tanks and some civil society organisations, to discuss the relevance or otherwise of subsidies on these essential products.

Sharing BoG's experiences on the impact of subsidy payments on monetary policy, Mrs Akrofi said the huge payments made on subsidies, most of which are often not budgeted for, sometimes puts a swing on monetary policy, leading to a rocky macroeconomic environment.

That, she said, acts to taint the image of the economy in the eyes of investors partly causing FDIs inflows to slow.

“Because we continue to subsidise the prices of petroleum products notwithstanding the cost involved, we are not able to achieve certain economic targets such as the budget deficit, trade deficit and even inflation. But all these things go a long way to determine how competitive we are for foreign investors," she said at the discussions.

"If these things are stabilised, possibly through the withdrawal of the subsidies, then we believe that more FDIs will come in and that will help grow the economy," Mrs Akrofi explained.

The government last year used some GH¢809 million in cash to subsidise the prices of fuel and utilities, according to this year's Budget and Economic Policy Statement.

An additional GH¢955.8 million was still outstanding and was expected to be retired this year, the Minister of Finance, Mr Seth Terkper, said during the presentation of the budget in March this year.

About GH¢1.2 billion has been budgeted for subsidies for 2013, accordingly to the years.

"All these payments contribute to the budget deficit and that is the concern we have. Assuming those payments weren't made, then it means that the deficit would have been far lower and other fiscals wouldn't have been affected," the

Acting Head of the Central Bank's Research Department said in an interview after the seminar.

BoG's latest posture on the subsidy debate adds to many the number of institutions and individuals advocating the complete withdrawal of subsidies in the country.

The first were the World Bank and the International Monetary Fund (IMF) with both contending that subsidy payments benefited the rich and not the poor, who are often the target, and further deny critical sectors of the economy such as health, education and infrastructure, among others, the needed funds to develop.

The authority said government needed to withdraw fuel subsidies to enable consumers pays realistic prices for petroleum, explaining that the late payment of subsidies was contributing to the current sorry state of the Tema Oil Refinery (TOR) and the intermittent shortages of petroleum products in the country.

These debates and the subsequent indoor negotiations with government led to a complete withdrawal of subsidies on petrol earlier this year amid mixed sentiments from the public.

"That was a good step and we are just wondering why government didn't extend to the other petroleum products," the Head of Pricing at NPA, Mrs Alpha Okaidja Welbeck, told the GRAPHIC BUSINESS after the seminar.

"But we are hoping that they will stop the subsidy thing soon," she added. An Oil and Gas Analyst at ISODEC, Mr Dennis Nchor, however disagreed, explaining that subsidies, by themselves, were not bad but its the strategy that is.

"We have always maintained that if you think subsidies are not benefiting the intended target, then re-target and ensure that it benefits the poor," he said, adding that government needed to institute mitigation measures in place before subsidises are remove otherwise, the poor will suffer greatly.

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