Monday, July 7, 2014

The Unbaised Economists Perspective on Government Policy Cuting Back on Fuel Subsidies

By Ateh Thomson Pepeah (Political Economist)

Ateh Thomson Pepeah
Since 2009, the government has worked harder towards accomplishment of her 2035 vision. Heavy projects have been initiated cooperation between the country and foreign governments, and lobbies for sound partnerships have been fruitful. However,growth rates have been sluggish, even with minimal inflation rates. Following international pressure on the need to cut back on fuel subsidies, the government of Cameroon  on June 30, 2014.eventually considered this decision.

Under strict economist perspectives, a cut back on fuels subsidies will imply a positive and negative effect to the Cameroonian economy.The Problem lies on which of these effects is more stronger.

Several empirical studies have indicated a significant negative relationship between subsidy removal and poverty reduction within various economies. In Cameroon, it is  important to recall that subsidies fall undercurrent expenditures which benefits the now only and effects, very short leaved. Creating more fiscal space by cutting back on fuel subsidies therefore can lead to spending reallocation towards capital investment on infrastructure,health care, and education etc in the long run.

Consider for instance the Balance of Payment situation (BOP): My clairvoyance reveals that a cut back in subsidies pushes up product cost and brings about a visible long run reduction in domestic demand (Cameroonians prefer trekking and car owners public transport). This extra fuel may then accumulate for the international markets which subsequently improves the Balance of payment situation but the TOT--Terms of Trade becomes favorable too. Revenue from international trade in extras from petrol--everything being equal then swell the national income of the country.

According to the world bank report, subsidies are said to only benefit the richest 10% of the population . They  stated that massive fuel subsidies reduces fiscal space such that government have fewer sources to promote economic growth through investment in infrastructure or human capital. That definitely worsens income distribution in thecountry because most of the fuel subsidies are enjoyed by the non poor,rather than by poor groups.Concretely this imbalance should be address by such a solution with reallocation towards more productive sectors.

However, these reallocation policies might not be effective to compensate the adverse impacts of the percentage removal of fuel subsidies if economic agents try to seek gain through mark-up pricing over the increase of production costs. Pumping stations all around towns have now added an inexplicable 50frs to the final cost of fuel and this is dangerous because it rather motivates resistance to such policy reforms.

On a General note, this decrease in fuel subsidies will be followed by a decrease in macro-economic indicators, such as private consumption, import s and gross domestic product (GDP), while other indicators, net indirect tax and consumer Price index (CPI) will increase. On a more technical bases adjustment effects, which result from real wage, price and structural rigidities in the economy, add to the direct income effect. Higher oil prices inevitably lead to inflation,increased input costs, reduced non-oil demand and reduces the attractiveness of the investment climate. Tax revenues  tend to fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates up. Because of resistance to real declines in wages, an oil price increase typically leads to upward pressure on nominal wage levels. Wage pressures together with reduced demand tend to lead to higher unemployment, at least in the short term. These effects are greater the more sudden and the more pronounced the price increase and are magnified by the impact of higher prices on consumer and business confidence. If not properly contended through non-violent government economic and social responds measures, Violence becomes inevitable in the near future.
In many countries like, the Philippine  etc, fuel subsidy removal despite relative government struggle came with some rational attached to their argument. Firstly, their oil fields as attested were becoming more and more empty—the natural resource was getting exhausted. Secondly, they were little alternatives to depend on than becoming net importers of oil. As such subsidy removal and refocusing on other avenues that equilibrate   living standards and welfare of consumers became the best alternative .

In Cameroon however, production and refinery capacity seems to have stagnated not as a result of the absent of oil wells but due to lack of investment in exploring new oilfields and declining production from maturing fields. I hold the view that several other wells still exist in the Country but have not been identified. This if taken seriously would increase production given the rapid growth in consumption. In addition,an increase in the middle class population also put pressure on fuel demands. More and more youths are gaining access to cars, or getting involved in productions that entail the use of fuel in Cameroon .These figures imply that even if all the available domestic crude oil were refined in Cameroon, it might not still meet the need of Cameroonians faced with an apparent youth bulge . Therefor investment in exploring new oilfields should be given a priority.

Again the fuel allocation of administrators should be drastically reduced. It will not be just having an office with very limited mobility yet being allocated over 922millionFCFA for fuel alone while the common man bears the entire burden. These reforms should be made known to Cameroonians and the total about secured be channeled with full explanations towards capital investments  which enhances growth.

More especially, the government should implement—not promise–compensation programmes to mitigate the obvious effect of subsidy removal. This programme might included cash transfer, health insurance, education subsidies and also rural infrastructures development. In the Philippine in 2008 for instance after cutbacks on subsidies, the Government launched a package of pro-poor spending programs that were financed by windfall VAT revenue from high oil prices. The policy package included electricity subsidies for indigent families, college scholarships for low-income students, and subsidized loans to farmers that reduced their cost relatively. In addition, the Government distributed subsidized rice to low-income families and started a conditional cash transfer program. The option went well and was successful. In Cameroon the situation is delicate, not only fuel prices but cooking gas prices have sore. This heavily affects house wholes and the majority student population—youths for that matters. If the Cameroon government can actually adapt this measures, it is possible, this policy would go through without major hitches. This should urgently be done before trade unions all around the country finalize their discussions and plans concerning the weeks ahead.

Effective communication to the general public is an eminent requirement to avoid misgivings that might transform in to political instability.The Philippine government used this amongst other measures in their case and it did worked for them in 2008.In Cameroon, this will go peacefully only if deliberations in parliament by parliamentarians validate such a pertinent policy with major impact on the lives in their constituencies. So because, as at now, such a defactor decision is unlawful for a law abiding country that Cameroon should be.

In 2012, i wrote thus......."As an indispensable catalyst within various sectors of pertinence in affecting country prosperity , it holds therefore that no alterations of this sector_( Transport) transmitted through increasing fuel prices goes without kickbacks effects to the entire economy. Enough reasons why governments should gauge economic policy in tandem to the countries stage of development and corresponding welfare levels therein before effecting such weighty adjustments. Without this, any other endeavor only comes to challenging the initial essence of such policies. Fuel subsidies for sure were intended to reduce the cost burden on Cameroonians given government judgement at previous, that citizens couldn't bare the entire cost and maintain a decent living standard. The point was on welfare and how to better the same. If today, a cut back on such subsidies (more than previous,) greatly dampens welfare, then government must have challenged the essence of the same policy. Perhaps, the economy might just need a little more time before getting ready for such policies. This gauging must come from within the country, not otherwise. for what worked else where must not necessarily be the case with Cameroon(consider the Structural Adjustment programs--SAPs).... Here we are!!!

I strongly belief,Cameroonians are not cowards. If fighting, they fight for a just course, if striking, it is just their rights they sick protection of. Can the government proposes to the general public a more Specific, Measurable, Attainable,  Realistic, and Time bound compensation and mitigation plan?
God Bless Cameroon!!!

Ateh Thomson Pepeah
Hon. Attempted; MezameCentral Const.

When News Breaks Out, We Break In. (The 2014 Bloggies Finalist)

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