The Energy Subsidy, Who Dares, And Who Cares?

What is the subsidy? It’s a government incentive, a financial aid extended to an economic sector. The World Trade Organization mentioned five types of governmental subsidies: cash subsidies, tax concessions, assumption of risk, government procurement policies that pay more than the free market price, stock purchases that keep a company’s stock price higher than market levels.  Consumption subsidies reduce the price of goods and services to consumers, and from the other side, production subsidy encourages producers/suppliers to increase the production of a particular product, so the market would promote it without raising the final price to consumers. It is well known that; the subsidy is applied with the aim of promoting social and economic policies. So it is clear that the subsidy which is counted as a burden on government, more expenditure, (means more pressures), from the other hand consumers are not prepared for its removal or redirection, unless compensated after a rational debate with conviction!!  The citizens will not accept any attempt or an action towards a price increase; it is a very hard issue for them to give up after acquisition!!  Therefore government leaders could not raise prices; otherwise they will be faced with a strong opposition, unrest, street protests, and strikes………… especially if a price raise is linked to necessities.                                                                                      Here at this area I will try to focus at the issue of energy subsidy reform. For many years and up to the present time a government‘s efficiency is measured through its ability to promote democratic principles, improve security, reduce poverty, and fight against corruption. Therefore a government might think that the big energy subsidy which benefits all citizens should be directed towards infrastructures, education, and all services which reduce poverty. If the price of energy is low, then the cost of energy subsidy reform will be low and possible to succeed, but if the price of energy is high, then cost of a failure subsidy reform will be high. Some people think that government should reduce fuel/energy subsidy, because a high energy subsidy will make less budget spending on other potential development fields such as infrastructure, education, clean water and so on. They believe that energy subsidy must not make a welfare loss, as it might benefit the rich more than the poor, as you know mathematically speaking the subsidy functions like a negative tax. They also believe that; economic inefficiency is created by a subsidy, because it costs a government more to enact the subsidy than the subsidy creates additional benefits to consumers and producers. While other economists believe that; subsidies are not bad for a society, they raise a surplus in market, and make sense when considering fairness and equity issues and market availability under rational prices for all subsidized necessities such as food and energy.                                                                                          I think that the oil (energy/fuel) subsidy must be applied when international oil prices are rising. Most countries subsidize fuel costs in order to stop its prices ballooning. The popular government is that one which; lower prices and control inflation, keep many businesses alive, and increases the access of goods and services to its citizens; all these mentioned goals are counted as subsidy advantages. From the other hand the subsidy disadvantages; might emerge when a government is pushed to impose high taxes or face a supply shortage, and I believe this is not a big issue compared to the advantages. Although we have got different views about subsidies in general and energy subsidy in particular, the G-20 leaders in the year 2009 made the elimination of energy subsidies a central element of their policy platform. Those policy active reforms, along with the big decline in international oil prices, have brought energy subsidies to their lowest levels in several years (up to the year2019).  Later on, at the UN Climate Change Conference, many countries indicated that they are planning to adopt an array of national policies reforms, including reforms of energy subsidy policies. So the problems with energy subsidy reforms have been known for a long time, the resources spent on subsidies could be devoted to other important social purposes!!?? Fixing the problem of energy subsidy has not been an easy one, as energy subsidy reform is mainly a challenge of political economy.                                                                                                  Can we in the Sudan carry out a successful energy subsidy reform programs?    I think the timing for implementing such a program is not suitable at all!! All types of reform: pricing, institutional, informational and complementary will face difficulties, and obstacles, (economic, technical and administrative). If the Sudanese government increased the fuel prices that will flame the high prices for everything and the present status of hyper inflation will be even worse. The collapsing economy will be without legs and feet!!  A cash transfer targeted to poor households’ reform program will not work because of weak institutions and lack of perfect information linked to the poor population. Also if the Sudanese government decided to redirect the energy subsidy to complementary services for the poor citizens, this is not going to happen smoothly, because there is a continuous high deficit in current expenses. All funds coming from the subsidy removal will be directed to cover the government running expenses. Therefore any strategy for elimination of energy subsidies in the Sudan right now, will end without any success, I bet the economy will be burning in a great hell!                                                                                         The Sudanese economy is very different; it cannot be compared with G-2o, or even with most of the developing countries. The Sudan has been under global economic sanctions, (American economic sanctions) for more than twenty years, with corruption and poverty, dominating the whole country, therefore psychologically and politically we are very different!! Therefore we should not think of importing any foreign experiments which are not applicable to our political, social and cultural environment, otherwise we will be strongly shocked!!                                                                                          Finally we have to remember that; when others talk about the energy subsidy, they mean that their local price is less than the international price of oil. So if the global oil price decreased, there will be no subsidy, or a declining one. But for the Sudanese odd case; the subsidy for everything including energy, is coming out from the wrong exchange rate policies!!    The continuous crazy devaluations in the local currency, is the main cause of subsidies, then we have to place our exchange rate issue on top of our economic priority problems, and think of it at the first level.    

Dr. Isam Elzein Elmahi Ahmed

Faculty of Economics and Administrative Sciences

Mashreq University

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