Analysis - Fuel subsidy cuts test faith in African governments

DAKAR Fri Jan 13, 2012 11:36am GMT

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DAKAR (Reuters) - A growing trend of African countries promising to free up money for social spending by slashing fuel subsidies will test public faith in governments, amid widespread fear the cash will vanish in a haze of graft and mismanagement.

Nigeria, Ghana, Guinea, Chad and others have all cut back on expensive fuel subsidy programmes in recent months.

For economists, the cuts have been an encouraging sign, raising hopes that reforms are taking root in the continent even as it braces for the fallout of the European debt crisis.

For millions of Africans, however, the changes have created nothing by pain.

Nigerians have taken to the streets across the country this week, furious at an overnight doubling of petrol prices and suspicious that the money might be diverted by corrupt officials.

"(Ending subsidies) makes eminent sense, but the public doesn't believe it," U.S. economist Jeffrey Sachs told Reuters during a visit to the region last week.

"So the question is, will the government follow through? Because simply removing all of those subsidies if the revenue gets stolen some other way is a disaster," he added, referring to Nigeria's subsidy cut.

Economists argue that if the region's governments manage the savings properly, some of the world's poorest countries will see improvements in transport, health care, education and energy, as well as an influx in investment.

Nigeria alone is expected to save more than $6 billion (3 billion pounds) a year by ending its subsidy programme, while other countries like Cameroon -- which has said it will cut subsidies in 2012 -- would save an annual $600 million.

But doubts are running high in a region notorious for government corruption and fraud. It remains to be seen whether Nigeria's government in particular can weather the storm of public opposition to the higher fuel prices.

The OPEC member's biggest oil union said it is ready to halt oil output by the weekend if the government does not reinstate the subsidy, piling pressure on President Goodluck Jonathan to reach some kind of compromise.

"How the government reacts to the protests will set the political tone for the whole reform programme, which will require tough decisions affecting some of Nigeria's most important vested interests," Fitch ratings agency said in a research note on Wednesday.

There is also a chance of serious opposition in Ghana, where President John Atta Mills is seeking re-election in polls later this year.

While Ghana's opposition has yet to criticise the move, the country's main labour union has called for subsidies to be reinstated. Campaign group the Alliance for Accountable Governance has threatened to organise protests.

"Our governments in Africa should know that if the people lose trust in them, nothing can be achieved," said Joe Abbey, an analyst at the Centre for Policy Analysis in Ghana.

WANTED: WORKING REFINERIES

The gradual shift away from subsidies comes after a vocal campaign by the International Monetary Fund, arguing subsidy programmes perpetuate fiscal inefficiencies, benefit the rich over the poor and cause smuggling.

Shortly after Nigeria lifted its subsidy on January 1, fuel prices spiked in neighbouring Cameroon and Benin, countries that had depended heavily on contraband Nigerian fuel.

Uganda this week abolished electricity subsidies in a move likely to cause public uproar. Tanzania has also adjusted fuel and power prices higher to reflect increases on the global market.

"Of course we can't merely see this debate as the imposition of IMF policies in African countries. There are some fundamental economic truths which African governments shouldn't ignore," said Rolake Akinola, Oil and Gas Specialist at Ecobank.

"A policy that sees almost 25 percent of a country's annual budget spent on subsidies to the detriment of health, education, or infrastructure is unsustainable," she said.

Rising world prices for petroleum, weak local currencies, and uncertainty over European demand for raw commodities from Africa have been the main drivers in rolling back fuel subsidies across Africa, Akinola said.

Removing them could also eliminate a barrier to investment in domestic refining and distribution, eventually easing fuel prices while creating jobs. Subsidies can eclipse the benefit of running a refinery if fuel prices are below the cost of production.

Africa is home to more than 40 oil refineries with a capacity that exceeds the continent's demand of roughly 3 million barrels per day, though the plants are largely under-utilized and in disrepair. New projects are mostly on hold.

Ghana's Tema Oil Refinery has been routinely left idle since 2009 because of debt and an inability to get lines of credit to purchase crude oil.

"In the longer-term, a deregulated market could attract core investors to refinery projects and distribution networks, but only if other investment conditions are right," Akinola said.

(Additional reporting by Clair MacDougall and Kwasi Kpodo in Accra, Tim Cocks in Lagos; Writing by Richard Valdmanis; Editing by Andrew Heavens)

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