By Franklin Sisabu Bendu
Petroleum products are an important cog in the running of any economy. The agriculture, industry and services sub-sectors are all reliant on different types of petroleum products for their daily functions.
Sadly, for Sierra Leone, we do not produce these petroleum products. All of what we consume must be imported. Over the last five years, the import value of petroleum products has averaged US$ 253 million (Two Hundred and Fifty-Three million US dollars).
To fully understand the government’s recent decision to remove fuel subsidies, we must first unpack the process and the current status quo. The petroleum pricing formula, which determines the pump price of petroleum products in Sierra Leone, is driven mainly by two components: the Platt price and changes in the exchange rate – particularly the US dollar.
Being an oil importing economy, Sierra Leone is a price taker, implying that the Government has no control over the prices of these products. In addition, the multiple global economic shocks continue to have knock-on effects on our exports receipt.
This development coupled with the increase in commodity prices, especially food prices, has increased our import payments with far-reaching implications for the exchange rate market. With excess demand pressures in the foreign exchange market, the Leone continues to depreciate against major international currencies, particularly the United States dollars. These developments continue to impact on the foreign exchange requirements of the oil importers. The Bank of Sierra Leone has intermittently intervened in the foreign exchange market to support the oil imports with foreign currency to facilitate the importation of the petroleum products.
Given the dynamics in the Platt price and the depreciation in the exchange rate, the two major triggers in the petroleum pricing formula, the domestic pump price of petroleum products should have increased before this current hike in pump prices. However, the government was reluctant to effect the full pass-through of the increase in the Platt price and the exchange rate depreciation to the domestic pump price of petroleum products, mostly owing to the potential adverse implications it might have on the overall pricing dynamics and by extension the cost of livelihood.
Petroleum goods play a significant part within the Classification of Individual Consumption by Purpose (COICOP), which is used for the categorization and analysis of individual consumption expenditures. These are expenditures by households, non-profit organisations serving households, and general government entities. The COICOP is used in the calculation of the consumer price index, which serves as a measure of inflation. An upward trend in the price of petroleum products results in a corresponding increase in the expenses on various categories within the COICOP. As a result, there is a subsequent rise in the overall prices of products and services over a certain period.
The importation of petroleum products further generates revenues for the government, mostly via the collection of import and excise duties. In several nations that are reliant on oil imports, governments’ exhibit significant worry over fluctuations in petroleum prices due to its implications on the most vulnerable segment of the society, who constitutes the majority. Thus, to maintain the pump price of petroleum products, the government had forgone import and excise duties. This measure incurs significant drag on the budget implementation, particularly on poverty related expenditures, with implications for fiscal sustainability in the medium to long-term.
Based on fiscal sustainability concerns, the Minister of Finance, in his supplemental budget speech delivered on July 31, 2023, announced the removal of fuel subsidies as a major policy shift. According to the Minister, “the government incurred a revenue loss of around US$32.8 million on fuel subsidy”. In light of the discontinuation of the fuel subsidy, there has been a notable increase in the cost of fuel, with prices rising from NLe 21.5 to NLe 25 per litre, representing a percentage increase of 16.3 across all fuel products.
This increase in prices of fuel has been felt in the prices of several commodities and services in the market. Even basic commodities like pepper and salt are not exempt from the impact of rising petroleum prices, as business people are compelled to bear the burden of increased transportation costs when moving these items from the farm gate to the market centres.
There are different opinions about maintaining or removal of the subsidy. In this piece, I will provide an argument advocating for the removal of subsidies.
Who benefits the most?
In assessing the merits of petroleum products subsidy, it is important to understand who benefits the most from such government largesse. Both high- and low-income earners benefit from the universal subsidy. However, the high-income earners benefit disproportionately. High income earners who are able to spend a larger amount on petroleum products (for cars, generators, etc) get a greater benefit from the universal subsidy on these products than low income earners, who mainly rely on commercial transportation. Low-income earners and the unemployed rely on Kekes, Okadas, taxis and Poda Podas to move from point A to point B.
Between 2018 and 2022, imports of petroleum products averaged US$ 253.3 million. In 2023, imports of petroleum products are forecast to amount to US$ 361.8 million. According to the Minister of Finance, total subsidies from January – June 2023 amounted to US$ 32.8 million, which is 9.1 percent of the total imports value. Extrapolating this for the entire 2023 means fuel subsidy will amount to US$ 65.4 million (18.2 percent of the total import value). For a poor country like ours, this can make tremendous impact in some many areas, if reallocated.
A delicate balancing act
The government can make better use of the revenue from petroleum products to implement meaningful programmes in certain key areas such as health, education, agriculture and the environment. This revenue from the universal subsidy can be ring-fenced and focused only on delivering tangible development outcomes.
One of the pillars in the Medium Term National Development Plan (2019-2023) was on human capital development. According to the government’s annual accounts for 2022, actual domestic development expenditures allocated to the Ministry of Health and Sanitation, Ministry of Education (both Basic and Tertiary) and Ministry of Agriculture amounted to US$ 3 million. This is one tenth of the revenue lost by government through universal subsidies on petroleum products in the first half of 2023.
If the same US$ 32.8 million can be realised between July and December 2023, then quite a few targets can be achieved on the human capital development front. Below is a list of my propositions for how the government could utilise the revenue that will be gained from the fuel subsidy removal.
On health:
- Approximately US$ 750,000 could be used to procure 32 dialysis machines (2 per district)
- Approximately US$ 3 million to procure one high-end system Magnetic Resonance Imaging (MRI) machine. Currently, there is no functional MRI machine in this entire country. The MRI is essential to helping our medical practitioners analyse in detail, images of almost every internal structure in the human body, including the organs, bones, muscles and blood vessels.
- US$ 5 million set aside to commence training of specialist medical personnel in various areas – neurosurgeons, bone specialist, paediatricians, gynaecologist, anaesthesia, midwives.
- US$ 3 million on solar installation in all Government hospitals
- US$ 5 million to build one additional operating theatre in regional districts hospitals.
On Education:
- Establish a research fund of US$ 2.5 million for Universities (US$ 500,000/university) – encourage researchers to undertake research in various fields. Some of the results can be used by government to support policy implementation.
- US$ 5 million to start the student loan scheme
On Transportation:
- US$ 5 million to procure additional buses to serve urban areas in order to ease the high cost of transportation on those reliant on commercial transportation.
On targeted interventions:
- US$ 3.5 million to target the vulnerable through the social safety net programme implemented by the National Commission for Social Action.
For these reasons outlined above, I argue that it could be in our best interest as a petroleum-importing developing country, to remove the fuel subsidy, as has been done by the government.
Looking forward, President Julius Maada Bio has outlined five key areas for his second term. FEED SALONE is the flagship programme focused on reducing food insecurity. Agriculture accounts for nearly 50 percent of our Gross Domestic Product even though productivity is still at a subsistence level. The sector is also characterised by high post-harvest loss and poor irrigation systems. There has to be a notable shift in agriculture investment if the FEED SALONE objective is to be met. Government can ring-fence a certain percent of the revenue from petroleum products, specifically targeting the agriculture sector. Such interventions can be in the form of expanding the current machine ring programme, procuring high yielding seeds, providing extension services and research into soil management in various ecologies with a view to increasing productivity, income and employment especially for women who provide the bulk of the labour and reduce the rural-urban migration among youths. Furthermore, Government should create the enabling environment for effective private sector participation in the agriculture sector.
The removal of the universal subsidy and the efficient utilisation of the revenue will allow for better use of public funds to achieve more meaningful development programmes, which will be more beneficial to Sierra Leoneans and positively impact on the economy.
Non-State Actors and the civil society should also take this opportunity to fully engage in the debate on how best to monitor the utilisation of revenue from petroleum products. The government must communicate its plans and actions transparently to citizens.
Copyright © 2023 Politico (07/08/23)
