Policy & Planning

Energy subsidies in Africa counterproductive − IMF

29 May 2013 | ESI Africa

A recent report from the International Monetary Fund (IMF) indicates that eliminating energy subsidies in developing countries could increase spending for health and education programs and ease budgetary pressures.

Released in February 2013, the report found that the current global energy policy is inefficient and inhibits sustainable development, deters private investment, and does not adequately deal with the energy needs of the poor. The estimated US$1.9 trillion that was spent globally on energy resources in 2011 could be better spent on bolstering often-fragmented education and healthcare infrastructures in developing states.

MediaGlobal News reports that least developed countries (LDCs), in particular, were mentioned as examples of how subsidies can create development-related problems, such as low growth and inequitable resource spending.

Roger Nord, the IMF’s deputy director in the Africa department, explained to MediaGlobal News that a poorly managed subsidy system in sub-Saharan Africa, an area containing the majority of LDCs, has resulted in less access to electricity and higher costs for the poor.

“Subsidies have discouraged investment and maintenance in the energy sector in sub-Saharan Africa, leading to costly and inadequate energy supply from the grid,” Nord says. “This policy has adversely affected growth and competitiveness, resulted in very low access for the poor, and required consumers to incur large costs for self-generation alternatives.”

Subsidy reforms encourage new investment and improved efficiency of state enterprises, Nord argues. “It offers the prospect of raising electricity supply, increasing access to the poor, and reducing the effective price currently paid by consumers for electricity.” Since 2005 Kenya and Uganda have raised energy production by 5% and 9% respectively, through the use of such reforms.

Some LDCs are not so fortunate. Further south, the IMF reported that subsidies have contributed to national deficits in Mozambique and Zambia. These countries currently spend more than 4% of their GDP on energy subsidies − the highest in sub-Saharan Africa. This type of spending is expected to grow as both economies expand, leading to more debt.

SOURCE: http://www.esi-africa.com/Energy/subsidies/in/Africa/counterproductive/IMF

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