Africa’s subsidy debate rolls on

In September, William Ruto was sworn in as Kenya’s fifth president after a hard-fought election in which he promised to be a champion for Kenya’s “hustler nation”.

In his inaugural speech, he highlighted the challenges facing the country, including joblessness, spiralling prices and the burden of regulation facing entrepreneurs. One of the central planks of Ruto’s economic policy was made clear: he argued that fuel and food subsidies have been ineffective and expensive.

“The interventions in place have not borne any fruit. On fuel subsidy alone, the taxpayers have spent a total of Ksh144bn [$1.2bn], a whooping Ksh60bn in the last four months. If the subsidy continues to the end of the financial year, it will cost the taxpayer Ksh280bn, equivalent to the entire national government development budget. 

“Additionally, there was an attempt to subsidise Unga [a state-owned holding company that invests in food companies] in the run up to the election, a programme that gobbled up Ksh7bn in one month, with no impact. In addition to being very costly, consumption subsidy interventions are prone to abuse, they distort markets and create uncertainty, including artificial shortages of the very products being subsidised.”

Just two days later, Ruto ordered the partial removal of petrol subsidies. “Super petrol” – mostly used by private motorists – will now cost about KSh179 ($1.50) a litre, up from KSh160. 

Instead, Ruto says that the cost-of-living crisis will be tackled by improving inputs, especially fertiliser, to agricultural producers. “The cost of living challenges are related to production. Our strategy to bring down the cost of living is predicated on empowering producers.”

The removal of subsidies is likely to prove controversial. But with a brand new mandate from the electorate, Ruto may be gambling that now is the time to make tough decisions.

Need for a safety net

Even so, the debate over subsidies in Africa is by no means settled. With populations across the continent looking to their governments for urgent support to cushion them from a global cost-of-living crisis influenced by the Russia-Ukraine war, climate change and the tailwinds of Covid-19, there is a growing clamour for direct support for citizens. 

In Angola, where the ruling MPLA’s popularity slumped in August’s presidential elections, the government is considering subsidies to win back support from voters battered by rising food and fuel prices.

As Alex Vines, Africa programme director at Chatham House, tells African Business:

“Like we’re seeing in the West, subsidies are coming back into fashion. I think we will see subsidies being used to cushion the strong headwinds of inflation and give a sense that the government is reaching out to those who punished it in the election.”

That may be possible in oil producers like Angola where the rising cost of international oil prices is giving a boost to government finances. But for countries without the benefit of substantial national resources, the subsidy option may not be on the table. Indebted African countries seeking the support of subsidy-sceptic multilateral lenders like the IMF are rather more likely to come up against demands to scrap subsidies than introduce new ones. 

“The benefits of these subsidies tend to accrue to richer households [more] than poorer households,” commented IMF Africa director Abebe Selassie on the Kenya subsidies. 

It is perhaps best not to take a blanket approach. While there is no doubt that poorly targeted subsidies can be wasteful and an outlet for corruption, well-designed subsidies targeted at the poorest could be a crucial safety net for Africans sinking into poverty. The debate will continue to roll on.