Estimating the Impact on Poverty of Ghana's Fuel Subsidy Reform and a Mitigating Response

Abstract

Governments across Africa have faced increasing challenges to maintain fuel subsidies over recent years. In Ghana, in the face of a near 12% fiscal deficit in 2012, their burgeoning cost has drawn attention to questions of fiscal sustainability as well as their overall efficiency and effectiveness. In 2013, the Ghanaian Government would have spent cost 2.4 billion GHS (approximately 1.2 billion USD) on fuel subsidies, equaling 3.2% of GDP and more than half of Ghana’s allocation to the entire education sector. Fuel subsidies around the world have been proven to be generally regressive, benefiting largely the richest group with very little reaching those living below the poverty line. In Ghana, this paper finds that almost 78% of fuel subsidies benefited the wealthiest group, with less than 3% of subsidy benefits reaching the poorest quintile.The richest quintile of the population received 15.86 GHS per year from the fuel subsidies per capita, while the poorest received just 2.23 GHS per capita. In early 2013 the Ghanaian Government introduced the removal of fuel subsidies over the first half of the year. Prices of petrol, kerosene, diesel and LPG saw rises of between 15% and 50%, until prices reached their market level in mid-September 2013. Following the subsidy removal and before the 2013 budget was finalised, the Government welcomed the initiation of this research in order to assess the impact of the reform on the poor and to ensure a mitigating response in the form of a social safety net. Based on recent studies of social protection in Ghana this paper identifies the national cash transfer programme, LEAP, as being well targeted, having positive impact, and functioning at national scale with immediate plans for expansion. This report builds on UNICEF technical support to reform fuel subsidies and scale-up social protection to respond to rising inequality. It aims to provide evidence of the magnitude and the distribution of the impacts of the 2013 fuel subsidy reforms on household welfare in Ghana, and to determine to what extent an expansion of social protection, through the LEAP cash transfer programme, is an effective mitigating measure.