beyondbrics

The government of a west-African country proposed this week to cut a recent hike in fuel prices by 20 per cent, after labour unions threatened to go on strike.

Sounds familiar? This isn’t Nigeria, however – where six days of strikes in January cost the economy around $1.3bn – but nearby Ghana.

There are key differences between the two countries: analysts consider the situation in Ghana much more benign, with little prospect of violent protests. But as with Nigeria, there are concerns that political populism is suppressing economic necessity – especially with elections just round the corner.

Speaking to African Business News, Razia Khan, Head of Africa Research at Standard Chartered said: “we don’t think necessarily that the climbdown on the policy is going to be a game-changer for [Ghana's] entire fiscal outlook… but what will leave investors a little less comfortable is the fact that Ghana’s political cycle now seems to be more of an influence on economic policy.”

Ghana announced that fuel prices would rise on December 28. The move didn’t surprise analysts but the timing did, coming ahead of presidential and parliamentary elections towards the end of 2012. Alex Mould, chief executive of the National Petroleum Authority in Ghana, cited the prohibitive costs of the subsidy: $276 million in 2011. That had been exacerbated by a rise in the cost of procuring crude oil and a depreciation in the cedi, he said.

Since Ghana removed its fuel subsidy, petrol and diesel prices have climbed 15 per cent, according to a Reuters report on Thursday. The new proposals would reduce this increase by 20 per cent – but the National Petroleum Authority has not yet signed off on the move.

Khan added: [The proposals] “will inevitably lead to investors being more cautious about what else might change; where else we might see some deterioration in the fiscal outlook.”

The differences between the situations in Ghana and Nigeria are marked. Ghana has only recently become an oil exporter, whereas Nigeria derives the vast majority of its export revenues from oil, producing more than 2m barrels per day. And Ghana is much more accustomed to frequent adjustments in its domestic fuel prices than its west African peer, where fuel prices were previously capped at 65 naira (around $0.40) per litre.

What’s more, there is a big discrepancy in the total cost of the subsidies – $11bn in Nigeria in 2011, 40 times as much as in Ghana (Nigeria’s GDP is around 6 times bigger) .

Nonetheless, Kahn argues that fuel prices in Ghana will have to rise eventually – and that politics cannot stand in the way indefinitely.

“The system that would probably suit Ghana better would be to see more flexibility in domestic fuel prices… in part because this would reduce the potential for a bigger shock when Ghana faces an inevitable fuel price adjustment. It would also help to de-politicise the issue of fuel prices,” she told beyondbrics.

Fortunately, there’s a precedent in Africa which not only Ghana, but other countries grappling with fuel subsidy costs – Nigeria, and also Guinea and Chad – could learn from.

“Ultimately, if African countries are looking for a model – something that’s likely to be sustainable in the future – the South African model, where there are monthly adjustments, creates a much more sustainable basis for the management of fuel prices longer term,” Khan said.

Related reading:
Nigeria: a reformed investment, beyondbrics
Nigeria: Power outage, FT
Ghana: almost a star, beyondbrics
Ghana: lies, damn lies and estimates, beyondbrics