Are subsidies the real issue?

31 May

The recent scrapping of subsidies on maize and fuel has been met with forceful commentary and sentiment.

That is not a surprise at all. The prices of our widely used mealie-meal and fuel pump prices have spiralled upwards.

In the heat of this topical development, it is easy to lose sight of the holistic picture and dwell on the subsidy removal only.

The question from my perspective is not whether or not the subsidies should have been removed. Rather it is the manner it was done on one hand and what will become of the savings on the other.

Even more critical is the learning derived from our experience with subsidies.

Should the subsidies go?

Based on the full impact of subsidies on the treasury, the decision here is a non-contest. For government to spend billions annually to cushion a consumption bill is not sustainable.

It follows then that the removal of fuel and maize subsidies was inevitable. The cost has been astronomical and arguably can be applied elsewhere in value adding sectors. But that resource redirection is only possible with political will and foresight.

Are subsidies unnecessary?

Surely not. Almost all nations one way or the other will subsidise some activity or sector. This is a form of support that government will render to achieve a progressive end in earmarked areas.

In Zambia’s case, agriculture and the energy sector have benefited through maize and fuel subsidies. This has mainly been with a view to stabilise prices and make these commodities affordable for the people.

This therefore has been a scenario that cushions consumption rather than support production. Government may as well be handing out cash.

It even gets worse if one understands that the subsidy allowed the middleman to purchase at relatively lower cost than the market demanded. However, this benefit though stabilising prices did not seem to trickle to the end user, the consumer.

In that regard, the subsidy has not achieved its intended purpose. As long as it is consumption that is subsidised, the incentive is an exercise in futility.

In our case, Zambia must be thinking of incentivising industrialisation, to revive our manufacturing. We must diversify our agriculture and steer away from monocropping evidenced in our obsessive reliance on maize.

We must invest in educating and skilling our people so they become the driver and bedrock of our development.

That is the subsidy that will have meaningful impact on the country’s overall development.

Subsidies must be channelled to areas where they will stimulate industrial activity, income generation and employment to empower the people. Any resources in our current circumstances as a nation must be appropriately applied for us to derive much needed benefits.

It is on that premise that we must learn from this subsidy episode to avoid a recurrence of the lapses noted.

The real and hard questions

One striking and key lesson about the whole subsidy saga has been the least mentioned or debated in my view.

The information made available for instance shows that in 2012, the budget allocation for the Fertiliser Input Support Programme (FISP) was K500bn but actual expenditure was K1.181tn. This represents a budget overrun of K681.2bn, even more than the initial budgeted amount.

The trend is the same when one notes that the 2011 subsidy allocation was K485bn and the actual spend was K1,354.70tn, an overrun of K869.7bn. This appears to be a consistent pattern even when analysing expenditure as far back as 2010 with shocking excesses recorded.

Based on these trends, it is evident that there is a financial discipline problem. The concern raised by government that so much has been spent on subsidies is welcome. But it must be accompanied by reasons and an explanation of why such budget overruns are allowed and tolerated.

Are our controls sufficiently designed to curb such abuse? Do they even exist or are they simply not adhered to?

The Auditor General’s reports have consistently highlighted such glaring indiscipline and misapplication of financial resources but alas, what is produced may well just be another collection of papers filed away in some office.

The results of turning a deaf ear to these concerns continue to show their head in situations such as the above. Where resources that can be utilised to full value end up down the drain or financing only a few beneficiaries over a bigger population.

If this aspect is not aptly dealt with, we have a serious challenge ahead of us. The waste we have witnessed in the recent past will undoubtedly repeat itself. Tangible action must be taken now to keep this cancer in check.

Subsidies are good, subsidies are bad! What’s the fuss?

The noise has been loud. There have been complaints and protests. Praises and endorsements. That is all healthy. Opposing views allow for an exchange of ideas and when properly harnessed, the best course of action is the end result.

However, what has ensued since the removal of subsidies also points to a point we must pay attention to especially our government and leaders in general.

There is immense value in explaining government policies to the people, even more when it involves harsh decisions. The abruptness with which the government scrapped the subsidies has contributed a great deal to the people’s discontent.

Very few had seen this one coming. An almost instant spike in fuel, mealie meal and general prices contrary to campaign promises and traditional political rhetoric. If any had anticipated this measure, they must be the privileged few with flies on the right walls to listen in on intimate intentions.

Stakeholder consultation and citizen engagement does not in anyway suggest incompetence or devolution of power. It instead communicates maturity, empathy and a genuine concern for the masses.

Therefore Government should have taken measures to breakdown its intention to the people and outlined a clear plan post-subsidy. Not in one instant but through active community engagement or interactive public fora.

I still recall how the late Dr Chiluba and his government sold the Structural Adjustment Programme (SAP) to the nation. As a result we anticipated hard times and “tightening of the belts” regardless of how much of a bitter pill it was bound to be. The end is another topic on its own but the courtesy of informing citizens is the main point.

I personally have heard more independent individuals explain the subsidies more eloquently than government officials. That in itself is worrisome. We must see a departure from an arms length uninterested approach to a more sensitive and embracing one.

As one caller on a popular radio show put it a few days ago, “Government must come down to the grassroot and also explain to us. We don’t all know what this ‘subwidi’ is or what it means. We just know prices have now gone up.”

‘Subwidi’ in this case was a reference to subsidy and it underscored how much information needs to be disseminated and awareness enhanced.

A lack of information or transparency will always dilute trust and sow the seed of resistance. In the end, even the noblest of intentions can slip off the rail.

What about those savings?

It has been in the news that the treasury stands to save K2.3bn annually after this removal measure. That is a significant amount of money that cannot be ignored. It can have a staggering impact on any beneficiary sector.

However, yet again what we have witnessed are a chain of generic statements that these saved resources will be channelled to more needy sectors etc. That as an intention is not disputable.

At this stage though, what is desired is the clarity of thought and evidence of an actual plan to achieve such an aspiration.

It is said that what is measured gets done. Therefore, from the onset we must be explicit about what we are chasing, how it will be done and the precise resource allocation required to realise this.

If the statements have been that we will now divert resources from subsidies to education or health or manufacturing, how will this be done and to what extent? This is information that can only come from the planners, government in this case. It is this level of transparency that we need and must strive for.

It not only enables ordinary citizens to be a part of governance and development. It keeps all stakeholders abreast and eliminates opportunity for speculation or misleading interpretations.

It further also allows government itself and the public in general to track progress made in pursuing these goals.

An opportunity to build credibility

It is a fact that the government and public leaders face a crisis of credibility. Many a time decisions made or actions taken have leaned more toward self interests than selflessness.

That should explain the genuine discomfort people have generally exhibited when informed that the savings will be channelled elsewhere.

It therefore is extremely cardinal for government to transparently share these plans. Otherwise it is easier for the public to conclude that the benefits of the subsidy removal will accrue on the part of politicians largely.

There is strong sentiment in the country presently following a string of seemingly unnecessary by-elections. Any hint that subsidies have been removed to finance such activities or reward politicians with better individual perks will be unfortunate.

It is for that very reason that one may not be faulted for requesting more detail from our leaders on what the post-subsidy plan is.

The contention generally is not whether subsidies must be removed. It instead is where these resources will be redirected and the value to be derived in the long term. Similarly, it is the learning we pick to guarantee fiscal discipline and curb these overruns we have become accustomed to.

Anything less will be a sure recipe for failure.

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Posted by on May 31, 2013 in Economic, Opinion, Politics


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