The previous weeks have been quite something with issue of subsidies in the air, fuel increment cascading to the increment of everything including the basic needs for survival as well as upkeep. We saw UNZA students taking to the streets… having a go at it with the Zambia Police, teargas, stones flying, rooms burning it was crazy, people calling in and giving the government a piece of their minds... some even mispronouncing the word as ''subsidiaries.'' It was quite eventful. For some it was the 1st time they were hearing of such a term hence the unrest… we heard of some people explaining to their friends that subsidies were some chemical that they put in mealie meal so that the germs die… and one Miss NIPA Participant was asked what subsidies were and unashamedly she answered that subsidy is “self-confidence…” and obviously before we know it the famous easterners will be naming their kids Subsidy or Sabu for short… lol
But really what are subsidies and how do they affect the economy? I’ll go for the most common definition: "a subsidy refers to a payment made by the government to a producer. Subsidies can be direct – cash grants, interest-free loans – or indirect – tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebates. This form of support can be legal, illegal, ethical or unethical. Subsidies are used for a variety of purposes, including employment, production and exports." Often subsidies are regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs. Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions.
That said, the government of Zambia removed subsidies on fuel and agriculture these have been some of the biggest expenditures of the government. It is safe to say that fuel subsidies add to the fiscal deficit, which in turn causes inflation. Reducing fuel subsidies would improve Zambia’s fiscal balance and create fiscal space for increased investment in infrastructure and other development activities. Environmental damage caused by the steady rise in the sale of fuel vehicles due to price differential between diesel and petrol can also be reversed over time.
With benefits of removing fuel subsidies known to everyone, it eventually boils down to the political economy of reform. Looking at it from way back it can be said that governments actually give subsidies as part of a political bargain — they are “a visible way to deliver benefits in exchange for political support.” Because they are a symbol of populist action by successive political leaders, these subsidies, once started, get permanently locked-in.
Something to critically look at though, is that, even if subsidies may free up resources for development, people have little confidence that this will happen given high levels of corruption in the country. The government would dread the scenes witnessed on the Nigerian streets where people came out with banners saying “Remove corruption, not subsidy”.
It is a very delicate issue, as in,. if you raise fuel prices, it has a cascading effect on the economy. The government should work out a solution so that this impacts the economy in the least manner but also brings down the fiscal deficit.
If fuel subsidies were meant to help the poor, then they were very poorly targeted. I might not have the statistics but I believe that billions of dollars/kwacha have been spent by the government in the past. Yet we haven’t seen a reduction but an increment in the poverty levels and reports that the MDG’s will not be met by 2015.
Allow me to highlight the fact that even if poor households previously got only a small portion of direct subsidies, the effects of subsidy removal on their incomes is far higher than for richer households. This is partly because raising fuel prices has a significant impact on inflation and cascading effects throughout the economy, via sectors such as transport and agriculture.
But the problem of removing fuel subsidies is not limited to chaotic democracies. Even China was unable to fully pass on fuel price increases at all times during 2010 and 2011. Elsewhere, attempts at fuel subsidy reduction were reversed within a few days in Ghana in 2008 and in Nigeria in January, and postponed in Indonesia earlier this year.
Overcoming political and public opposition to fuel subsidy removal would have been the order of the day in Zambia and for the current regime, in my thinking, hence the decision to go ahead and just announce the removal.
Just my thoughts really, subject to discussion… sometimes if we resist change we will end up being crushed. Let us be knowledgeable be well read so that when we want to argue we are well informed and not following the masses blindly. Let us work at developing and improving our country. Individual efforts always ripple out to the development of a country as a whole. God Bless Zambia.
