Subsidies: Africa’s troubling addiction

The average African feels entitled to subsidies. Due to prevailing poverty, subsidies are perceived to be a necessity because of the wide gap between the market-determined price of goods and services and the financial strength of the wider population. From agriculture subsidies in Kenya and Malawi, to transport subsidies in South Africa, and fuel subsidies in virtually all African nations, the government bears the price burden to ease the financial hardship of the people.

However, while subsidies are laudable from a welfare economics standpoint, they are detrimental to the fiscal health of African economies as many nations on the continent are infamously riddled with unsustainable debt burdens and large budget deficits. The region’s limited capacity to attract revenues, both internally and from the international market, further compounds the strain on African governments to support their subsidy schemes. This leaves the perplexing question of why subsidies are not only still being maintained in African economies, but seem to not be nearing extinction or at least reduction.

The reality is subsidy schemes would remain in African economies for the foreseeable future and the reason is not far-fetched. Subsidies are a knotty mix of politics, economics, and social welfare, strung into a complex web, and subsidy removals have far-reaching implications, which African economies do not have efficient structures to manage.

With fuel subsidies, environmental considerations are thrown into the mix as well. In recent times, the subsidy debate has transcended the borders of individual nations and attracted attention from global leaders including the G7 and G20 countries. In the fight against climate change, subsidies on fossil fuels – which is the most common among low-income countries – are a drawdown on the hard-pressed progress being made by advanced economies.

Subsidy removal plans have a low success rate in African countries, and this can be attributed to the unprepared state of the African economies to absorb the price spike left in its wake. Consumers are averse to price increases – and they cannot be blamed. Higher prices imply higher costs of living and lower living standards. As such, any attempt at subsidy removal is regarded as one aimed to increase the hardship the people already face due to widespread poverty, and naturally, uprisings emerge to fight against such policy movements, leading to a breakdown in law and order- case in point, Nigeria in 2012.

This captures the socio-economic considerations attached to subsidies in a vast majority of African countries and contributes to subsidy removals being widely unpopular on the political front. Removing the price cushion that the populace sits on prematurely does not score an administration any points with the people. Subsidies are also widely claimed to give lopsided benefit to higher income groups rather than the low-income population they ought to serve, while also serving as a vehicle for corruption in the public sector.

African countries are currently in no position to get rid of the unsustainable burden of subsidies. However, what point is ideal for subsidy removal and when would African countries get there? Arguments for subsidies are premised on the idea that economies need to be supported at the infancy stage by the government to aid and fast-track the development process. As economies grow and the private sector blossoms, the government takes a back seat in driving economic growth. For African countries, with underdeveloped private sectors, the road to free-market pricing without the government holding the reins is long.

Gradual and phased removal of subsidies is largely advocated as a good place to start in the short term. African countries can develop their vast wind and solar resources to reduce the dependence on fossil fuels and consequently, subsidies on them. African countries are also encouraged to increase investment in education, trade, and health –sectors that aid human development – to bring their economies to the private sector-led point. Pressing calls for reforms from international institutions have intensified, especially in light of the just-concluded COP26 climate change conference. However, despite the climbing costs and various externalities attached to subsidies, there is a very limited chance that they would be scrapped by African nations in the near term.