Countries face subsidies vs unrest dilemma


Soaring food and fuel prices have set many African governments a tough choice: to blow their budgets with subsidies or risk street anger.

How they navigate the dilemma could play a role in the political survival of leaders facing elections this year, and could impact donor aid flows.
“Many African states are between a rock and a hard place right now as a result of food and fuel inflation,” said Lydie Boka of consultancy Strategico, Reuters reports.
“For some this is a question of maintaining peace and survival, at the expense of fiscal discipline.”

Food prices have risen almost 30 percent since last year, the World Bank says, a trend that has hit Africa’s urban populations harder than during the last spike in 2008 which triggered street protests.

Oil prices, meanwhile, have climbed more than 55 percent, raising costs for transport and cooking fuels.

Seeking to shelter their public finances from the shock, countries like Sierra Leone, Ghana and Niger have rolled back subsidies, in some cases to service donor debt.

But other nations — particularly those with fragile politics and upcoming elections like Cameroon and Congo — may be less willing to expose citizens to higher prices.
“When people are hungry and they feel that their governments are sitting pretty, that is when the streets become the theatre for unrest,” said Kissy Agyeman-Togobo of Songhai Advisory.

The resulting higher subsidy costs could lead to broader fiscal deficits and frustrate international donors.
“Budget slippages would normally attract more sanctions from Bretton Woods institutions,” said Boka.
“But I expect donors including the IMF to show more understanding this year for countries having elections and facing shocks at the same time,” she said.


Anger over food and fuel inflation has already turned violent in Uganda, where security forces crushed recent demonstrations by firing tear gas and live rounds.

Uganda — which came through a smooth election in February — is facing budget pressures and has ruled out measures to cushion consumers from rising food and fuel prices.

But in places where elections are still on the horizon, governments seeking reelection have appeared more willing to spend cash to appease the street.

In Senegal, where President Abdoulaye Wade is planning to stand in a 2012 poll, authorities cut prices for sugar, rice, soap, tomatoes, oil and milk by 15 percent in February, and also launched agricultural input subsidies in May.

The moves come amid rising protests over power cuts as Senegal faces an electricity generation deficit.
“With the current tensions … Wade cannot afford not to subsidize commodity prices,” said Boka.

In Cameroon, similarly, prices for sugar and other basic commodities have long been fixed by government.

But while President Paul Biya announced the country will revise its fuel subsidies policy in 2011, experts believe it is unlikely to follow through ahead of elections this year — particularly after its food and fuel riots in 2008.

In one of Africa’s most fractious nations, the Democratic Republic of Congo — also planning elections in the coming months — the IMF said higher food and fuel prices could complicate economic management.

IMF mission chief Robert York said last month there was fiscal space to accommodate higher spending to protect the poor from rising prices, but added his team had also discussed with Congo’s government reforms to allow for some pass-through of higher world oil prices to domestic fuel prices.

Congo observers are concerned the poll could touch off violence among a population frustrated by entrenched poverty, instability, and a slow pace of change.

Analysts said resource-exporting countries, particularly oil producers, could have an easier time funding higher spending as rising world commodity markets spell more revenues.
“Other countries will struggle, but will almost always find a way to pay,” said Chris Melville of Menas Associates. “The question then is not whether or not they can afford the subsidies, but at what cost to other services.”