For decades, the IMF has railed against West African countries subsidizing petroleum products. It has always been a contentious issue, with public opinion usually strongly against any increase in the prices of these products. For decades, West African governments, when they agree to do the IMF's bidding or when they themselves decide they need to raise cash, have declared that they are ending, wholly or in part, subsidies on petrol, diesel and kerosene. The IMF and West African governments have, at the very least, been stretching the truth on this issue for decades.

IMF economists and government planners love petroleum products because they are a ready cash cow. The few companies involved within national borders in the importation of fuel are easily regulated and taxed. The quantum of their business is readily monitored. And fuel, as the economists like to say, has an inelastic demand: if you tax it and thus increase the price to the consumer the demand drops very little compared to inessential products, where the demand (and thus the tax!) drops off quickly as you increase the tax rate. And so, governments generally, all over the world, derive much income from petroleum products. The government tax is simply added to the landed cost and the consumer pays. A look at the government budget in any West African country will readily identify how much the government expects to make on taxation of petroleum products.

Now West African governments, no different from many governments around the world, would like to derive a good income from the sale of fuel but are wary of the reaction of the struggling masses against increases in price. So they SOMETIMES accept a reduction in tax income rather than face the wrath of their people. This is what the IMF has for decades been calling a subsidy.

The IMF and West African governments are well aware that the interpretation of most people (not excluding professors of English!) of the word "subsidy" is that the product is being sold below its actual landed cost and that government is paying the difference between the landed cost  and the actual pump price. Most often in West Africa, this is simply not the case. The government adds its tax to the landed cost and then at some point, if it so decides, particularly when the world market price of fuel has risen, returns a portion of that tax back to the petroleum companies in order for them to sell at a fixed price. Of course, when the world market price of fuel drops, with a fixed government price, there is much money to be made by the companies and/or government, but that is a subject for another day. The point here is that when the world market price increases West African governments SOMETIMES decide to reduce their tax takings but still realize substantial tax income from the sale of the products. The domestic market is controlled by the government to the extent that it can adjust its tax takings to realize a fixed price. A free market would imply that prices would fluctuate up and down in line with world market prices, but West African governments choose to control this market by adjusting their level of taxation of these products.

Now all over the world, the level of taxation on specific products is entirely a political decision, decided upon by the government of the day and hour. One government might decide on a tax rate of x%, say, on a particular product and then the succeeding government might decide based on its political imperatives that no, the rate should be y%. Indeed tax rates frequently change from year to year even under the same government. There is no one, mandated tax rate which governments must enforce. These are political decisions. So if a government decides for political reasons to reduce the tax rate on fuel, there's nothing intrinsically wrong with that particularly so if it is NOT subsidizing the market, ie NOT selling below landed cost.

Let's look at current (16/7/2018) pump prices of petrol in West African and other selected countries courtesy of www.globalpetrolprices.com/gasoline_prices/. These countries are all purchasing fuel on the world market, at prices that are more or less the same. One might expect their domestic pump prices to all be very close. The reality is very different. Some may be refining crude oil bought on the world market in local refineries, so this may lower their costs somewhat, but the refining process and costs should be similar whether the refining is done locally or abroad. The major cost of the finished product is the cost of the crude oil. Some may be refining crude oil produced locally and this may lower their costs further, yielding an even lower pump price if those lower costs are passed on.

Gasoline Prices 16-Jul-2018
 US dollar/litre

Nigeria             0.42
Liberia             0.84
USA                0.84
Togo                0.89
Benin               0.94
Sierra Leone     1.04
Ghana              1.04
Ivory Coast      1.09
Guinea             1.11
Senegal            1.24
Mali                 1.28
Cape Verde      1.39
UK                  1.68
Germany         1.69
France             1.81



One notices immediately that the US has very low prices (approx 50%) compared to EU countries UK, Germany and France. Why? Because EU countries have very high taxation on petroleum whilst the US has low taxation . Price fluctuations are constant in both the US and the EU, as the world market price changes, but the EU's prices fluctuate at a much higher level. Prices dropped as low as 40 cents/litre in the US a few years ago, when the world market price was very low (at a time when some West African countries were selling at about a dollar/litre), but have risen recently as the world market price has risen. If one now turns to West Africa, one sees that Nigeria has far and away the lowest price in the region despite the fact that the Nigerian government announced some time ago that it was removing subsidies on fuel. The other West African countries listed all have pump prices higher than the US's price of 84 cents/litre (except Liberia, which is at par) even though the IMF and many of these governments claim West African fuel is subsidized, whilst the US government readily acknowledges that it is taking an (approximate) 12% tax on its fuel and its oil companies are making hefty profits. How strange! How can this be?

To return to the issue of political decisions, the US government has made a long-term political decision to keep fuel taxes low, whilst the EU countries have a long-term commitment to keep fuel taxes high. West African governments have decided  to impose variable taxation on fuel, somewhere between the US and the EU levels, in order to keep pump prices stable. All these are valid political decisions. The problem in the West African system is not that the fuel is subsidized, as the IMF and many others have argued for decades, but that the system creates room for corrupt manipulations and is not quickly responsive to that great and powerful beast, the world market.

The deception in the claims of subsidies is clearly revealed when one reads the 2014 World Bank document Fuel Prices in Sierra Leone. In it the authors write:


If one were to follow this contorted justification of the word 'subsidy' to its logical conclusion governments could impose a taxation of 1000% say on fuel yielding a pump price of 10$/litre say, and then turn round and provide a rebate to oil companies in order to achieve a price of $9/litre, say, and then still claim it was being kind to its people by giving them a subsidy!

There may be good reasons to impose high taxation on petroleum products. It may be that the money is needed and wisely spent; that the corruption often associated with manipulated markets does not exist; that windfall profits, when the world market price drops in a fixed pump-price environment, are properly accounted for. If that is the case the IMF and West African governments should stop this deceptive talk of subsidies and instead attempt to justify their tax increases on merit.

See also Is IMF's West African Fuel Subsidy Still in Place?