The Myth of Cash Transfers: On the Issue of Fuel Subsidies and the Need for Reform

By Mohammed El-Shahhati, Libyan Oil Expert

Abstract:

The article highlights the necessity of reforming the current fuel subsidy system in Libya within a rational legislative framework, aligned with global practices of energy cost mitigation for consumers. It argues against misleading data promoting the concept of “cash transfers” as an alternative, and emphasizes the importance of gradual reform that balances market mechanisms with comprehensive development needs.

The Necessity of Reform

I begin by addressing a fundamental question that arises upon reading the title: am I for or against subsidies? Simply put, I am not satisfied with the current subsidy structure and advocate for its rational, organized reform, free from media influence, administrative confusion, and political pressure. As an insider in the oil industry, I can affirm that there’s no single country that doesn’t implement some form of energy subsidy. Examples from the United States, Australia, and Norway demonstrate various direct and indirect subsidy methods. Emerging or developing countries like Indonesia, Malaysia, Saudi Arabia, Brazil, and Russia also employ subsidies at different levels. We are not merely discussing car fuel here, but rather the entire energy consumption structure and its alternatives.

Correcting Misguided Predictions

There’s a prevalent push, based on misleading data, to overhaul the existing subsidy structure or advocate for cash transfers to citizens. However, these efforts are based on inflated figures about Libya’s fuel consumption and smuggling. The actual consumption in Libya, as published by the Audit Bureau for 2022, is considerably lower than what is claimed. The assertions of extensive smuggling are also exaggerated. The real issue is the internal speculation within the country rather than the smuggling outside its borders.

Methodological Error Correction

The skewed assumptions lead to conclusions that favor a particular approach to fuel issues, describing the situation as “catastrophic.” However, the actual scenario is complex, involving distribution disturbances and the economic impacts of government spending and currency devaluation. The role of fuel as a fundamental part of general consumption must be realistically assessed, considering Libya’s consumption figures, which are justified regionally and economically.

The Issue of Inflation

While some argue that abolishing the current fuel subsidy structure will lead to parallel inflation rates, others believe that this will not significantly affect transportation costs or consumer prices. However, the reality lies in between, with potential impacts on individual transportation, industrial production costs, and services like aviation and healthcare.

Cash Transfer as an Alternative to Subsidies

The concept of cash transfers, proposed by the IMF, aims to redistribute resources efficiently to eliminate price distortions. However, its application in Libya requires a nuanced approach, considering the state’s limited law enforcement capabilities and the need for structural economic changes.

Alternative Developmental Experiences

Looking at successful developmental models in China, Vietnam, Algeria, and Jordan, it’s clear that maintaining a balance between free market mechanisms and comprehensive social development needs is crucial. The IMF’s cash transfer model, despite its media portrayal, has had limited success and faced issues like government corruption and local industry impacts in places like Kenya and India.

Gradual Reform as a Solution

A long-term approach is necessary for addressing fuel subsidy issues. The demand for petroleum products, particularly gasoline, is inelastic, and changing its price requires sensitivity to consumer impacts. The proposed savings from reducing smuggling are overstated, and the actual consumption of gasoline represents only a fraction of total oil product consumption. A reasonable solution involves gradually lifting subsidies over time, investing the savings in developing reliable public transportation, and improving distribution systems and commercial practices within the sector.

Final Thoughts on Diesel and Electricity Subsidies

The issue of diesel subsidies, particularly for electricity generation, is complex and intertwined with the challenges of revenue collection and technical losses in the electricity network. Cash transfers alone cannot solve these issues. A comprehensive reform policy should focus on funding improvements in the electrical grid and separating power generation from distribution, a strategy employed worldwide.