Fuel Subsidy Removal in Angola: A Path to Fiscal Sustainability with Social Protections

The paper examines fuel subsidy reforms in Angola, highlighting their economic and social impacts. It stresses the need for gradual removal, targeted compensation, and clear communication to mitigate adverse effects on vulnerable sectors and households.

A working paper produced by the World Bank's Macroeconomics, Trade, and Investment Global Practice, in collaboration with researchers Bao-We-Wal-Bambe, Chadi Bou Habib, and Joaquin Marandino Peregalli, examines the economic and social implications of fuel subsidy reforms in Angola. It highlights the effects of these reforms across different sectors, drawing on international case studies and Angola's specific context. Fuel subsidies have long been a tool used by governments worldwide to protect vulnerable populations from the impacts of volatile global oil prices. However, while these subsidies may offer short-term relief, they are generally considered inefficient and costly in the long run. The study outlines how fuel subsidies tend to disproportionately benefit wealthier households while placing a heavy burden on public finances and encouraging the over-consumption of environmentally harmful fuels. Moreover, the removal of these subsidies, if not managed carefully, can have significant adverse effects on household welfare, employment, and sectoral competitiveness.

The Burden of Fuel Subsidies on Public Finances

The researchers explore the broader literature on fuel subsidy reforms, noting that many governments have struggled to balance the need for fiscal sustainability with protecting the most vulnerable segments of society. In the absence of subsidies, fuel price increases raise the cost of living by driving up the prices of essential goods and services like food and transportation. This effect is particularly pronounced in sectors that rely heavily on fuel inputs, such as fisheries and road transport. The paper underscores that while removing subsidies can lead to higher prices and inflation, it can also generate substantial fiscal savings, which, if reinvested wisely, could help offset the negative impacts on lower-income households. In Angola, a country where fuel subsidies have historically represented a significant portion of public expenditure, recent reforms aim to gradually phase out these subsidies by 2025 or 2026. These reforms are expected to produce substantial fiscal savings, with the potential to reduce public spending on fuel by up to 2.4 percent of GDP by 2026.

Sectoral Impacts of Subsidy Removal

One of the critical tools used in the paper's analysis is the input-output table, which simulates the impact of fuel price increases on different sectors of the Angolan economy. The simulation results indicate that the removal of fuel subsidies would lead to an overall price increase of approximately 5 percent, with the fisheries and transportation sectors experiencing the largest increases up to 20 percent in some cases. These sectors, which are heavily dependent on fuel, would face higher production costs, which could have ripple effects across the economy, particularly in terms of employment and household welfare. The study emphasizes that government intervention is necessary to mitigate these impacts. For instance, fully compensating for the price increases in the fisheries and transportation sectors would absorb about 30 percent of the fiscal savings generated by subsidy removal, equating to around 1 to 1.5 percent of Angola's GDP.

International Examples of Successful Reforms

The paper also points to international examples to illustrate how other countries have managed similar reforms. In countries like Indonesia and Brazil, governments have implemented targeted cash transfer programs to cushion the poorest households from the effects of rising fuel prices. These programs have generally been successful when well-designed and synchronized with the timing of subsidy removals. The key lesson here is that any reform must be accompanied by measures that directly address the socioeconomic consequences of price increases, particularly for low-income households. In Angola's case, the researchers suggest that the government could use part of the fiscal savings from subsidy removal to finance compensation packages for sectors and households most affected by the price hikes. These compensation packages could take the form of direct cash transfers, subsidies for essential services, or producer subsidies in key sectors like fisheries.

Challenges in Implementing Compensation Programs

However, the study also cautions that the success of these measures will depend heavily on Angola's administrative capacity to implement and monitor such programs. While Angola's Kwenda program has already provided some support to vulnerable households, there are significant challenges, particularly in reaching remote areas where access to financial services is limited, and infrastructure is poor. Additionally, many households lack the necessary documentation, such as national identity cards, which can further complicate the delivery of assistance. The paper emphasizes that addressing these logistical challenges will be critical to the success of any compensation program.

The Importance of Timing and Communication

The case of Angola also underscores the importance of timing and communication in implementing fuel subsidy reforms. The researchers note that the government's decision to increase gasoline prices by 87.5 percent in June 2023 triggered significant political resistance and social unrest, highlighting the potential for backlash if reforms are not communicated effectively. In contrast, the subsequent increase in diesel prices in April 2024 was met with less resistance, largely because the government had taken steps to raise transportation tariffs in parallel, easing the burden on consumers. The experience of Angola aligns with global lessons on subsidy reform, where success often hinges on the sequencing of reforms, the scale and timing of compensation measures, and clear communication with the public about the benefits of reform. In conclusion, the paper suggests that while fuel subsidy removal offers a path to fiscal sustainability, it requires careful planning, a strong administrative framework, and robust social protection measures to ensure that the most vulnerable are not disproportionately affected by the resulting price increases.