Poor developing countries with empty granaries cut electricity and fuel subsidies... 'Fiscal crisis caused by COVID-19'

Lack of Funds for Quarantine and Unemployment
Subsidy Policy Shift Initiated Thanks to Low Oil Prices

[Asia Economy Reporter Naju-seok] Developing countries facing worsening fiscal crises due to the novel coronavirus infection (COVID-19) have begun cutting subsidies on electricity bills and gasoline. With reduced tax revenues caused by economic contraction and increased spending on quarantine and unemployment, even subsidies that were part of welfare policies for the common people have started to be trimmed.

On the 11th (local time), The New York Times (NYT) reported that developing countries are reconsidering subsidy policies on oil and electricity. Although public backlash is inevitable as price increases become unavoidable when subsidies are cut, it has become difficult to sustain them any longer due to fiscal problems.

Nigeria recently cut subsidies on oil. In 2012, it attempted to eliminate oil subsidies but reversed some of them after violent protests; now, it is pushing the policy again after eight years. Venezuela also raised gasoline prices, which had been nearly free, by reducing subsidies. In Dubai, electricity rates are being raised for the first time in decades. Sudan is pursuing a policy shift from subsidies to direct cash support for the poor.

Developing countries have long implemented welfare policies relying on subsidies. They provided tax benefits so that citizens could use electricity and oil. This essentially served as welfare, but the effectiveness of the policy has been controversial. A representative criticism is that the biggest beneficiaries of subsidies are not the poor but affluent households, as both electricity and oil are used more by the middle class and above than by the poor. Experts point out that developing country governments have lacked resources to invest in education and healthcare because a significant portion of their budgets has been spent on subsidies for electricity and energy. Moreover, because energy was provided at prices lower than market rates due to subsidies, excessive use became a problem.

This is why international organizations such as the World Bank, the International Monetary Fund (IMF), and others recommend subsidy cuts to developing country governments.

Energy subsidies also impose a considerable burden on public finances. According to an analysis by the International Energy Agency (IEA), last year more than 40 countries spent $318 billion (384.56 trillion KRW) on energy subsidies.

Jim Crane, a researcher at Rice University in the U.S. who has studied energy subsidy issues, said, "Developing country governments are caught in a dilemma. They must decide whether to protect the poor who face unemployment or income loss, or to address the subsidy problem that has long drained their budgets."

There is also a possibility of political instability in developing countries due to subsidy cuts. The poorest have been sensitive to changes in subsidy policies. There are forecasts that large-scale protests will occur if governments reduce subsidies.

Some analysts view the recent series of circumstances as a golden opportunity to change subsidy policies. This is because oil prices plummeted due to decreased demand caused by COVID-19. Even if subsidies are reduced, the actual pain felt by the poor is not significant.

The NYT sees the success or failure of Nigeria's subsidy cut policy as a bellwether for policy changes across developing countries. If Nigeria succeeds in cutting subsidies this time, it will be able to secure an additional $2 billion in resources.

This content was produced with the assistance of AI translation services.