Fuel Subsidy Reform Offers a Path to a Stable, Sustainable Economy in the Central African Republic: A World Bank Report
BANGUI, June 27, 2023 – The Central African Republic’s economy is expected to return to growth this year after stagnating in 2022. Severe floods and fuel shortages took a heavy toll on the economy and people last year. Severe food insecurity, says the latest edition of the World Bank’s Central African Republic (CAR) Economic Update.
Released today, it notes that last year’s floods caused significant physical damage to homes, transport infrastructure and crops and displaced more than 6,000 people. Flooding fuel shortages fueled by civil tensions, activities by armed groups and continued declines from the war in Ukraine, coupled with high energy prices, could result in a zero-growth economy by 2022.
CAR’s economic activity is likely to see a moderate recovery in the medium term, with growth expected to reach 3.6% in 2024 and 2025, as fuel supply in the domestic market improves and security gains continue. The outlook is driven by expected higher international prices for timber, CAR’s main export, due to the resurgence of global demand, particularly in China.
With nearly half of the population unable to meet minimum daily food requirements, the report underscores the need for policy measures to improve the security situation, improve public finances, attract private investment and develop human capital.
„With domestic challenges exacerbated by a challenging external environment of slowing global growth, high inflation and tight fiscal conditions, CAR’s economic outlook remains weak. CAR will do well to implement bold reforms to boost growth, improve living standards and reduce extreme poverty.” said Guido Rurangwa, World Bank Country Manager for the Central African Republic.
As international oil prices began to rise in late 2020 and hit new highs in 2022 amid the war in Ukraine, the report focuses on much-needed reforms to fuel subsidies that have soared globally. In CAR, fuel subsidies account for 0.5% of GDP and 6% of domestic revenue and 6.3% of tax revenue in 2022.
Fuel subsidies mainly and directly benefit the wealthiest segments of the population, while diverting limited financial resources from sectors, households and institutions in need. Although highly subsidized fuels such as diesel and petrol indirectly benefit the poorer sections of the population through lower transport and imported food prices, these fuels are largely consumed by the affluent, urban population. Poor households mainly depend on kerosene, which receives relatively few subsidies. This disparity exacerbates income inequality and perpetuates social inequalities.
„A well-designed fuel subsidy reform should include a robust mitigation package that provides targeted support to the most vulnerable segments of society,” explains Pierre Manton, co-author of the report.
Drawing lessons from the experiences of countries that have successfully implemented fuel price reforms, the report outlines four best practices for a fuel subsidy reform strategy. These include:
Temporary exclusion of socio-economic strategic fuels like kerosene from subsidy reform. Adopting a price smoothing mechanism that strikes a balance between excessive price volatility and financial risks for households. Implement a phased reform approach to rehabilitate households and ensure effective roll-out of mitigation measures. Engage in comprehensive stakeholder consultations and conduct targeted communication campaigns to address the concerns of various population groups.
Download the Central African Republic Economic Update French
Press Release No: 2023/079/AFW
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