Maximising the impact of existing social protection or pro-poor spending

The six countries studied in this report subsidise food, fuel and electricity through a variety of mechanisms. The rationale for these subsidies is often that they safeguard the ability of poor households to access essential goods. However, these subsidies are widely found to be regressive: according to the IMF, 45% of the value of fuel subsidies in sub-Saharan Africa accrues to the wealthiest consumption quintile, while only 10% of households in the lowest two quintiles in the region even have access to electricity and thus benefit from the subsidised prices (Alleyne and Hussain, 2013). The World Bank (2008) found there to be substantial leakage of food subsidies to higher-income groups, since these households also consume the subsidised staples, and in larger absolute quantities.

Replacing or eliminating these subsidies would free up significant resources for governments to spend on social protection programmes aimed directly at supporting the consumption of poor households. Table 3.2 shows the scale of the potential savings generated by eliminating energy subsidies across the six countries, which range from 1.5% of GDP in Uganda to 8.3% of GDP in Zambia. Increasing expenditure on social protection by equivalent amounts in the respective countries would not only achieve major gains in terms of reducing poverty and inequality7 but would also lead to broader efficiency gains, in particular in terms of incentivising electricity producers to enhance their distribution networks (Alleyne and Hussain, 2013). Eliminating fuel subsidies might also yield environmental benefits by reducing emissions.

Removing subsidies is often very challenging in political terms. Examining the removal of fuel subsidies in Ghana, Indonesia and Iran, Lindebjerg, Peng and Yeboah (2015) find that such reforms can generate a “triple win” (improved social distribution, fiscal savings and reduced emissions) but this is not guaranteed: subsidy reductions need to be carried out through a gradual and clearly-communicated process that emphasises the social benefits of the reform.

Table 3.2. Fiscal savings after energy subsidy elimination

Post-tax subsidies as a percentage of GDP

Estimated total fiscal savings (USD billion)

Savings per capita (USD)

Petroleum

Coal

Natural gas

Electricity

Total

Ethiopia

2.0

0.1

0.0

1.1

3.2

1.63

18.38

Kenya

1.3

0.1

0.0

0.3

1.7

0.95

22.78

Mozambique

0.6

0.0

0.5

5.9

7.0

1.10

42.63

Tanzania

1.2

0.0

0.3

2.1

3.7

1.37

29.60

Uganda

0.0

0.0

1.5

1.5

0.38

10.52

Zambia

0.4

0.2

0.0

7.7

8.3

2.19

150.35

Source: IMF (2015), How large are global energy subsidies? (database), imf.org/external/pubs/ft/survey/so/2015/ NEW070215A.htm

Humanitarian assistance and social protection are still widely viewed as discrete instruments. However, in regions that are vulnerable to extreme climatic conditions, there is a strong argument for bridging the gap between the two. As del Ninno et al. (2016) note, “Humanitarian assistance will remain an appropriate short-term response to emergencies, but in many countries it is provided year after year in the same areas and to the same recipients, suggesting it is being used as a long-term instrument to address chronic poverty”. Social protection programmes represent a far more effective response in this regard, not only in terms of improving the outcomes for people living in those areas on a sustainable basis but also making more efficient use of funds.

Cabot Venton et al. (2012) demonstrate how the implementation of different mechanisms to enhance resilience to climate-related shocks in Kenya and Ethiopia would have proven more cost-effective than relying on humanitarian assistance, while del Ninno et al. (2016) demonstrate the affordability of scalable social protection programmes relative to humanitarian assistance across a number of countries. It is important to note, however, that budgeting for a scalable programme poses a challenge for public finance management, since it is not possible to predict ex ante when additional funds will be required or in what quantity (World Bank, 2015c; OECD, 2016c).

A third area where there is significant scope for reprioritisation of funds within the social protection spending envelope is pension arrangements for civil servants. As the World Bank notes, “Civil service pension spending in Africa may not appear high relative to other countries but it is extraordinarily high when we consider the number of people receiving pensions” (Schwarz and Abels, 2016). Expenditure per capita on such schemes is also notably high relative to other national social protection programmes: Tanzania, for example, spends 1.6% of GDP on its civil service pension scheme. About three quarters of civil service schemes across Africa are defined benefit arrangements run on a pay- as-you-go basis; in most cases, expenditures are financed by current employees and the government (the former through salary contributions, the latter through general tax revenues).

Civil service pension arrangements in the region typically offer higher accrual rates and earlier retirement ages than national schemes in their respective countries, and they are also more generous than equivalent schemes in OECD countries. Compounding this generosity is the fact that the age profile of civil service schemes is typically older than that of the country as a whole, meaning that population ageing is affecting these arrangements before it affects the wider population. This combination of generous benefits and rising dependency ratios is driving up expenditure at a rapid rate; with the government funding these benefits from general revenue, the cost of these entitlements is borne by the population as a whole and will absorb an ever-higher proportion of public spending.

The design of civil service schemes differs between the six sample countries. Mozambique, Tanzania and Uganda operate unfunded stand-alone schemes, while Ethiopia and Zambia have integrated civil servants into the public pension arrangements for the private sector and Kenya recently established a fully funded defined contribution arrangement for civil servants. Even if a reform process is under way, the legacy costs of old arrangements are extensive: entitlements for civil servants under the previous dispensation need to be honoured and the transition from an unfunded to a funded scheme imposes a significant debt on the government’s balance sheet related to these entitlements.8

These legacy costs can be a convenient excuse not to enact policies that are likely to be unpopular with the constituency responsible for enacting them. However, with every year that passes, the long-term burden that civil service schemes represent magnifies; an urgent first step in the reform process is to quantify this liability through regular actuarial studies.

 
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