World Bank urges states to avoid short-term subsidies

World Bank has warned urged countries to avoid short term subsidies and policy measures as a way to cushion families from high cost of living occasioned by the rising inflation.

Instead, the lender advocates for policies in the context of social protection and targeted relief efforts.

In a statement on Monday, the lender said the short term measures are politically constrained and often end with no clear sunset clauses.

“These types of policies implemented, were tested and thereafter, everywhere and always, they failed to sustain the situation in long term as they are driven by political forces,” World Bank's Prospects Group's director Ayhan Kose said.

Although, he also notes that Policy makers in some cases would need to employ these types of policies. He recommended that long term provisions should be considered in their implementation.

World Bank also warned against the faster than expected tightening of financing conditions because of policy interest rates going up due to covid-19 pandemic disruptions.

Kenya among many developing countries, has relied on short term policies with the recently concluded unga subsidy and fuel subsidy which is on the verge of being terminated.

The one-month unga subsidy that ended on August, 18, was to cushion consumers from the high prices of the basic commodity, which hit a first-time high of Sh200 per 2kg packet.

The prices had soared due to inflation and high costs of imports backed on the weakening shilling against the greenback.

Even as the subsidy was on, the commodity was still scarce as consumers continued lamenting on the empty shelves at most retail shops countrywide.

Millers had also cited the higher prices that they had to incur to be supplied with the commodity some resorting to hoarding.

Termination of the subsidy meant prolonged empty shelves as prices were back to their normal high of over Sh200.

The prices are expected to rise further as consumers continue being hit by scarcity of the commodity.

The fuel subsidy, was  also meant to cushion consumers from rising prices which was occasioned by the Russia Ukraine war.

The government recently reported to be working on a plan to adjust domestic fuel prices saying that the move is necessary in order to progressively eliminate the need for the fuel subsidy.

In a statement, the National Treasury and Planning cabinet secretary Ukur Yatani said that the move will create the fiscal space necessary for the government to support targeted public spending.

“This will allow the government focus on productive sectors that support  the most vulnerable such as fertilizer subsidies, universal health coverage and subsidized primary and secondary education,” Yatani said.

The anticipated fuel subsidy termination mirrors the International Monetary Fund’s (IMF) fresh loan condition that requires Kenya to drop the fuel subsidy programme by October which will expose motorists to a sharp rise in pump prices.

The lender has inserted the removal of the subsidy under the 38 month budget support scheme, in the list of reforms attached to  Sh270.2 billion loan package.

Upon termination, fuel prices will go up, meaning consumers will feel the pain at the pump and this will occasion price hike of other commodities.

World Bank further recommends that if there is a fiscal space that can be utilized, it should be utilized in a manner that is targeted and well defined.

“If there is revenue base, there is need to expand that revenue base a bit further to generate revenue to help most vulnerable segments of the society thus policy makers need to have a well-defined, medium-term plan and communicate it clearly,” World Bank says.

The lender says the anticipated slowdown in its outlook is much more pronounced now amid multiple economic shocks.

Latest data from the World Bank Group warns of the sharpest deceleration in economic activity in 80 years if countries continue with the short term policy strategies and could be a drive towards stagflation.

In its report, the lender highlighted that the growth of emerging market in developing economies was projected to slow from 6.6 per cent last year to 3.4 per cent this year.

Advanced economies were expected to have a slow growth from 5.6 per cent last year to 2.6 per cent this year, and growth will continue slowing next year.

As most people think about stagflation as a problem specific to the US, the lender affirms that It's a global problem with the global inflation close to eight per cent.

This indicates the highest rate seen since 2004 whereas in developing economies only, it is above nine per cent, one of the highest rates recorded in the past two decades.

Policy makers are hereby called upon to avoid acts of saving the day now and then have bigger problems down the road.

“We can easily find ourselves in the midst of a perfect storm which will push growth rate this year to two per cent and next year to 1.5 per cent globally. When you have growth rate at the global level around 1.5 mark , It means you are in severe downturn,” Kose said.