Beyond Economics: Subsidies and Stability in Sudan
While the decision by the Sudanese government to reduce subsidies on fuel prices triggered the unrest that led to violent confrontations between security forces and groups of protesting citizens across Sudan, there are many, deeper causes. The thousands who took to the streets were not only reacting to the consequent increases in fuel prices (and anticipated second round inflationary effects). They were expressing deep-seated dissatisfaction at the widening economic inequality and extreme frustration with the regime in Khartoum. Sudan's youthful population seized the opportunity to protest a system of government which they believe offers a blighted future for the vast majority of Sudanese. This is why the response to the demonstrations and protests should not only focus on fiscal re-engineering or attempts to combat perceived criminality. An effective response must focus on deeper social and governance factors that underlie persistent instability and entrenched inequity, which could precipitate societal upheaval.
Sudan's oil revenue has steadily declined since South Sudan gained its independence in July 2011 and the revenue-sharing formula was subsequently renegotiated. Oil production ground to a halt in January 2012 over disagreements relating to oil transit fees for use of the pipelines and transit facilities. This development deprived both nations of their primary source of income. Although Sudan appeared to be less severely impacted compared with its neighbor to the south (oil receipts accounted for an estimated 40 percent of fiscal revenue in Sudan, compared with over 90 percent in South Sudan), it suffered significant budgetary disruption owing to much higher spending requirements (a bloated public service and high security expenditures) and significant debt servicing liabilities. The situation became untenable by early 2013 and Sudan sought assistance from potential creditors, including the International Monetary Fund, who stressed the urgent need for Sudan to balance its budget. The Sudanese authorities considered a range of options, including 'quick fixes,' like the removal of fuel subsidies. Subsidy removal is an attractive policy instrument because it holds the promise of immediate revenue gains, it is relatively easy to administer and it would not have a significant effect on the regime's leadership and its supporters. The poor suffer disproportionately, while the rich have safety nets.
The September 2013 subsidy reductions in Sudan led to 75 percent increases in the prices for both diesel and gasoline, and a 66 percent rise in the price of cooking gas. These price hikes have a negative impact on household budgets, particularly for the majority of Sudanese, who live below (or close to) the poverty line. Furthermore, fuel prices affect other domestic prices, particularly food and housing. The combined direct and indirect price increases could potentially cripple household budgets, constrain the domestic economy and set off an inflationary spiral. This could lead to broad discontent. A crucial question is the extent to which this discontent explains the violent clashes between protesters and security personnel in major Sudanese cities. A closer examination suggests that dissatisfaction over a fiscal policy change only partially answers this question. The motivation for the protestors goes beyond economics, and includes concerns over inequity and a crisis of confidence in the regime. The average Sudanese citizen understands the need for fiscal belt-tightening during tough times, but fails to understand why the poor should bear the burden disproportionately. They further question the regime's unwillingness to make other tough fiscal choices like trimming the bloated bureaucracy and taking credible steps to address corruption and waste. A recent IMF working paper provides empirical evidence that explains how subsidy "leakages" benefit the rich six times more than the poor. It therefore appears unjust to adopt policies that adversely affect the poor. The inequity and injustice underlying the decision to reduce fuel subsidies angered the protestors more than the consequent price increases. Ideally, Sudanese citizens could have addressed these concerns differently if they trusted the government to do the right thing.
The violence that claimed the lives of dozens in Khartoum and Wad Madani could be primarily attributed to an incorrect diagnosis by the Sudanese authorities. Sudanese Information Minister, Ahmed Bilal, described the protestors as "outlaws" and the state-run Al-Sahafa newspaper described the government's intention to "paralyze the hands of vandals."
Reducing or removing subsidies is much more than an exercise in closing fiscal gaps. It requires a more nuanced approach, a lot of public education and confidence-building. This is especially true in fragile regions. The January 2012 unrest in Nigeria (fuel subsidies) and the 2008 riots in Egypt (food subsidies) attest to the inherent difficulties and complexities. Like these examples, a more appropriate approach in Sudan would involve a better appreciation of the pass-through of price incentives in the economy, as well as the adoption of measures to ensure that governance prioritizes the welfare of the people over the needs of the regime. The brutal suppression of the September 2013 protests in Sudan may have succeeded in getting people off the streets, but the fundamental issues are not resolved. The government's actions may have further alienated, and hardened, broad sections of Sudanese society. Furthermore, the violent confrontations that ensued could end up being more damaging to the Sudanese economy than the subsidies. The destruction, disruption and reputational damage are particularly inopportune at a time when the country is seeking much-needed investment to support diversification in the wake of its oil-related woes.
Drawing lessons from the turmoil in Sudan, five guidelines for addressing costly and ineffective subsidies in a conflict-sensitive manner are included here:
- Governments could have a better sense of political economy implications of subsidy reduction/removal, and should be prepared to take necessary steps to ensure equity and justice.
- Every effort should be made to explain the rationale and outcomes of proposed changes. Transparency, flexibility and communication could improve buy-in and build trust.
- Governments should explain how the fiscal "savings" would be used to help the disadvantaged. Community groups, civil society organizations and the media could be more effectively engaged and address some of the political sensitivities.
- Some consideration should be given to phasing in the reductions, while concomitantly strengthening relevant institutions and ensuring a softer landing for those living near or below the poverty line.
- Subsidy reductions/removals must always be presented as part of a broader package of fiscal reform that is clearly linked to national development goals.
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