Fuel Subsidy Reform Offers a Path to a Resilient, Sustainable Economy in Central African Republic: World Bank Report

Fuel Subsidy Reform Offers a Path to a Resilient, Sustainable Economy in Central African Republic: World Bank Report

Fuel Subsidy Reform Offers a Path to a Resilient, Sustainable Economy in Central African Republic: World Bank Report

Fuel Subsidy Reform Offers a Path to a Resilient, Sustainable Economy in Central African Republic: World Bank Report

The economy of the Central African Republic is projected to return to growth this year after stalling in 2022. Heavy flooding and severe shortages of fuel took a heavy toll last year on the economy and people, who experienced high levels of acute food insecurity, says the latest edition of the World Bank’s Central African Republic (CAR) Economic Update.

Released today, the report notes that floods inflicted significant physical damage last year to homes, transport infrastructure and crops, and displaced over 6,000 people. The floods, together with high energy prices due to fuel shortages provoked by domestic tensions, armed groups activities and continuing fallout from the war in Ukraine, resulted in a zero-growth economy in 2022.

Economic activity in CAR may see a modest rebound over the medium term, with growth projected at 3.6% in 2024 and 2025, provided that fuel supply in the domestic market improves and the security gains continue. This outlook is driven by anticipated higher international prices of timber, CAR’s main export, owing to a rebound of global demand, particularly from China.

With nearly half of the population unable to meet their daily minimum food needs, the report underscores the need for policy actions to improve the security situation, bolster public finances, attract private investment and improve human capital.  

“CAR’s economic outlook remains fragile as domestic challenges are exacerbated by a challenging external environment of slowing global growth, high inflation and tighter financing conditions. CAR would do well to implement bold reforms to boost growth, improve living standards, and reduce extreme poverty,” said Guido Rurangwa, World Bank’s Country Manager for the Central African Republic.

The report focuses on much-needed reforms on fuel subsidies, which have surged globally as international oil prices began rising in late 2020, reaching new heights in 2022 amid the war in Ukraine. In CAR, fuel subsidies represented about 0.5% of GDP and accounted for nearly 6% of domestic revenues and 6.3% of tax revenues in 2022.

It highlights that fuel subsidies benefit mainly and directly the richest segments of the population, while diverting limited fiscal resources from sectors, households, and firms that might need them more. Although heavily subsidized fuels, namely diesel and gasoline, might indirectly benefit the poorest segments of the population through lower transport and imported food prices, these fuels are largely consumed by wealthier, urban dwellers. The poorest households predominantly rely on kerosene, which receives comparatively fewer subsidies. This disparity exacerbates income inequality and perpetuates social inequities.

“A well-designed fuel subsidy reform should include a robust mitigation package that offers targeted support to the most vulnerable segments of society,” explains Pierre Mandon, co-author of the report.

Drawing lessons from the experiences of countries that have successfully implemented fuel price adjustments, the report outlines four best practices for a fuel subsidy reform strategy. These include:

  • Temporarily excluding socioeconomically strategic fuels, such as kerosene, from the subsidy reform.
  • Adopting a price smoothing mechanism that strikes a balance between excessive price volatility for households and fiscal risks.
  • Implementing a phased reform approach to allow households to adjust and ensure effective rollout of mitigation measures.
  • Engaging in comprehensive stakeholder consultations and conducting targeted communication campaigns to address the concerns of various population groups.

Distributed by APO Group on behalf of The World Bank Group.