1st Edition | June 2023 Equatorial Guinea Economic Update Reforming Fossil Fuel Subsidies © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Washington, DC: World Bank.” All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org 1st Edition | June 2023 Equatorial Guinea Economic Update Reforming Fossil Fuel Subsidies Table of contents Abbreviations and Acronyms 6 Acknowledgements 7 Summary 8 Chapter 1. Recent Economic Developments and Outlook 12 1. Recent Economic Developments 13 1.1 Global and regional growth has slowed, while high 13 hydrocarbon prices have supported CEMAC economies 1.2 Economic activity in Equatorial Guinea rebounded in 2022 supported by positive developments in the 15 hydrocarbon sector 1.3 Higher oil prices improved the country’s fiscal position 19 1.4 … as well as its external position 21 1.5 Monetary policy tightening and long-standing banking 22 sector vulnerabilities constrained credit to the economy 2. Outlook, Risks, and Policy Watch 24 2.1 Global growth is expected to slow 24 2.2 Equatorial Guinea’s GDP growth is projected to turn 26 negative over the medium term 2.3 A decline in hydrocarbon production is the main risk to 27 the medium-term outlook 2.4 The government has made progress in some areas, but the implementation of key reforms needs to be accelerated 27 to promote economic diversification Chapter 2. Assessing the Impact of Fossil Fuel Subsidies in 30 Equatorial Guinea and Options of Policy Reforms 1. Recent Developments in Fossil Fuel Subsidies 31 1.1 Evolution of oil prices and related subsidies – Regional 31 overview 1.2 The fiscal cost of fossil fuel subsidies in Equatorial 35 Guinea 1.3. Distributional analysis of fossil fuel subsidies 37 2. General Principles from International Experience 43 2.1 Calibrating price adjustments by petroleum products 43 2.2 Adopting a mechanism to move gradually towards 45 market-based pricing 2.3 Staggering the reform 46 2.4. Stakeholder consultations 47 3. Accompanying Measures 49 3.1 Reinforcing Social Safety Nets 49 3.2 Increasing transparency of public financial management 54 3.3 Increasing social public spending 54 3.4 Supporting the transport sector 54 3.5 Increasing productive structural public investments 55 Technical Annex 1 – Fossil fuel types and uses 56 Technical Annex 2 – Quantifying fossil fuel subsidies in CEMAC 57 Boxes Box 1. Recent shocks in Equatorial Guinea: impact and 16 government’s response Box 2. International country case – Indonesia 44 Box 3. International country case – Morocco 46 Box 4. International country case – The Philippines 47 Box 5. International country case – Ukraine 48 Box 6. Reinforcing social safety nets as a mitigation measure 50 Figures Figure 1. Real GDP growth (in percent), 2020-2022 14 Figure 2. Equatorial Guinea - Oil and Non-oil GDP growth (in 16 percent), 2015-2022 Figure 3. Equatorial Guinea and CEMAC countries - Real GDP growth 16 (in percent), 2020-2022 Figure 4. Equatorial Guinea - Hydrocarbon Production (in millions of 18 barrels of oil equivalent), 2021-2022, quarterly Figure 5. Equatorial Guinea - Growth in Hydrocarbon Production by 18 Commodity (percentage points), 2022 Figure 6. Equatorial Guinea - Contribution to Growth, demand (in 19 percent), 2019-2022 Figure 7. Equatorial Guinea - Contribution to Growth, supply (in 19 percent), 2019-2022 Figure 8. Equatorial Guinea - Fiscal Balance, 2019-2022 20 Figure 9. Equatorial Guinea - Public debt (in percent of GDP), 2019- 20 2022 Figure 10. Equatorial Guinea - Current Account Balance (in percent of 21 GDP), 2019-2022 Figure 11. Equatorial Guinea - Composition of export value (in 21 percent of total exports), 2021 Figure 12. Equatorial Guinea - Composition and growth of credit to 23 the economy, 2014-2022 Figure 13. Global GDP growth (in percent), 1990-2025 25 Figure 14. GDP growth in SSA (in percent), 2021-2025 25 Figure 15. Equatorial Guinea - Real GDP growth (in percent), 2022- 26 2025 Figure 16. Equatorial Guinea, CEMAC, and SSA - Worldwide 28 Governance indicators (percentile), 2021 Figure 17. Crude oil price, Brent (US$/bbl) 32 Figure 18. Fiscal fuel consumption subsidies worldwide (billion US$) 32 Figure 19. Fiscal cost of fuel subsidies in West and Central African 33 countries (in percent of GDP) Figure 20. Social Spending in West and Central African countries (in 33 percent of GDP) Figure 21. Fuel subsidies, by net oil importers and exporters in in 34 West and Central African countries (in percent of GDP) Figure 22. Oil revenues and fuel subsidies for net exporters in West 34 and Central African countries (in percent of GDP) Figure 23. Fiscal balance by net oil importers and exporters in West 34 and Central African countries (in percent of GDP) Figure 24. Current account balance, by net oil importers and 34 exporters in West and Central African countries (in percent of GDP) Figure 25. Fiscal cost of subsidies in Equatorial Guinea 36 Figure 26. Budget allocation to Social Spending (in percent of GDP) 36 Figure 27. Gabon - Distribution of fuel consumption by income group 38 (in percentage, by decile) Figure 28. Gabon - Distribution of kerosene consumption, by income 38 group and region (in percentage, by decile). Figure 29. Cameroon - Distribution of fuel consumption by income 38 group (in percentage, by decile) Figure 30. Cameroon - Distribution of kerosene by income group and 38 region (in percentage, by decile). Figure 31. Congo - Distribution of fuel consumption by income group 39 (in percentage, by decile) Figure 32. Congo - Distribution of kerosene consumption by income 39 group and region (in percentage, by decile). Figure 33. Gabon - Distribution of fuel consumption, by gender (in 39 percentage) Figure 34. Gabon - Proportion of fuel consumption as a percentage 39 of the budget share (in percentage, by income group and by fuel) Figure 35. Cameroon - Distribution of fuel consumption by Gender 40 (in percentage) Figure 36. Cameroon - The proportion of fuel on total consumption 40 (in percentage, by decile) Figure 37. Congo - Distribution of kerosene consumption by gender 40 (in percentage) Figure 38. Congo - Share of fuel consumption over total budget by 40 income group (in percentage, by decile)  Figure 39. Cameroon - Price increase in case of withdrawal of fuel 41 subsidies in 2022 (by sector, in percent) Abbreviations and Acronyms ARE Agenda for Economic Recovery; Agenda De Recuperación Económica BEAC Bank of Central African States; Banque des États de l'Afrique centrale CEMAC Economic and Monetary Community of Central Africa; Communauté économique et monétaire de l’Afrique centrale COBAC Central African Banking Commission; Commission Bancaire de l'Afrique Centrale COVID-19 Coronavirus disease 2019 IDR Indonesian rupiah IEA International Energy Agency IMF International Monetary Fund INEGE National Institute of Statistics of Equatorial Guinea; Instituto Nacional de Estadística LPG Liquified Petroleum Gas NPL Non-Performing Loan RUS Single Social Registry; Registro Unico Social SDR Special Drawing Rights UNICEF United Nations International Children's Emergency Fund WCO World Customs Organization Acknowledgements T he first edition of the Equatorial Guinea Economic Update was prepared by a World Bank team co-led by Djeneba Doumbia (Country Economist for Equatorial Guinea, EAWM2) and by Joana Monteiro Da Mota (ET Consultant, EAWM2), consisting of Houda Karafli (Young Professional, EAWM2), Clarence Tsimpo Nkengne (Senior Economist, EAWPV), Paula Maria Cerutti (Senior Social Protection Specialist, HAWS3), Samer Naji Matta (Senior Economist, EAWM2), Daniel Pajank (Senior Economist, EAWM1), and Anna Bokina (Operations Officer, IAWE4), under the supervision and guidance of Elisabeth Huybens (Acting Director, AFWC1), Sandeep Mahajan (Practice Manager, EAWM2) and Raju Singh (Lead Economist, EAWM2). The Update benefited from comments from Steve Loris Gui-Diby (Senior Economist, EAEM2) and Defne Gencer (Senior Energy Specialist, IEEES). The team received guidance and insightful comments from Ashish Khanna (Practice Manager, IAWE4), Keiko Kubota (Manager, AWCC1), Clelia Kalliopi Helena Rontoyanni (Program Leader, EAWDR), Nathalie Lahire (Program Leader, HAWDR), Ambar Narayan (Lead Economist, EAWPV), Yussuf Uwamahoro (Lead Energy Specialist, IAWDR), Olayinka Mutiat Edebiri (Senior Energy Specialist, IAWE4), Defne Gencer (Senior Energy Specialist, IEEES), Cemile Sancak (Advisor, IMF). The team also received support from Pinar Baydar (Operations Analyst, EAWM2), Suhair Murad Al-Zubairi (Program Assistant, EMNPV) and Irene Sitienei (Program Assistant, EAWM2). The team benefited from consultations with key policymakers in Equatorial Guinea, including officials from the Ministry of Planning and Economic Diversification; the Ministry of Finance and Budget; the Ministry of Mines and Hydrocarbons; the Ministries of Commerce, Education, and Social Affairs; the National Institute of Statistics of Equatorial Guinea ( Instituto Nacional de Estadística de Guinea Ecuatorial , INEGE); and the Bank of Central African States. 8 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Summary T his is the first edition of the Economic Update for Equatorial Guinea. This report presents recent economic developments in Equatorial Guinea as well as the medium-term economic outlook and risks (Chapter 1), followed by a detailed exploration of a specific topic (Chapter 2). This edition focuses on fuel subsidies and advises on fuel subsidy reform options and mitigation measures by drawing on lessons from international experience. The objectives of the Equatorial Guinea Economic Update are to: (i) strengthen the analytical underpinnings of the policy dialogue; and (ii) contribute to an informed debate on policy options to enhance macroeconomic management and development outcomes. Following seven consecutive years of recession on the back of low commodity prices and the COVID-19 shock, Equatorial Guinea’s economic activity expanded in 2022 thanks to a rebound in the hydrocarbon sector. Economic growth is estimated to have reached about 3 percent. Stronger hydrocarbon output compared to the previous year, especially natural gas, drove the rebound. Meanwhile, the activity of other sectors was sustained by strong domestic demand fueled by the oil windfall as well as the complete removal of COVID-19 restrictions. In 2022, the fiscal and external positions improved, and public debt remained sustainable. The rebound in hydrocarbon production, along with more favorable commodity prices, increased the fiscal surplus to an estimated 3.9 percent of GDP in 2022 from 2.8 percent of GDP in 2021. Public debt at 37.6 percent of GDP, mostly domestically owned, remained sustainable. Equatorial Guinea’s current account deficit narrowed. 9 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Owing to the monetary tightening of the Bank of Central African States (Banque des États de l’Afrique Centrale, BEAC), inflation is under control, but credit growth remains overly subdued. Inflation in Equatorial Guinea is estimated to have surged to 4.9 percent in 2022 from -0.1 percent in 2021, due to higher global food and energy prices, which have been exacerbated by Russia’s invasion of Ukraine. Recent inflationary pressures in countries of the Communauté économique et monétaire de l’Afrique centrale (Central African Economic and Monetary Community, CEMAC) led the BEAC to increase the policy rate twice during 2022. Meanwhile, the monetary tightening and persistent banking sector vulnerabilities kept credit growth to the private sector and to the overall economy negative. The non-performing loan (NPL) ratio decreased but remained high in 2022 at 57.5 percent. Equatorial Guinea’s medium-term outlook is negative and subject to significant downside risks. Without significant diversification efforts or new discoveries of hydrocarbon reserves, Equatorial Guinea is projected to re-enter recession in 2023 with an average real GDP growth of about -4 percent over the period 2023 to 2025. The medium-term outlook is subject to downside risks, including increases in international food prices, lower-than-expected oil production and prices, and a further tightening of global financial conditions. Considering the secular decline in hydrocarbon production, policy priorities include changing the current development model to promote economic diversification. While the government has taken positive steps in some areas, significant progress in adopting and fully implementing key reforms to boost economic diversification is needed. Policies should focus on supporting social cohesion and human development, strengthening governance, boosting trade integration, and creating an enabling business environment to promote economic diversification and inclusive growth. The special topic of this Economic Update focuses on fossil fuel subsidies. In 2022, the sharp rise in international oil prices—against a backdrop of stagnant domestic retail prices—led to an increase in fuel subsidies in the CEMAC region, including in Equatorial Guinea. The cost of fuel subsidies at 1.3 percent of GDP in 2022 was already elevated in Equatorial Guinea and competing with higher priority spending, especially in social sectors. Yet, while fuel subsidies aim to support consumers’ purchasing power, especially that of the most vulnerable, in practice these subsidies benefit the richest segments of the population, especially groups living in urban areas. This is mainly explained by their consumption of the two most heavily subsidized fuels - diesel and gasoline - in contrast with kerosene, a fuel mostly consumed by the poorest. Furthermore, fuel subsidies introduce environmental 10 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies and market distortions, preventing an efficient use of energy and the development of renewable sources of energy or the adoption of low emitting development solutions, instead locking into a higher emission development pathway into the future. The removal of fuel subsidies (except for kerosene) would, nonetheless, have a limited one-time effect on the general price level. Such an increase would impact the purchasing power of the population, as higher fuel prices would indirectly lead to higher prices for other products and services, especially in the transport, fishing, and forestry sectors. Therefore, a fuel subsidy reform needs to be accompanied by a strong mitigation package aimed at protecting the vulnerable segments of the population. Lessons can be drawn from the experiences of countries that have carried out fuel price adjustments. Principles from international experience show four good practices when carrying a fuel subsidy reform: (i) exclude (at least temporarily) from the subsidy reform fuels that are used by the most vulnerable segments of the population; (ii) adopt a price smoothing mechanism that offers a balance between excessive price volatility and fiscal risks; (iii) stagger the reform to allow households to adjust and the mitigation measures to be rolled out; and (iv) engage in stakeholder consultations and carry out communication campaigns to address the concerns of various population groups. Moreover, targeted measures should be implemented to mitigate the impact on affected vulnerable groups and sectors. This can be achieved by reinforcing social safety nets, increasing transparency of public financial management, increasing targeted social spending, supporting strategically affected sectors such as transport, and increasing productive structural public investments. Country experiences illustrate a variety of possible accompanying measures to make adjustments in fuel prices socially acceptable. They show that there is not a standard set of actions but that these measures need to be discussed, identified, and designed to reflect the concerns and the characteristics of each country. 11 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Credits: “Seiba”, by Marat Assanov on Flickr (https://www.flickr.com/photos/131926685@N07/16458817653), licensed under CC BY-NC 2.0) Chapter 1 and Outlook Recent Economic Developments 13 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 1/ Recent Economic Developments 1.1. Global and regional growth has slowed, while high hydrocarbon prices have supported CEMAC economies T he global economy grew by about Against this backdrop, economic growth 3.1 percent in 2022, a slowdown in Sub-Saharan Africa has also slowed. compared to the previous year Economic activities in Sub-Saharan Africa resulting from tighter monetary conditions slowed in 2022 to about 3.7 percent (from 4.4 and global trade disruptions . Global percent in 2021), with the slowdown driven growth has been slowing since its peak at by weaker external demand for non-energy about six percent in 2021, when it started commodities, tightening global financing to rebound from the pandemic (Figure conditions, and rising inflation. The cost of 1). Trade disruptions caused by Russia’s living increased across the continent, as higher invasion of Ukraine and tightening monetary food and fuel prices resulted in increased policies aimed at containing high inflationary vulnerability and distress. pressures in different regions have been contributing to this slower growth. Advanced Higher hydrocarbon prices have, however, economies including the U.S. and Europe and allowed CEMAC economies to experience most emerging markets are experiencing faster growth in 2022. Higher hydrocarbon weaker growth. At the same time, risks of debt prices, combined with the lifting of COVID-19 distress have heightened. containment measures, have had an overall 14 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies positive impact on the terms of trade and and limiting their ability to take advantage of economic growth of the region. CEMAC’s rising oil prices to rebuild fiscal and external economic growth is estimated to have reached buffers (the special focus of this edition 2.9 percent in 2022, up from about 1.1 percent provides a more detailed discussion of the in the previous year but below the average for topic). Meanwhile, rising global inflation is Sub-Saharan Africa. However, while oil and gas weighing on domestic prices and real incomes exports have been contributing to improved while tighter global financial conditions are regional fiscal and external balances, the fiscal also constraining growth. costs of fuel subsidies have been increasingly weighing on the budgets of CEMAC countries Figure 1. Real GDP growth (in percent), 2020-2022 8 6 4 2 0 -2 -4 -6 2020 2021 2022 e World SSA CEMAC Equatorial Guinea Source: Global Economic Prospects, World Bank The BEAC continued to tighten its monetary appels d’offre, TIAO) by 25 basis points to 3.5 policy to contain inflationary pressures percent. Further policy rate increases were and ensure external viability. Following an adopted, to 4.0 percent in March 2022, 4.5 extraordinary Monetary Policy Committee percent in September 2022, and 5.0 percent meeting on November 25, 2021, the BEAC in March 2023. The BEAC also decreased increased the policy rate (taux d’intérêt des its weekly liquidity injections from CFAF 15 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 160 billion in April 2022 to CFAF 50 billion thanks to higher commodity prices, and tighter in December 2022. Moreover, the regional fiscal and monetary policies helped to support central bank continues to work towards the buildup of regional gross reserves, which the effective application of the new foreign have been increasing steadily since early 2022 exchange regulation, strengthening the and reached CFAF 6,851 billion in December repatriation of foreign exchange earnings 2022 (up from CFAF 4,779 billion in January for the extractive sector as agreed in January 2022). Foreign exchange reserves at the 2022. Against this backdrop, the CFA franc BEAC increased to reach the equivalent of 4.7 depreciated in real effective terms for most months of prospective imports of goods and of 2022 as the Euro depreciated against the US services by end-December 2022 (compared to dollar. Improved terms of trade in the region, 4.1 months at end-December 2021). 1.2. Economic activity in Equatorial Guinea rebounded in 2022 supported by positive developments in the hydrocarbon sector Over recent years, Equatorial Guinea’s Equatorial Guinea’s growth turned economic growth has been hampered positive in 2022, driven by the rebound in by a shrinking hydrocarbon sector and the hydrocarbon sector. In 2022, real GDP external and domestic shocks. The economy is estimated to have expanded by about 3 has been in recession for seven consecutive percent (Figure 3)1. Hydrocarbon production years. The hydrocarbon sector has declined increased sharply during the first half of the at an average rate of 7.2 percent per year year, thanks to a rebound in gas production between 2015 and 2021 amid maturing oil following the repairs carried out on the fields and multiple incidents at both gas and Punta Europa complex after a fire incident oil production sites (Figure 2). Meanwhile, the in September 2021. The economic rebound double shock of the COVID-19 pandemic and was, however, weaker than previously the Bata explosions of March 2021 aggravated expected as another incident, this time at the Equatorial Guinea’s macroeconomic situation country’s largest offshore oil platform, Zafiro, (Box 1). The estimated direct losses of the Bata in September 2022, stopped crude production explosion, including substantial damages in starting from the fourth quarter of the year. infrastructure, reached 2.5 percent of GDP in Strong aggregate demand fueled by higher oil 2021. The non-hydrocarbon sector contracted prices and the lifting of COVID-19 containment because of COVID-19 containment measures measures also led to a rebound in the non-oil and mounting fiscal pressures amid lower oil sector, which marked its best performance prices. since the end of the oil boom in 2015. 1 INEGE estimates GDP growth rates of -0.9 percent and 3.1 percent for 2021 and 2022, respectively. 16 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 2. Equatorial Guinea - Oil and Non-oil GDP Figure 3. Equatorial Guinea and CEMAC countries - growth (in percent), 2015-2022 Real GDP growth (in percent), 2020-2022 4 6 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 Equatorial Gabon Congo, Cameroon Central Chad Guinea Rep. African -10 Republic 2015 2016 2017 2018 2019 2020 2021 2022 e Oil GDP Non-oil GDP Real GDP Growth 2020 2021 2022 Source: World Bank and Equatoguinean authorities. Box 1. Recent shocks in Equatorial Guinea: impact and government’s response COVID-19: While the spread of COVID-19 was relatively contained with a total of 17.2 thousand confirmed cases and 183 casualties as of end-2022, the pandemic intensified the slowdown in economic growth in 2020 and 2021. The government swiftly declared a state of health emergency in March 2020 and proactively implemented containment measures, including the closure of borders, businesses, and schools, among other restrictions. Containment measures led to a sharp deceleration in economic activity, which was exacerbated by low oil prices and the contraction of the hydrocarbon sector due to lower domestic and international demand. Despite the decline in government revenues, the government adopted a broad emergency health spending package (one percent of GDP), a social assistance scheme (0.3 percent of GDP), temporary support to the private sector (0.3 percent of GDP), and devoted additional resources to the education sector (0.4 percent of GDP). Vaccination rates remained low at 27.3 percent of total population. 17 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Bata explosions: On March 2021, a series of explosions occurred at a military warehouse in Bata, the country’s largest city and commercial capital. The explosions resulted in widespread human and physical damage, with a total of 107 casualties, over 600 people injured, and vast destruction of infrastructure throughout the city, including residences and public buildings such as schools and hospitals. The estimated direct losses were estimated at 2.5 percent of GDP in 2021. The Bata explosions occurred while a second wave of COVID-19 was still unfolding, aggravating an already challenging situation. The government increased fiscal spending for the reconstruction of Bata and provided immediate emergency support for victims. The latter included temporary shelters, targeted assistance in the form of basic nutrients, water, and hygiene supplies, and cash transfers to 300 families. The cash transfers initiative was co-led by United Nations International Children’s Emergency Fund (UNICEF) and the government in coordination with non-governmental organizations. In 2021, the pandemic and Bata-related spending amounted to 0.4 percent of GDP. War in Ukraine: The impact of the war in Ukraine on Equatorial Guinea has been felt mostly through an increase in oil and food prices. In 2022, oil prices rose to US$ 97.1 a barrel (from US$ 69.1 in 2021),2 which boosted the country’s oil revenues to CFAF 1,406 billion (17.6 percent of GDP) from CFAF 846 billion in 2021 (or 13.3 percent of GDP). While direct food imports from Russia and Ukraine amount to only 0.7 percent of Equatorial Guinea’s total imports of food, the rise in food prices globally has led to higher food inflation domestically (of 5.8 percent in 2022, up from 1.2 percent in 2021). While no comprehensive data is available for Equatorial Guinea, it is likely that food insecurity has increased since the country imports about 70 percent of its food consumption needs. The 2022 rebound in the hydrocarbon end of 2021, when total production amounted sector was driven by gas, while oil only to 151 thousand barrels per day because production continued declining. In 2022, of the incident in Punta Europa, which led gas production, including liquified natural to a drop in gas production of 32 percent in gas, propane, and other gases, increased by 2021Q4 (quarter-on-quarter). Meanwhile, 13 percent, to reach more than 170 thousand crude oil production contracted by more than barrels of oil equivalent per day (Figure 4 14 percent (year-on-year) to slightly more than and Figure 5). The increase reflected mostly 80 thousand barrels per day in 2022 (from a recovery from depressed production at the peak of 321 thousand barrels per day in 2004), 2 World Bank Commodity Price Data (March 2023) 18 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies the lowest production level ever registered in thanks to the dynamism of the oil industry and the country. The drop in crude production associated services, as well as a small recovery in 2022 reflects maturing oil fields and the in the construction sector. The removal of incident at the Zafiro offshore production site containment measures boosted other services in September. in 2022, with a registered increase in hotel stays and the number of passengers flights The non-hydrocarbon sector benefited in compared to 2021 (Figure 7). 2022 from high aggregate demand fueled by favorable oil prices and the total opening Inflation increased in 2022, driven by of land and air borders. On the demand side, food prices. Inflation in Equatorial Guinea government consumption was the largest is estimated to have surged to 4.9 percent in driver of growth, with an increase of 18 percent 2022 (above the 3 percent CEMAC convergence in real terms. The complete lifting of COVID-19 criterion) from -0.1 percent in 2021, due to containment measures renewed domestic higher global food and energy prices following confidence and boosted private-sector the war in Ukraine. Food prices peaked at 5.8 spending. Meanwhile, investment continued percent in 2022, up from 1.2 percent in 2021. to decline, driven by lower investment in the In March 2023, the average inflation rate stood oil sector (Figure 6). On the supply side, the at 5.1 percent, up from 1.0 percent in March secondary and tertiary sectors rebounded 2022. Figure 4. Equatorial Guinea - Hydrocarbon Production Figure 5. Equatorial Guinea - Growth in Hydrocarbon (in millions of barrels of oil equivalent), 2021-2022, Production by Commodity (percentage points), 2022 quarterly 30 20 15 25 10 20 in millions bbls 5 15 0 -5 10 -10 5 -15 0 -20 Q1-21Q2-21Q3-21Q4-21Q1-22Q2-22Q3-22Q4-23 ol te ne o e G ud an n sa LN pa ha t Cr en Bu o et Pr Oil Gas nd M Co Source: Equatoguinean authorities. Note: LNG is liquefied natural gas. 19 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 6. Equatorial Guinea - Contribution to Growth, Figure 7. Equatorial Guinea - Contribution to Growth, demand (in percent), 2019-2022 supply (in percent), 2019-2022 6 4 3 4 2 2 1 0 0 -1 -2 -2 -4 -3 -4 -6 -5 -8 -6 2019 2020 2021 2022 e 2019 2020 2021 2022 e Private cons. Gov. cons. Services GFCF Investories Industry (including construction) Net Exports Real GDP Growth Agriculture, forestry, and fishing Source: Equatoguinean authorities and World Bank staff calculations Note: GFCF is gross fixed capital formation. 1.3. Higher oil prices improved the country’s fiscal position… The country recorded a wider fiscal surplus CFAF 170 billion in 2022) as the non-oil sector in 2022 owing to the oil windfall. The overall rebounded and tax reforms started to bear budget surplus is estimated at 3.8 percent fruit. In addition, the 2022 fuel subsidy reform of GDP in 2022, from 2.8 percent of GDP in is estimated to have generated savings of the previous year (Figure 8). The rebound about 0.1 percent of GDP in 2022 (see Chapter in gas production during the first half of the 2 for a detailed discussion on fuel subsidies).3 year and higher commodity prices boosted On the expenditure side, both capital and hydrocarbon revenues to 17.6 percent of GDP current spending expanded and reached 15.5 (from 13.3 percent of GDP in 2021). Non-oil tax percent of GDP (from 13.8 percent of GDP in revenues also performed better compared to 2021). 2021 (with an increase of about 15 percent to 3 IMF estimates as of August 2022 (IMF Article IV for Equatorial Guinea). Estimated savings compare spending had the authorities not increased the reference price in 2022. 20 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Public debt has been decreasing and is arrears, including with construction companies, expected to remain sustainable over the using 70 percent of the IMF Special Drawing medium term.4 Public debt in Equatorial Rights (SDR) allocation (equivalent to US$ Guinea is modest at 37.6 percent of GDP in 150.5 million). Notwithstanding, outstanding 2022 and mostly domestic (including arrears domestic arrears with construction companies owned to construction companies), with only remain high at 10.8 percent of GDP. The 33 percent of the total debt held by multilateral government has committed to continue and bilateral foreign creditors (9). In 2022, settling arrears using government bonds. public debt decreased (from 42.2 percent Further progress in the clearance of arrears of GDP in 2021) thanks to the economic would, in turn, help reduce the high share of expansion and higher oil prices. In addition, non-performing loans. the government settled a share of its domestic Figure 8. Equatorial Guinea - Fiscal Balance, 2019-2022 Figure 9. Equatorial Guinea - Public debt (in percent of GDP), 2019-2022 60 1800 5.0 1600 3.8 50 4.0 1400 2.8 3.0 in percentage of GDP 40 1200 CFAF Billions 1000 1.9 2.0 30 800 1.0 600 20 0.0 400 10 -1.0 200 -1.7 0 -2.0 0 2019 2020 2021 2022 2019 2020 2021 2022 Total Revenues Total Expenditures Fiscal Balance External Debt Domestic Debt Source: Equatoguinean authorities and World Bank. 4 IMF Debt Sustainability Analysis, July 2022 21 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 1.4. …as well as its external position Higher international commodity prices As a result, the current account deficit improved the country’s export performance narrowed in 2022. The current account deficit in 2022. Equatorial Guinea’s exports value in narrowed to 0.8 percent of GDP in 2022, from US$ increased by 41.7 percent in 2022, driven 2.3 percent of GDP in 2021. The improvement by rising oil and gas prices (Figure 10). Fuels was mainly driven by an increase in the country’s and mineral oils accounted for 87 percent of trade balance which was 11.3 percentage the total exports value in 2021 (Figure 11). points higher than in 2021 (Figure 11). Imports Despite the incident at the Zafiro production increased by 11.7 percent compared to 2021 platform in September 2022, hydrocarbon amid higher capital spending, but this increase exports are estimated to have increased by was more than offset by the strong export 44.6 percent in 2022 (in value), mainly due to performance discussed above. Improved higher prices. export performance resulted in a trade balance of 14.5 percent of GDP in 2022 (compared to 3.2 percent of GDP in 2021). Figure 10. Equatorial Guinea - Current Account Figure 11. Equatorial Guinea - Composition of export Balance (in percent of GDP), 2019-2022 value (in percent of total exports), 2021 60 20 50 15 7.5% 2.9% 10 40 2.0% 5 0.6% 30 0 87.0% 20 -5 10 -10 0 -15 2019 2020 2021 2022 Fuels and mineral oils Organic chemicals Ships and other floating devices Exports Wood, charcoal and wood manufacturing Imports Others Trade Balance (rhs) Current Account Balance (rhs) Source: BEAC, INEGE, and World Bank staff calculations. 22 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 1.5. Monetary policy tightening and long- standing banking sector vulnerabilities constrained credit to the economy Credit to the economy declined amid Centrale , COBAC), the regional banking protracted banking sector vulnerabilities. supervisor, ended its temporary forbearance Despite the partial clearance of domestic measures related to the COVID-19 pandemic arrears by the authorities, banking sector in June 2022, a deterioration of asset quality liquidity remains low, and credit to the (increases in overdue loans and NPL ratios) economy declined by two percent in 2022 could soon become visible. In addition, as driven by a decline in credit to the non- of September 2022, liquidity and capital financial private sector, following a three requirements were not met by some banks in percent decline in 2021 (Figure 12). Tighter Equatorial Guinea. For instance, out of the five monetary conditions to curb inflation have banks present in the country, one bank had a contributed to this restrictive environment liquidity ratio below the regulatory minimum with a continued decline in credit to the private of 100 percent, and three banks did not comply sector of about three percent in 2022. with the minimum capital requirement as per the regulations established by the regional Notwithstanding a decrease in non- supervisor, COBAC. performing loans, Equatorial Guinea’s financial sector remains subject to significant vulnerabilities. The share of NPLs to gross loans decreased to 57.5 percent (CFAF 552 billion) as of end-September 2022 (down from 61.3 percent in September 2021) thanks to the recent clearance of domestic arrears by the authorities.5 Deposits increased by 8.9 percent to CFAF 1,186 billion in the third quarter of 2022, compared to the same period in 2021. The loans-to-deposit ratio also improved from 135.4 percent in September 2021 to 149.0 percent one year later. While these positive developments, combined with the recent clearance of domestic arrears, are a positive sign for the stability of the banking sector, the NPL ratio is still extremely high, indicating a banking sector subject to significant risk. Moreover, as the Central African Banking Commission (Commission Bancaire de l’Afrique 5 NPLs increased significantly from 5.8 percent of gross loans in December 2012 (during the oil boom) to 21 percent in February 2015. The high level of NPLs is mainly due to domestic arrears with construction companies. 23 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 12. Equatorial Guinea - Composition and growth of credit to the economy, 2015-2022 1200 20 15 1000 10 800 5 In CFAF billion in percent 0 600 -5 400 -10 -15 200 -20 0 -25 2015 2016 2017 2018 2019 2020 2021 2022 Non-monetary Financial Institutions (lhs) Non-financial Public Enterprises (lhs) Non-Financial Private Sector (lhs) Credit to the economy (growth, rhs) Source: BEAC, INEGE, and World Bank staff calculations Credits: “Produce vendor in Malabo, Equatorial Guinea”, by Pablo Manriquez on Flickr (https://www.flickr.com/photos/mnrqz/5992757315/), licensed under CC BY-ND 2.0 24 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 2/ Outlook, Risks, and Policy Watch 2.1. Global growth is expected to slow Global economic activity is set to decelerate tightening financial conditions, and heavy as a result of synchronized monetary indebtedness is likely to weaken investment policy tightening to contain high inflation, and trigger corporate defaults. Further less favorable financial conditions, and negative shocks—such as higher inflation, disruptions from the war in Ukraine . even tighter monetary policy, financial stress, Global growth is expected to decelerate deeper weakness in major economies, or sharply to about 2.1 percent in 2023 (from rising geopolitical tensions—could push the about 3.1 percent in 2022) (Figure 13). The global economy into recession. sharp downturn in growth is expected to be widespread. The United States and the Euro In SSA, growth in 2023-24 is projected area are undergoing a period of pronounced to remain below long-term averages in weakness, and the resulting spillovers are several economies. Economic growth in exacerbating other headwinds faced by the region is projected to remain modest in emerging market and developing economies 2023 at 3.2 percent (from 3.7 percent in 2022) (EMDEs). The combination of slow growth, before picking up to around four percent, on 25 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies average in 2024-2025 (Figure 14). Per capita downside. A more pronounced weakness in income in the region as a whole is expected major economies, further increases in global to grow by only about 1.0 percent a year on interest rates, higher and persistent inflation, average in 2023-25, half a percentage point fragility, and increased frequency and intensity below its trend rate before the pandemic. of adverse weather events could further In the CEMAC region, economic growth is slow growth across the region, exacerbating projected to slow down marginally, with an poverty and leading to debt distress in some average real GDP growth of 2.7 percent in countries. 2023 and about 2.9 percent in 2024-25. Even though an expected moderation of global commodity prices should temper increases in the cost of living, tighter policy stances to address elevated inflation and public debt will weigh on domestic demand. Subdued growth will make it difficult to reverse increases in food insecurity and poverty. Meanwhile, weakening growth in advanced economies is expected to pose headwinds for external demand, particularly among exporters of industrial commodities. Risks are tilted to the Figure 13. Global GDP growth (in percent), 1990-2025 Figure 14. GDP growth in SSA (in percent), 2021-2025 6 6 5 5 4 4 3 3 2 1 2 0 1 -1 0 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 -2 -3 Sub- Angola, Nigeria, Other SSA Saharan and South -4 Africa Africa 1990 1995 2000 2005 2010 2015 2020 2025 2000-19 average Source: Global Economic Prospects, World Bank 26 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 2.2 Equatorial Guinea’s GDP growth is projected to turn negative over the medium term Barring substantial new hydrocarbon The overall fiscal and external positions are discoveries and significant progress in projected to deteriorate over the medium structural reforms, Equatorial Guinea’s term. As highlighted in the 2023 Budget Law, economy is projected to re-enter a the government is expected to continue its sustained recession. Following the positive fiscal consolidation efforts through improved growth observed in 2022, real GDP growth is domestic revenue mobilization and contained projected to turn again negative in 2023, on public spending amid a projected decrease the back of lower hydrocarbon production in hydrocarbon production. Despite these (expected to contract by 6.5 percent) and efforts, the fiscal balance is projected to domestic demand (Figure 15). Amid a secular deteriorate slightly to a smaller surplus of decline in oil production and without new 2.1 percent of GDP in 2023 (compared to a investments in the hydrocarbon sector or surplus of 3.9 percent of GDP in 2022). The significant diversification efforts, real GDP fiscal position is projected to narrow further growth is projected to remain negative over in 2024-25 with a small average surplus of 0.6 the medium term, reaching an average percent of GDP. The current account balance negative growth of about 5 percent.6 The non- is also projected to deteriorate gradually over hydrocarbon sector is projected to grow by the medium term to an average of -1.6 percent five percent, while the hydrocarbon sector is of GDP over 2023-2025 on the back of declining expected to contract by 14 percent in 2024- export earnings. 2025. Figure 15. Equatorial Guinea - Real GDP growth (in percent), 2022-2025 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 2022e 2023f 2024f 2025f Source: World Bank staff calculations 6 INEGE forecasts an average negative GDP growth rate of 5 percent in 2024-2025. 27 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 2.3 A decline in hydrocarbon production is the main risk to the medium-term outlook The medium-term growth outlook faces needs. Fourth, further tightening of global significant risks that are tilted to the financial conditions would reduce investment downside. First, given that oil represents flows. Finally, delays in addressing structural more than 60 percent of the country’s total and governance issues, as well as addressing exports, a more pronounced decline in oil banking sector risks amid failure to clear prices and production than expected would domestic arrears, could hinder further private further reduce fiscal space over the medium investment, including into new oil or gas fields. term and undermine fiscal and external On the upside, significant progress in settling stability. Second, a weaker-than-expected domestic arrears could lower NPLs, decrease growth in Equatorial Guinea’s top exporting banking sector vulnerabilities, strengthen countries such as China and India could private sector performance, and lower the negatively impact export demand. Third, debt burden. If successful, the planned new a rise in food prices amid a protracted war investments of about US$ 1.5 billion in the in Ukraine would increase food insecurity, exploration of three oil concessions, combined especially for the most vulnerable. Equatorial with progress on structural reforms, could also Guinea heavily relies on food imports, covering present an upside to growth prospects in the about 70 percent of its food consumption medium-to-long term. 2.4 The government has made progress in some areas, but the implementation of key reforms needs to be accelerated to promote economic diversification The government has adopted some reforms Worldwide Governance indicators, including in recent years to improve governance, for control of corruption, regulatory quality, the business environment, and trade and voice and accountability (Figure 16). facilitation. Weak governance and high levels The government has sought to improve of perceived corruption could undermine governance with the adoption of an anti- the effective implementation of the reforms corruption law by the parliament in 2022 identified in the government’s National and the drafting of a procurement law. The Sustainable Development Strategy (AGENDA authorities have published the final audits 2035), including economic diversification of COVID-related expenses and the audits of efforts. While Equatorial Guinea scores state-owned oil and gas companies (GEPetrol, above CEMAC averages for government Guinea Ecuatorial de Petróleos, and Sonagas, effectiveness and political stability and Sociedad Nacional de Gas de Guinea Ecuatorial) absence of violence, the country scores well on the Ministry of Finance website. They below Sub-Saharan African averages in most are also taking measures to improve the 28 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies business environment, including through: (i) (ASYCUDA) information system in 2020, the creation of a One Stop Shop to facilitate accession to the World Customs Organization business registration, (ii) the simplification of (WCO) in December 2021, progress towards work permits, and (iii) the implementation of a accessing the World Trade Organization with soon-to-be launched e-visa which would ease the completion of the Memorandum on visa requests and help attract more investors Foreign Trade Regime in November 2022, and tourists. Key actions adopted or in the and the enactment of a new law in 2022 to pipeline to improve trade facilitation and reduce import and export duties and expand expand trade integration include the adoption operating hours at the Malabo and Bata ports. of the Automated System for Customs Data Figure 16. Equatorial Guinea, CEMAC, and SSA - Worldwide Governance indicators (percentile), 2021 40 35 30 25 20 15 10 5 0 Control of Government Political Stability Regulatory Quality Rule of Law Voice and Corruption Effectiveness and Absence of Accountability Violence/Terrorism Equatorial Guinea Average CEMAC Average SSA Source: Worldwide Governance Indicators, World Bank. Note: Higher values (up to a maximum of 100) indicate better governance ratings. Important measures have also been working to improve the monitoring of current implemented to strengthen fiscal and expenditures to enhance overall public debt management. In 2021, the General spending efficiency and accountability. The Tax Unit conducted a restructuring of its government has established a single window services with support from the IMF, which led for vehicle registration payments, and the to more coordinated services and improved country joined the WCO in order to improve tax compliance. A system to track capital non-hydrocarbon revenue mobilization. To expenditures on a timely basis has been put strengthen the government’s capacity on debt in place, and the authorities are currently management, the United Nations Conference 29 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies on Trade and Development (UNCTAD) launched based economic growth, the currently weak a technical assistance activity in June 2022 (co- banking sector must be made more sound and financed by the African Development Bank and financial inclusion expanded. Accelerating the the government), which will help implement settlement of domestic arrears would reduce the Debt Management and Financial Analysis the high NPL ratio and improve the liquidity of System (DMFAS) and support the authorities the banking sector. In addition, strengthening in publishing regular debt statistics. The financial inclusion (only one third of the adult new debt management system and regular population holds a bank account) would be debt reporting are also important steps in key to support inclusive growth going forward. enhancing the transparency of public finances. In 2019, the government created the National Economic and Financial Committee to promote Despite these efforts, much remains to financial inclusion, but lack of capacity, budget be done given the country’s urgent need and data has hindered the implementation to change its current economic model.7 A of the Committee’s initiatives. Last, reforms broad set of reforms are needed to enable are needed to improve governance including economic diversification and inclusive growth to improve the efficient allocation of public and to put the country on a fiscally sustainable resources and the mobilization of non- trajectory. First, social cohesion and human hydrocarbon revenue, to accelerate trade development require strengthening. The integration, and to improve the business limited allocation of resources to social environment. sectors (with only 1.9 percent of GDP in public spending in the education, health, and water sectors) is reflected in the country’s human development outcomes which are below its peers and out of line with its upper middle- income status. In particular, the primary school gross enrollment rate was estimated at 61.7 percent in Equatorial Guinea in 2015, below the Sub-Saharan Africa and upper middle- income countries averages of 97.9 percent and 100.7 percent, respectively, while stunting still affects 19.7 percent of children under age five in Equatorial Guinea, hindering their learning potential and economic opportunities.8 While a Social Protection Law has been drafted, there is still a need for a social protection strategy with clear objectives and measures within a streamlined administrative structure. Second, to encourage private investment and broad- 7 The upcoming Equatorial Guinea Country Economic Memorandum (2024) will provide detailed information on key policies and reforms to foster long-term economic growth and promote economic diversification. The report will also provide scenario analyses using the World Bank Long Term Growth Model, including on the impact of different reforms and changes in oil prices on economic growth in the medium to long run. 8 Data are from the World Development Indicators. According to the Voluntary National Review 2022 for Equatorial Guinea the implementation of the new Economic and Social Development Strategy (EDES) by the government, as well as the creation of educational and professional centers, and universities at the national level, has allowed an increase in the schooling rate. Chapter 2 Assessing the Impact of Fossil Fuel Subsidies in Equatorial Guinea and Options of Policy Reforms Credits: Freepik 31 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies T his chapter provides policy options for gradually reforming fossil fuel subsidies in Equatorial Guinea. While fuel subsidies imply significant fiscal, and environmental costs, they benefit mainly the richest households. In addition, fuel subsidies divert fiscal resources from sectors, households, and firms that might need them more. International experience would suggest that the reform is most successful when fuel subsidies are phased out in a sequenced and gradual approach. This approach should be designed in consultation with key stakeholders and accompanied by compensation mechanisms that minimize potential short- and medium-term shocks on households and firms. This chapter focuses on subsidies on kerosene, diesel, and gasoline (see Technical Annex 1 for more information on their use). 1/ Recent Developments in Fossil Fuel Subsidies 1.1 Evolution of oil prices and related subsidies – Regional overview The recent surge in international oil prices measures to ease the impact of these high has led to an increase in fuel subsidies energy costs on households and businesses, across the world. After a price decline induced energy consumption subsidies rose sharply by slower economic activity and reduced in 2022, reaching more than US$ 700 billion demand due to the COVID-19 pandemic, for oil, natural gas and coal, the highest level energy commodity prices have been rising ever recorded (Figure 18). These subsidies are since late 2020 and reached new heights in mostly broad-based, instead of being targeted 2022 amid the war on Ukraine (Figure 17). As towards vulnerable groups, and come with governments around the world introduced significant fiscal costs.9 9 Recently published estimate from IEA based on data from 51 countries, covering the OECD, G20 and 33 other major energy consuming and producing economies. 32 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 17. Crude oil price, Brent (US$/bbl) Figure 18. Fiscal fuel consumption subsidies worldwide (billion US$) 120 800 100 700 600 80 500 400 60 300 40 200 100 20 0 10 11 12 13 14 15 16 17 18 19 20 21 22 0 20 20 20 20 20 20 20 20 20 20 20 20 20 Oil Natural Gas Coal 10 11 12 13 14 15 16 17 18 19 20 21 22 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: IEA (International Energy Agency) and World Bank Countries in West and Central Africa, including in the CEMAC region, have seen a similar development. The fiscal cost of energy subsidies in West and Central Africa more than doubled compared to their pre-COVID levels (Figure 19). In contrast to rising energy subsidies, public spending on social sectors has stagnated or even decreased (Figure 20). The fiscal cost of fossil fuel subsidies in CEMAC countries reached CFAF 1,243 billion in 2022, equivalent to about 1.8 percent of the region’s GDP, above the average of West African countries at 1.5 percent of GDP. While some CEMAC countries have increased retail fuel prices in early 2023, subsidies (except for CAR) are still substantial.10 10 In early 2023, Cameroon increased retail fuel prices (diesel +25 percent, gasoline +15 percent, kerosene to industries +60 percent), as well as CAR (diesel +70 percent, gasoline +50 percent) and Congo (diesel +5 percent, gasoline +5 percent). 33 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 19. Fiscal cost of fuel subsidies in West and Figure 20. Social Spending in West and Central Central African countries11 (in percent of GDP) African countries12 (in percent of GDP) 2 7 6 1.5 5 4 1 3 2 0.5 1 0 0 1 2 3 4 5 18 19 20 21 22 Education Health 20 20 20 20 20 Social protection Social spending Source: IEA and World Bank CEMAC economies are exposed to oil Both oil importers and exporters have price volatility and have not managed increased their fuel subsidies, although to translate their natural wealth into oil exporters have larger buffers . Fuel sustainable development. Oil accounted subsidies have been rising in both net oil in 2022 for more than 25 percent of GDP in exporting and net oil importing countries CEMAC economies and covered roughly 80 (Figure 21). A share of the oil windfall in oil percent of the region’s exports of goods. Tax exporting countries has been used to finance and nontax revenues related to oil contributed subsidies and protect their population from to about 55 percent of total revenues. Many the higher international prices for oil (Figure crude oil exporters rely to a great extent 22). These countries have nevertheless larger on imports of refined products because of external and fiscal buffers than oil importing constraints in refining capacity. Given the countries, with on average narrowing current size of the oil sector and its importance account and fiscal deficits (Figures 23 and in commanding public resources, these 24). However, subsidizing fuel, even for oil countries are highly exposed to the volatility in exporters, is a story of an expensive missed international oil prices. Their fiscal space is less opportunity as these resources could have predictable, and they have been challenged in been used for other purposes and perhaps using oil revenues to invest in physical and to a greater benefit. human capital to lay the foundations of more sustainable and inclusive growth. 11 Due to data availability, in this graph, “West and Central African countries” refers to the following countries: Burkina Faso, Cabo Verde, Cameroon, Central African Republic, Republic of Congo, Cote d’Ivoire, Equatorial Guinea, Gabon, Ghana, Mauritania, Nigeria, Senegal, The Gambia, and Togo. 12 Due to data availability, in this graph, “West and Central African countries” refers to the following countries: Benin, Burkina Faso, Cabo Verde, Central African Republic, Chad, Republic of Congo, Cote d’Ivoire, Gabon, Ghana, Guinea, Mali, Mauritania, Nigeria, Senegal, Sierra Leone, The Gambia, and Togo. 34 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 21. Fuel subsidies, by net oil importers and Figure 22. Oil revenues and fuel subsidies for net exporters in in West and Central African countries exporters in West and Central African countries (in percent of GDP)13 (in percent of GDP) 2 12 1.8 10 1.6 1.4 8 1.2 1 6 0.8 4 0.6 0.4 2 0.2 0 0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Exporters Importers Fuel Subsidies Oil Revenues Figure 23. Fiscal balance by net oil importers and Figure 24. Current account balance, by net oil exporters in West and Central African countries exporters and exports in West and Central African (in percent of GDP) countries (in percent of GDP) 3 0 2 -1 -2 1 -3 0 -4 -1 -5 -2 -6 -3 -7 -4 -8 -5 -9 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Exporters Importers Exporters Importers Sources: National authorities and World Bank Staff calculations 13 AFW exporter countries include: Cameroon, Chad, Congo, Equatorial Guinea, Gabon, Ghana and Nigeria; importers include: Benin, Burkina Faso, Cabo Verde, Central African Republic, Cote d’Ivoire, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Senegal, Sierra Leone, The Gambia, and Togo. 35 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 1.2 The fiscal cost of fossil fuel subsidies in Equatorial Guinea Fossil fuel subsidies have been in place Mines and Hydrocarbons, the Ministry of in Equatorial Guinea for well over a Finance and Economics, and fuel distribution decade to contain domestic retail prices. companies – within the Ministry of Mines In 2007, price ceilings were established for and Hydrocarbons, which is expected to hold four products: gasoline, diesel, kerosene, monthly meetings to monitor the application and Jet A1 (domestic). These have been of the regulated prices. applied to households, while businesses face international market prices. Between 2010 and While the reform is a positive step, the cost 2021, the fiscal costs of fossil fuel subsidies of fuel subsidies is still high compared to ranged from 0.2 percent of GDP to 1.0 percent other spending, including in social sectors. of GDP, reaching a peak in 2011-2012 when The subsidy reform increased diesel by CFAF international prices were significantly above 120 (compared to the 2007 price ceiling) to domestic prices. Over the past three years, CFAF 470 per liter, gasoline by CFAF 15 and the fiscal costs of fuel subsidies averaged Jet A1 (domestic) by CFAF 130 (Table 1). The 0.5 percent of GDP, equivalent to about 4.1 regulated price of kerosene remained the percent of total current spending. same as in 2007 at 215 CFAF per liter, while the selling price of Jet A1 (international) In 2022, the government increased remained liberalized. With the new regulated regulated fuel prices for all customers. As prices and higher oil prices in 2022, the overall per Decree N. º 139/2021 issued in November fiscal cost of subsidies is estimated at 1.3 2021, with the exception of kerosene, fuel percent of GDP in 2022, from 0.5 percent of prices increased in 2022. The price of kerosene GDP in 2021 (Figure 25). The weight of fossil was maintained to protect the poorest, fuel subsidies in the budget is relatively high since this fuel is mostly used for cooking in comparison with public expenditure on and lighting by vulnerable segments of the education, health, and water sectors, which population. The new price structure for other combined is estimated at only 1.9 percent of fuels – which became effective in March 2022 GDP (Figure 26). Although regulated prices – was established to contain the fiscal burden were intended to be reduced progressively of fuel subsidies amid ongoing efforts of fiscal and assessed annually, fuel prices in 2023 are consolidation and fight against clandestine expected to remain the same. distribution and commercialization of fuel in the country. Indeed, regulated prices for most fuels in Equatorial Guinea were among the lowest in the CEMAC region, which reportedly has led to cross-border fuel smuggling. Clandestine distribution is expected to be contained by restricting fuel stations from selling subsidized fuel containers (selling only permitted to vehicle gas tanks). In addition to the new regulated prices, the government also established a Price Control Committee – composed of the Ministry of 36 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Table 1. Price ceiling: pre/post-2022 reform Price ceiling 2007-2021 New Price ceiling 2022 Diesel 350 470 Gasoline 480 495 Jet A1 (domestic) 300 430 Kerosene 215 215 Source: Equatoguinean authorities Fuel subsidies also introduce environmental and market distortions. By preventing domestic retail prices from being aligned with international prices, fuel subsidies distort the actual cost of energy. This distorted pricing does not encourage an efficient use of energy, with adverse effects on the environment. Such distortions might prevent countries from reducing reliance on the subsidized fossil fuels and from developing renewable sources of energy or adopting low emitting development solutions, locking them on a higher emission development pathway in the future. In addition, such market distortions may lead to unlawful market practices, such as the creation of an informal parallel market or cross-border smuggling. Such practices could generate domestic energy supply shortages, further deteriorating the domestic market dynamic and local economy. Figure 25. Fiscal cost of subsidies in Equatorial Guinea Figure 26. Budget allocation to Social Spending (in percent of GDP) 2 120 1.4 1.8 1.2 1.6 100 1.4 1.0 1.2 80 1 0.8 60 0.8 0.6 0.6 40 0.4 0.4 0.2 20 0 0.2 Total Health Education Drinking Social Social and Water Protection 0 0.0 Spending Vocational Training 10 11 12 13 14 15 16 17 18 19 20 21 22 20 20 20 20 20 20 20 20 20 20 20 20 20 in CFAF millions (lhs) in % of GDP (rhs) Source: IMF (Article IV, 2021) Note: Estimated data for 2020, economic classification of Source: Equatoguinean authorities expenditures is not available. 37 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 1.3. Distributional analysis of fossil fuel subsidies International experience shows that fuel subsidies do not benefit the poor. While sufficient data is unavailable in Equatorial Guinea to determine the regressive or progressive nature of fuel subsidies, distributional analysis for some other CEMAC countries finds that fuel subsidies tend to favor the richest segments of the population and urban areas. In Congo, for instance, the richest decile consumes 77 percent and 73 percent of diesel and gasoline, respectively, while the poorest consume less than one percent, thus, most of the subsidies are captured by the wealthiest (Figure 31). The situation in Gabon and Cameroon is similar (Figures 27 and 29). By contrast, kerosene, used mostly for lighting, is much more equally distributed across income groups. At the geographic level, kerosene is used mostly in rural areas like Cameroon (Figure 30). Credits: Freepik 38 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 27. Gabon - Distribution of fuel consumption Figure 28. Gabon - Distribution of kerosene by income group (in percentage, by decile) consumption, by income group and region (in percentage, by decile) 40 25 35 20 30 25 15 20 15 10 10 5 5 0 0 st st 2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9 st st he he e e or or ric ric po po e e Th Th e e Th Th Kerosene Diesel and Gasoline Urban Rural Source: Gabonese authorities and World Bank staff calculations. Note: These estimations are based on data from the EGEP 2017 Household survey. Figure 29. Cameroon - Distribution of fuel Figure 30. Cameroon - Distribution of kerosene by consumption by income group (in percentage, by income group and region (in percentage, by decile) decile) 80 18 70 16 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 st st 2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9 t t es es he he or or ric ric po po e e Th Th e e Th Th Kerosene Diesel Gasoline Urban Rural Source: Cameroonian authorities and World Bank staff calculations. Note: The distribution of fuel consumption by deciles is estimated from data from the 2021-2022 household survey. 39 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 31. Congo - Distribution of fuel consumption by Figure 32. Congo - Distribution of kerosene income group (in percentage, by decile) consumption by income group and region (in percentage, by decile). 90 16 80 14 70 12 60 10 50 8 40 6 30 4 20 10 2 0 0 st 2 3 4 5 6 7 8 9 t t st es 2 3 4 5 6 7 8 9 he es he or or ric ric po po e e Th e e Th Th Th Kerosene Gasoline Diesel Urban Rural Source: World Bank calculations based on data from the 2011 Household survey “ Enquête Congolaise auprès des Ménages pour le suivi et l’évaluation de la pauvreté » (ECOM) Fuel subsidies are mostly captured by male- the poorest segments of the population. For headed households. In Congo, 97 percent example, fuel subsidies in Congo represent of both diesel and gasoline are consumed only about 2.2 percent of the income of the by male-headed households (Figure 37). In poorest decile in Congo (compared to 4.7 Cameroon, while kerosene consumption is percent for the richest decile) (Figure 38). In relatively gender-neutral, other fuels such as Cameroon, these subsidies represent only diesel and gasoline are mostly consumed by about one percent of the income of the male-headed households (Figure 35). Even in poorest (compared to 3.7 percent for the terms of people’s income (estimated by their richest decile) (Figure 36). consumption), fuel subsidies do not favor Figure 33. Gabon - Distribution of fuel consumption, Figure 34. Gabon - Proportion of fuel consumption as by gender (in percentage) a percentage of the budget share (in percentage, by income group and by fuel) 100 2.5 90 2 80 70 1.5 60 1 50 0.5 40 30 0 20 t st 7 8 2 4 5 6 9 3 es he or ric 10 po e e Th Th 0 Kerosene Other Fuels Kerosene Diesel and Gasoline Male Female Source: Gabonese authorities and World Bank staff calculations. Note: “Other Fuels” includes Diesel, Gasoline and Gas butane (Liquefied Petroleum Gas, LPG). 40 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Figure 35. Cameroon - Distribution of fuel Figure 36. Cameroon - Proportion of fuel on total consumption by Gender (in percentage) consumption (in percentage, by decile) 80 4 70 3.5 60 3 50 2.5 2 40 1.5 30 1 20 0.5 10 0 0 st 2 3 4 5 6 7 8 9 st Kerosene Other Fuels he e or ric po e Male Female Th e Th Source: Cameroonian authorities and World Bank staff calculations. Note: The distribution of fuel consumption by deciles is estimated from data from the 2021-2022 household survey. Figure 37. Congo - Distribution of kerosene Figure 38. Congo - Share of fuel consumption over consumption by gender (in percentage) total budget by income group (in percentage, by decile) 120 5 4.5 100 4 3.5 80 3 60 2.5 2 40 1.5 1 20 0.5 0 0 Kerosene Other Fuels st 3 5 6 7 8 9 2 4 st he e or ric po Male Female e Th e Th Source: World Bank calculations based on data from the 2011 Household survey “ Enquête Congolaise auprès des Ménages pour le suivi et l’évaluation de la pauvreté » (ECOM) Note: “Other Fuels” include Gasoline and Diesel 41 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies An increase in fuel prices could have structure in January 2023, removing subsidies direct and indirect effects, implying a for all petroleum products except kerosene, limited increase of the general price for instance, would imply an increase of about level . Directly, households are affected 47 percent and 74 percent for gasoline and through their own consumption of gasoline diesel, respectively, and lead to a one-time or kerosene. Indirectly, they are also affected adjustment of about 4.7 percent in the overall since petroleum products are used as price level (Figure 39). The highest increases intermediary products in many sectors and would be observed in transport, fishing, and their higher price will feed into the price of forestry. Because subsidies for kerosene do the final good produced by these sectors. not account for the bulk of the fiscal costs, Again, data limitations do not allow for an excluding them from a price adjustment assessment of the situation in Equatorial would not erode much the potential fiscal Guinea, but preliminary analysis in the case of savings of this action. Cameroon suggests that, based on the price Figure 39. Cameroon - Price increase in case of withdrawal of fuel subsidies in 2022 (by sector, in percent) 14 12 10 8 6 4 2 0 g n rt ry e e s ct in nc nc tio o st du sp sh na a re ita en an Fi ro Fo te n nt lp sa Tr n ai ai ra nd m m tu ra ry e ul cl ne e ic hi at r hi Ve Ag W ac m Price increases by sector General price level Source: World Bank calculations based on data from the Cameroonian authorities (preliminary data based on 2012 calculations). 42 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies The removal of fuel subsidies would that removing all energy subsidies (estimated nevertheless add to the inflationary to be 1.4 percent of GDP in 2007) without pressures in the country and, if not redistribution of the savings would have been accompanied by mitigation measures, detrimental to growth and employment. The could push some households into poverty. more the savings from subsidy removal s are While representing a very small share of reallocated to certain sectors (agriculture, their income (as measured by consumption), services, and light industry), the greater the the elimination of fuel subsidies erodes positive effects on these macroeconomic nevertheless the purchasing power of variables.15 Investing in a country’s people, in households. The removal of fuel subsidies their health, their skills, and their resilience could also exacerbate the severity of living to shocks, is critical to foster more inclusive conditions for those who are already poor. growth, especially for CEMAC countries where International experience shows that even the average child born today will be only 37 small losses risk triggering negative coping percent as productive as he or she could be. mechanisms, such as pulling children out from school or selling productive assets, that erode human capital and contribute to the intergenerational transmission of poverty. Therefore, a fuel subsidy reform requires a strong mitigation package aimed at providing targeted support to the most vulnerable segments of the population. The government’s use of the fiscal resources freed up by the removal of subsidies is critical for the ultimate outcome of poverty, employment, and growth. Governments can reduce the fiscal burden of energy price subsidies and use the new fiscal space for more sustainable and equitable uses. The various options include paying down debt, investing in public infrastructure and in people, protecting specific population groups, and targeting assistance to certain industries. Simulations using economy-wide models tend to show that building or protecting human and physical capital lead usually to higher employment and growth rates.14 In the case of China, for instance, these simulations would suggest 14 Burns, Andrew; Djiofack Zebaze, Calvin; and Prihardini, Dinar (2018) “Energy Subsidy Reform Assessment Framework: Modeling Macroeconomic Impacts and Global Externalities. World Bank, Washington, DC. 15 Lin, B., and Z. Jiang. 2011. “Estimates of Energy Subsidies in China and Impact of Energy Subsidies Reform.” Energy Economics 33:273–83 43 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 2/ General Principles from International Experience I nternational experience shows that removing fuel subsidies has been difficult. In many countries with limited social safety nets, a generalized subsidy is seen as a part of the social contract. This could be particularly true for oil producing countries. As further developed below, transparency and trust between the authorities and the population are crucial to convincing the population about a credible mitigation package. A couple of general principles could be drawn from the experience of countries that have carried out fuel price adjustments. These principles could frame a discussion for Cameroon. 2.1 Calibrating price adjustments by petroleum products Depending on the consumer profile of For example, kerosene tends to be consumed each fuel (e.g., income group, area, gender, more by poorer households and in rural usage, etc.), it can be envisaged to prioritize areas. In many developing countries, petrol the reform that benefit the richest and diesel are consumed mainly by wealthier segments of the population and represent households with private cars and/or power the highest fiscal cost. For instance, some generators, as well as by the industrial countries have decided to exclude (at least sector. Eliminating (or substantially reducing) temporarily) from the subsidy reform subsidies for the most regressive fuels could socioeconomically strategic fuel(s) which (i) limit the fiscal cost, while mitigating the impact are used by the most vulnerable households on low-income households. and/or (ii) have a universal use (both from a geographic and a socioeconomic perspective) and/or (iii) are used in a systemic segment of the economy (agriculture, industry). 44 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Box 2. International country case – Indonesia Since 1967, Indonesia had been subsidizing retail prices of fuel, a policy facilitated by its status of net oil exporter – lost in 2003 as the country needed to increase its oil imports to meet domestic demand. The Indonesian government subsidized mainly two categories of fuel: cooking gas in the form of liquified petroleum gas (LPG), and two other petroleum products used for transportation – gasoline and diesel (the latter being used for public transportation, fisheries, and small and medium-sized enterprises).16 This fuel subsidy policy was favoring mainly the richest households, as over 50 percent of subsidized fuel was bought by the richest 20 percent of the population in 2014.17 In addition, the fiscal and social opportunity cost of energy subsidies (LPG, petroleum products and electricity) had become particularly heavy, accounting for 20 percent of Indonesia’s central government budget from 2008 to 2014, surpassing by far government expenditure on health and infrastructure over the same period.18 In November 2014, President Joko Widodo launched a reform of gasoline and diesel subsidies (prices for gasoline were increased by 31 percent and 36 percent for diesel in 2014, prices of kerosene were kept unchanged).19 The price gap was further narrowed by a decrease in international oil prices. As a result of the reform, the Revised State Budget 2015 saved US$ 15.6 billion (IDR 211 trillion) on fossil fuel subsidies, equivalent to 10.6 percent of government expenditure.20 As of January 2015, the Government fully removed the subsidy on gasoline, but introduced a fixed subsidy on diesel, because it was used by public transporters (mostly used by the most modest segments of the population) and by small and medium-sized enterprises (SMEs). Domestic diesel prices were allowed to fluctuate, while benefitting from a fixed subsidy of 1,000 rupiah per liter. This temporary measure in favor of diesel should have been part of a longer-term agenda aimed at phasing out subsidies more broadly, but is still in place. 16 A citizen’s guide to energy subsidies in Indonesia – IISD, Global Subsidies Initiative and IESR, 17 Financing development with fossil fuel subsidies – The reallocation of Indonesia’s gasoline and diesel subsidies in 2015 – IISD, Global Subsidies Initiative, P2EB - May 2016. 18 Indonesia’s effort to phase out and rationalize its fossil fuel subsidies – A self-report on the G20 peer review of inefficient fossil fuel subsidies that encourage wasteful consumption in Indonesia, 2019 19 President Jokowi’s Economic and Energy Reforms: A Year in Review – The National Bureau of Asian Research, October 2015. 20 Financing development with fossil fuel subsidies – The reallocation of Indonesia’s gasoline and diesel subsidies in 2015 – IISD, Global Subsidies Initiative, P2EB - May 2016. 45 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 2.2 Adopting a mechanism to move gradually towards market-based pricing While eliminating subsidies and allowing retail price changes (either defined as a national retail prices to reflect international percentage of current retail prices or as an prices, many countries have opted to keep absolute amount). At a pre-defined interval some smoothening mechanism in place (for example, monthly), the retail price will be to protect their population and their determined based on the average import cost economy from wide swings in fuel prices. of the previous month and will be allowed to While appealing, stabilization funds carry high increase within the limits of this cap, either in fiscal risks and have faced very often financial a one-shot or in successive increases allowing difficulties requiring support from the budget, prices to catch up gradually to international especially in times of steadily rising oil prices. price levels. Another common price smoothing mechanism is the establishment of a moving Adopting a mechanism to move gradually average mechanism. This mechanism defines toward market-based pricing is an option domestic retail price adjustments based on to mitigate the impact of commodity price changes in the average of past import costs. volatility while managing fiscal risks . The longer the average period of import costs Limiting a full pass-through of price changes used (for example, the past three or five to domestic consumers entails significant months of imports), the smoother the price volatility in tax revenues and potentially changes, but the higher the fiscal risk. high fiscal costs, especially during periods of sustained increases in international prices. In The second pillar of this measure is the this context, adopting an explicit fuel pricing adoption of a calendar to review the formula that smooths price variations but price adjustment formula. For instance, allows for the pass-through of international the margins defined in a formula can be prices to domestic consumers, both increases updated based on the findings of studies and decreases, may offer a balance between to be commissioned regularly. The third excessive price volatility and fiscal risks. pillar of this measure is the creation of a The adoption of such automatic pricing technical autonomous body in charge of mechanisms should be viewed as the first step the implementation and supervision of the towards a fully liberalized and competitive automatic pricing mechanism. The intention is fuel market. that price changes do not result from a political decision but rather reflect international The first pillar of such an option is to market price fluctuations. design a fuel price adjustment formula. Several price smoothing mechanisms are possible.21 One of the most common price smoothing mechanisms is the establishment of a price band mechanism. This mechanism sets a cap on the magnitude of possible 21 Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation and Fiscal Implications - IMF, Fiscal Affairs Department, December 2012. 46 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Box 3. International country case – Morocco22 In the early 2010’s, a multiyear subsidy reform strategy was launched to reform retail fuel prices in Morocco (excluding LPG, deemed socioeconomically strategic). The strategy comprised three stages: a preparation phase characterized by incremental increases in retail prices to gradually reduce subsidies; a partial indexation phase whereby prices were defined according to an automatic pricing mechanism with smoothing rules aimed at gradually eliminating subsidies; and a final phase of price liberalization.23 In 2013, following a preparation phase which introduced differentiated ceilings on unit subsidies (higher ceilings for diesel), the government introduced an automatic pricing mechanism for diesel and gasoline. This mechanism was based on a moving average of international prices in the previous two months. The adjustment frequency was monthly and was later adjusted to become more frequent (bi-monthly) until subsidies were fully eliminated (in January 2014 for gasoline and fuel oil and December 2014 for automotive diesel). 2.3 Staggering the reform Many countries have not eliminated fuel reducing risks to social stability, especially subsidies in one go but sequenced and when combined with strengthening social gradually implemented the reform. This safety nets, including temporary, targeted allows households and firms time to adjust, transfers, and supported by consistent which accompanied by mitigation measures, communications to raise awareness of the supported both groups in the transition benefits of reform. Transparency, including process. A review of cases of fuel subsidy clear communication and managing reforms shows that subsidy reforms are less expectations, is critical throughout the reform subject to rejection and/or reversal when process. In a staggered reform, it opens the prices are raised in an incremental manner, possibility of announcing the timing of price over periods ranging from a few months increases to prepare citizens, allowing them to a few years. This approach slows down time to change their behavior, and adopting the passthrough of the impact, allowing more energy efficient alternatives. the population to adjust gradually, hence 22 The time is right! Reforming Fuel Product Pricing Under Low Oil Prices – IMF, Fiscal Affairs Department, July 2020. 23 A phased approach to energy subsidy reform – The Morocco experience – ESMAP, Practicioner’s exchange series. 47 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Box 4. International country case – The Philippines24 The Philippines is an example of a successful sequenced reform, having phased out fossil fuel subsidies in the late 1990s following several policy milestones. Before fully liberalizing fuel prices, the Philippines went through several stages ranging from (i) 1984: implementing an oil stabilization fund (intended to smooth international price volatility); (ii) 1996-1997: transitional subsidies assisted by the stabilization fund; (iii) 1996-1997: implementing an automatic pricing mechanism adjusting monthly prices, with a special attention given to the three most socially sensitive products (LPG, kerosene and regular gasoline); and (iv) 1998: market-based fuel pricing. The impacts of these fuel subsidy reforms were mitigated using targeted cash transfers, as well as transitionary targeted regulated subsidies aimed at low-income households, specific sectors, and socially sensitive fuels. In parallel to the fuel subsidy reform, an electricity sector reform also took place as part of a comprehensive energy sector policy strategy. This reform was designed to deregulate the sector while protecting the most vulnerable customers (a lifeline rate for low-income users cross-subsidized by high-income groups, targeted subsidy providing discounted electricity prices to senior citizens, a one-off cash transfer for marginalized electricity consumers to cushion the impact of rising electricity and fuel prices). 2.4. Stakeholder consultations Countries that have successfully identify differentiated measures according to reformed energy subsidies have each group’s vulnerability. Communication has undertaken extensive consultations and stressed the urgency of the reform, as well as communication campaigns to address the the government’s commitment to reallocating concerns of various population groups. resources made available by the reform to Consultations have helped the government programs that benefit most of the population. 24 Lessons Learned: Fossil Fuel Subsidies and Energy Sector Reform in the Philippines – GSI Report, International Institute for Sustainable Development and Global Subsidies Initiatives, March 2014. 48 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies These sessions are also the occasion to measures of the subsidy reform. Organizing unbundle misconceptions about fuel prices, consultations with key stakeholders gives subsidies, and compensation mechanisms. them a platform to express their views, They can be the opportunity to discuss the reducing the risk for an abrupt rejection of magnitude, timing, and relevant mitigation the reform during its implementation. Box 5. International country case – Ukraine25 In 2015, Ukraine undertook a subsidy reform for gas, electricity and district heating. In addition to providing strong mitigation measures such as strong social protection measures, the reform significantly relied on dialogue with key stakeholders (especially end-consumers) to (i) explain the objective of the reform (common good), as it was largely misunderstood; (ii) guide the sequencing of reform policy at a pace deemed acceptable; (iii) revitalize access to compensatory social safety net mechanisms, little known or understood The communication strategy was successful in (i) mapping key stakeholders as 2,000 citizens were polled, in 20 strategic cities; (ii) informing these stakeholders through the organization of 40 dialogue groups as well as reaching-out campaigns (advertisements were broadcasted 400 times a week through 19 credible and popular TV channels); (iii) co-designing the reform with citizens. 25 Designing Communication Campaigns for Energy Subsidy Reform, Heather Worley, Sara Bryan Pasquier, Ezgi Canpolat - Energy Subsidies – Good Practice Note 10, ESMAP and World Bank Group. 49 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 3/ Accompanying Measures C ountry experiences illustrate the variety of possible accompanying measures to make adjustments in fuel prices socially acceptable and with minimized impacts to the population. They show that there is not a standard single set of actions, but that these measures need to be discussed, identified, and designed to reflect the concerns and the characteristics of each country. 3.1 Reinforcing Social Safety Nets International experience shows that manage risk and cope with shocks. To mitigate social safety nets can play an important the immediate impact of fuel subsidy reform, role in mitigating the adverse effects of measures can be designed to provide a the subsidy reform on the poor.26 Most temporary, targeted financial support to countries spend 1–2 percent of GDP on safety protect the purchasing power of affected net programs (excluding subsidies), Equatorial groups, especially the poorest households. The Guinea spends only 0.03 percent of GDP on success of these measures greatly depends on social protection.27 Safety nets are effective several factors, such as the modality of their and efficient at supporting the poor and design (scope, conditionality, roll-out) as well vulnerable by: (i) redistributing income, with as their adequacy with the local capabilities an immediate impact on both poverty and (such as fiscal space, existence of a complete inequality, (ii) enabling households to make and up-to-date social registry, administrative better investments in their future—both in management). Such support can be provided, the human capital of their children and in for instance, through a social safety net system their livelihoods, and (iii) helping households (Box 6). 26 Social safety nets are non-contributory transfer programs, including cash transfers, income support through public works programs, or in-kind transfers such as school feeding. 27 Data from Equatoguinean authorities and World Bank staff calculations (2021). 50 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies The 2005 cash transfer program in percent of the 2005 national minimum wage) Indonesia shows that logistics matter. The was significant enough to improve outcomes.28 Government of Indonesia launched a cash The transfers were mainly used for purchasing transfer program in October 2005 to support rice, kerosene, and health services as well as the poor and vulnerable adapt to the effects repaying debt and led to slight improvements of higher gasoline, diesel and kerosene prices. in labor, education and health outcomes. First, the timing of the program was key in While two-thirds of the benefits went to the reducing protests against the reform, as the poorest 40 percent of the population, the cash program was designed and deployed in less transfer program encountered, nevertheless, than five months, providing timely support several challenges, including the lack of to affected groups. Second, using an existing transparency in the selection of beneficiaries delivery system (the national postal system), (some households receiving transfers should the cash transfer program was able to reach not have been eligible), increasing the fiscal those most in need with limited delay. Last, the cost of the program. amount provided (Rp 100,000, equivalent to 20 Box 6. Reinforcing social safety nets as a mitigation measure29 Social safety nets can play a key role in mitigating the negative effects of a fuel price adjustment. Depending on the state of development of the social safety net programs, various options are possible: 1. Increase the benefit levels of existing social safety net programs. This is the preferred, most direct and most effective option if - and only if - the programs already cover the majority of the poor and have the capacity to absorb a reasonable number of new eligible households. This option is particularly relevant in countries where there are existing programs with high coverage, but low benefit levels (e.g., Azerbaijan, Egypt, the Philippines, Russia). 2. Introduce a new dedicated program directly linked to the subsidy reform. This program should be able to expand very quickly to cover the poor and vulnerable. This is often the most difficult option, but sometimes it is the only viable strategy. Examples of the use of this option include subsidy reform in Indonesia in 2005-2008, subsidy reform in India in 2013, or, more recently, temporary compensation in Jordan as part of the 2012 and 2018 reforms. This option requires significant administrative, implementation and coordination capacity, which may not be readily available. 28 Indonesia – Trends in wages and productivity – International Labor Organization, January 2015. 29 Yemtov, R., & Moubarak, A. (2018). Good practice note 5: Assessing the readiness of social safety nets to mitigate the impact of reform. Energy subsidy reform assessment framework. 51 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 3. Reform and extend the coverage of an existing program to cover a significant share of the poor and vulnerable. International experience shows that this expansion and increase in benefit adequacy can happen relatively quickly: for example, programs in Tanzania, Senegal and Indonesia have moved from 5-10 percent coverage of the poor to more than 50 percent coverage of the poor within 2-4 years. The reform in the Dominican Republic is another example: a pre-existing cash transfer program was substantially expanded to mitigate the impact of the subsidy reform on the poor. The government of Equatorial Guinea Reguladora del Sistema de Protección Social increasingly recognizes the urgent need de Guinea Ecuatorial” contains operating for a social inclusion agenda . In 2015, principles including a social registry (Registro Equatorial Guinea committed to the United Unico Social; RUS) and the establishment of Nations 2030 Agenda, and since then, the a Social Protection Institution (Instituto de country has undertaken several actions to Protección Social; IPSO) in charge of social achieve the Sustainable Development Goals. protection policies and strategies. UNICEF Due to implementation challenges, however, has supported the development of the Social the government adopted an interim plan - the Protection Law. The Standing Committee ARE (Agenda De Recuperación Económica De on Social Policy, Gender Equality, and La República De Guinea Ecuatorial, 2020-2022) Employment Promotion is evaluating the draft - which has shown a growing recognition of Law to ensure greater coverage and efficiency. the urgent need for a social inclusion agenda. Under the ARE social inclusion agenda, the The Social Protection Law establishes a government has expressed its intention to long-term vision for social protection and eradicate poverty with targeted interventions institutional arrangements with clear rules and social programs for the extreme poor. and responsibilities, as well as common Most of these interventions relate to in-kind guides and a planning tool for government and food subsidies such as uniforms and programs . The law contemplates (a) school kits, school feeding, targeted health establishing a permanent social safety services, and housing. Other programs nets program; (b) providing a long-term, mentioned are universal basic pension and predictable budget for key social safety net income support for poor families. Moreover, programs; (c) mobilizing regular government social protection is one of the key areas financing to ensure predictable payments for reforms in the Equatoguinean National of cash transfers to beneficiaries as per the Development Strategy 2035 (AGENDA 2035). established calendar; and (d) establishing a permanent and stable government structure In September 2022, Equatorial Guinea’s to administer social safety net programs. congress approved the country’s first Social Protection draft Law, and it is expected While the government responded swiftly to have full government approval soon. to the COVID-19 pandemic and the Bata The Social Protection Law - “Proyecto de Ley explosions, social protection remains low in 52 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Equatorial Guinea. In 2021, the government launched the country’s first cash transfer program using mobile phones. A series of explosions in a military camp in Bata killed 100 people, injured 615 people, and destroyed 300 houses in March 2021. UNICEF supported a cash transfer program to almost 100 families affected by these explosions. The transfer was three months in duration and provided families with approximately US$ 275 per month.30 Beneficiary families were encouraged, through the involvement of community leaders, health workers, and NGOs, to prioritize the use of funds for children’s care and nutrition. Despite these efforts, the social protection system in Equatorial Guinea mainly includes untargeted fuel subsidies, housing support, and contributory social insurance for workers in the formal sector. Social assistance programs for the poor are provided on a small scale and primarily by non-profit private organizations. While there is a policy for targeted health fee waivers, there is yet to be a reliable mechanism to target the poor as beneficiaries of social assistance programs. program to alleviate poverty and protect the most vulnerable from the effects of Equatorial Guinea’s recent social safety net future negative shocks. This program should experiences are opportunities to establish be based on the lessons learned from the building blocks for an inclusive and the responses to the pandemic and the sustainable social protection system. The explosions, as well as global and regional best recent ARE interim plan for 2020–22 and the practices. This program, under the guidelines government’s response to the recent crisis of the social protection law, could help build have shown a growing acknowledgement of key components of a strong social protection the urgent need for a well-functioning social delivery system, including a beneficiary protection system. registry and digital payments system, which are also needed to enable the country to Once the Social Protection Law is adopted, respond to shocks. the next step should be to establish a permanent social safety net program . A permanent social safety net program The government, in collaboration with would require enhanced government international and national development coordination, financing and monitoring and partners, could design, implement, and evaluation capabilities. Currently, there are evaluate a comprehensive social safety net no shared administrative tools, systems and 30 UNICEF (2021) “Principales contribuciones de las Naciones Unidas a las Catástrofe del 7M: Plan de Respuesta y Recuperación, Informe Final” 53 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Credits: Freepik no budget lines for social protection programs. A social safety net program would need The budget allocated to social programs has to be targeted and therefore require a varied over time, with no consistent pattern, comprehensive social registry. Currently financed by private companies without any there is no targeting mechanism of social safety strategic plan for longer term delivery. Several net programs. Furthermore, weaknesses in institutions are involved in social protection, data and analysis on poverty and vulnerability including the Ministry of Health and Social mean that there is limited understanding of Welfare, Ministry of Labor and Employment the problems that need to be addressed, so and Social Security Promotion, Ministry of program benefits are not related to individual Social Affairs and Gender Equality, and the needs. The second National Household Survey National Social Security Institute (INSESO). (currently ongoing) will help inform current In 2008, the total resources allocated to the needs and assess poverty in the country. Ministry of Social Affairs and Gender Equality, Under the context of the cash transfers one of the ministries that could be expected to coordinated by UNICEF for the support to take on a leading role in the implementation Bata, data was collected for the first Single of social protection, was only 1.6 percent of Social Registry (RUS), an open database the total budget. The coordination of social maintained by UNICEF. Notwithstanding, the assistance interventions is limited, as they RUS remains limited in coverage and needs are provided primarily by non-profit private to be expanded. organizations, such as NGOs and there is currently no monitoring of social assistance programs. 54 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies 3.2 Increasing transparency of public financial management Some countries have chosen to reinforce subsidy reform (2006-2007) was accompanied trust in public action and public financial by reforms to improve the transparency of management . This stronger trust was oil revenues and investments to improve achieved by promoting greater transparency electricity services More specifically, post- as part of the mitigation measures offered reform compensatory measures have gone in the compensation package. Concrete, hand in hand with increased transparency attributable and monitorable actions were in the management of social safety net taken, targeting one or several segments of mechanisms, including social insurance and public resources management. Azerbaijan targeted social assistance administrations. provides an interesting example, where fuel 3.3 Increasing social public spending An additional channel to rebuild 2010’s in social sectors. These savings were trust between a government and its redirected to (i) targeted support for poor constituencies – especially during critical households through several mechanisms times of a subsidy reform – is to retarget (conditional cash transfers, free medical care fiscal policy towards social spending, for low-income groups, financial support for especially in a context where out-of-pocket widows, orphans, and people with disabilities); expenditure for social services is high. This and (ii) investment projects in the education could generate a double beneficial effect: (i) sector. The Government of Morocco took the support the purchasing power of affected opportunity of these mitigation measures to groups, especially low-income groups; and (ii) also support the implementation of other allow citizens to easily trace the use of savings sectoral reforms, by conditioning some of its realized thanks to the reform. Morocco, for aid to specific items (e.g., school enrollment, instance, reinvested the savings it achieved and the establishment of a social security through its fuel subsidy reform in the early number). 3.4 Supporting the transport sector Providing temporary compensation for vulnerable households. Such subsidies could the transport sector could help prevent be implemented through various mechanisms, higher fuel prices from translating into such as direct financial support to transporters higher prices for other goods and services. or travelers, or tax relief targeting the transport Examples of short-term measures include the sector. Examples include the support for temporary implementation of subsidies to the adoption of energy efficient modes of carriers to limit higher fuel prices from being transportation, the improvement of transport passed on to travelers, especially the most infrastructure which would positively impact 55 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies the maintenance cost of vehicles, and the vehicles were officially registered with the tax implementation of public policies aimed at authority. Country experiences with transfers facilitating mobility (e.g., mass transportation, to the transport sector also highlight the risk congestion control through transportation of capture of transfers by private operators, and urban planning). However, such measures without the benefits being passed through can carry high risks of leakage. The Dominican to end users. As a general principle, the close Republic has prevented such abuses by the benefit is to end user the highest chance limiting compensation to truck drivers whose of success of the selected measure. 3.5 Increasing productive structural public investments As with higher social spending, allocating was provided through several mechanisms, additional resources to productive such as increased budgetary allocations to structural public investments can serve particular ministries (Education, Agriculture, the double purpose of reinforcing trust in Transport, Public Works and Housing), capital public action as well as contributing to a increases of key state-owned enterprises in positive structural transformation. Subsidy the transport and agriculture sectors, and reform in Indonesia (2015) was combined with investment projects in key sectors at the local increased spending on health, education, and level (health, mobility, local economy). transfers to local governments.31 This spending 31 Financing development with fossil fuel subsidies – The reallocation of Indonesia’s gasoline and diesel subsidies in 2015 – IISD, Global Subsidies Initiative, P2EB - May 2016. 56 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Technical Annex 1 Fossil fuel types and uses Fuel type Sub-category Common uses Oil Gasoline Automotive (light and medium duty, including motor bicycles), aviation, and marine transportation; limited use in very small-scale electricity generation. Bioethanol Automotive (usually blended with gasoline). Kerosene Heating, cooking, lighting, aviation. Diesel Automotive (medium and heavy duty), rail, marine transportation, aviation,a heavy equipment, electricity generation, irrigation. Biodiesel Automotive and aviation (usually blended with petroleum diesel fuel), electricity generation, heavy equipment. Fuel oil Electricity generation, industrial application, marine transportation. Gas Natural gas (Methane) Electricity generation, industrial application, space and water heating, cooking, refrigeration, automotive, marine transportation. Liquified Petroleum Gas Cooking, heating (water, space, process), (LPG, Butane) lighting, refrigeration, automotive. Coal Lignite (brown coal), Electricity generation, industrial heat, space anthracite, bituminous heating, cooking. and sub-bituminous 57 Equatorial Guinea Economic Update | 1st Edition | Reforming Fossil Fuel Subsidies Technical Annex 2 Quantifying fossil fuel subsidies in CEMAC I.1. Defining fuel subsidies A fossil fuel subsidy can be broadly defined as a deliberate policy action by the government that specifically targets fossil fuels and that results in at least one of the following effects:32 → It reduces the net cost of fuel purchased → It reduces the net cost of fuel produced or delivered → It increased the revenues retained by those engaged in fuel production and delivery. This definition excludes (i) government inaction (such as weak capacity to implement regulations or tax administrations); and (ii) policy actions which would affect the whole economy, such as lowering the corporate income tax rate or the general income tax rate. The cost of subsidies can be either covered by direct budgetary transfers (such as direct support to oil producers), foregone fiscal revenues (such as tax exemption at any point of the fuel supply chain), or other implicit channels (such as the underpricing of government or government-regulated inputs to the fuel production and supply chain, transfer of the cost of subsidies from one category of customer to another, as is the case in cross-subsidization, etc.). In CEMAC, fossil fuel subsidies are distributed through various mechanisms33 such as: CEMAC Country Fossil fuel subsidy provision mechanism Cameroon Budgetary transfers, tax exemption Central African Republic Government-induced transfers between importers and distributers, underpricing of services Congo, Republic of Budgetary transfers, tax exemption Equatorial Guinea Budgetary transfers, tax exemption Gabon Government-induced transfers between consumers, budgetary transfers, tax exemption This chapter focuses on the result of fossil fuel subsidies, taking the form of price distortions whereby the price set by the government or charged by the fuel seller (retail price) is purposedly maintained below the price that would prevail in a competitive market (reference price). This notion leaves aside indirect forms of subsidies to producers (such as credit guarantees or financial assistance, which eventually lower the production cost and/or sale price). However, it allows for an easier cross-country comparison and is commonly used throughout specialized literature.34 32 This definition is based on the Energy Sector Management Assistance Program (ESMAP) Good Practice Note 1 – Identifying and quantifying energy subsidies, by Masami Kojima. 33 These mechanisms are based on the nomenclature presented in the Energy Sector Management Assistance Program (ESMAP) Good Practice Note 1 – Identifying and quantifying energy subsidies, by Masami Kojima 34 Including by the International Energy Agency and The International Monetary Fund. Cover photo: Freepik