Namura's Fuel Subsidy: Sequencing, Targeting and Credibility

The political business cycle. Governments prefer policies whose benefits arrive before elections and whose costs arrive after. Subsidy reform inverts this: the price rise is immediate and visible, the fiscal space and growth dividend arrive over two to four years. With 26 months to go, the calculus is not straightforward - the adjustment costs would hit within months, but the disinflation and the transfers would have a year to bed in before polling day. A naive reading says delay; a careful one says 26 months is just long enough to sequence the pain early and the relief late.

Credibility. The deeper problem is not timing but belief. A subsidy reform is only as good as the expectation that it will not be reversed. If the government announces removal and then seeks a waiver, three things follow: the risk premium on its debt rises, private investors wait, and the next reform is discounted before it is announced. Each reversal raises the political price of the next attempt, because households learn that protest works. A waiver also hands the Fund a choice it will resolve against the government: suspension of the programme and loss of the $2.9 billion, or a looser review that reopens every other condition.

Evaluation of (c). Delay is not a neutral option. It accumulates arrears, keeps 4.8 per cent of GDP flowing disproportionately to the rich, and converts a scheduled adjustment into a crisis adjustment later, at a larger scale and with no transfers ready. The IMF's quarterly review exists precisely to make the commitment time-consistent.

Conclusion. (c) is the most expensive option, not the cheapest, because its cost is paid in credibility. The political constraint is real, but it argues for design and compensation, not postponement.

Sequencing.

• Months 0-3. Publish the full schedule and the transfer rules before the first price change. Pre-announcement lets households and firms adjust, and it deprives opponents of the claim that the plan is hidden.
• Months 1-6. Raise fuel prices by a third of the gap, then a third at month 6 and the final third at month 12. Electricity tariffs follow the same path with a lag. Adopt an automatic pricing formula so that future changes are a rule, not a political decision - this is what converts a one-off reform into a credible regime.
• Month 0 onward. Cash transfers begin before the first price rise, not after. This is the single most important design choice: compensation that arrives late is remembered as compensation that did not arrive.
• Months 12-18. Independent evaluation; adjust the transfer value quarterly for inflation.

Targeting. The case for means-testing is fiscal: it costs less and directs more to the poor. The case against is administrative: in an economy with a large informal sector, a 24 per cent poverty headcount and a 38 per cent inflation rate, means tests produce exclusion errors - eligible households wrongly excluded - and those errors fall hardest on the people the policy is meant to protect. Exclusion also destroys political support: a transfer that misses the neighbour is a transfer nobody defends.

Judgement. Use a categorical or proxy-means approach anchored to the existing social registry and the electricity consumption band, with a universal floor - for example, a fixed cash amount to every household in the bottom three deciles, topped up for households with children or disabled members. Index the transfer to inflation, because a nominal transfer in a 38 per cent inflation environment loses a third of its value in a year. Build in an appeal mechanism: it reduces exclusion errors and it demonstrates fairness. Finally, cost the transfers at roughly 1 per cent of GDP against 3.1 per cent of savings, so the reform is fiscally and politically sustainable.

The Washington Consensus case. The subsidy is regressive, distortionary and unaffordable - 4.8 per cent of GDP flowing disproportionately to the richest 40 per cent while the deficit runs at 9.1 per cent and inflation at 38 per cent, financed by the central bank. Price signals should reflect scarcity; fiscal discipline is the precondition for macroeconomic stability; and an independent central bank plus a rules-based pricing formula is exactly the institutional machinery the Consensus recommends. On the numbers, the reform adds 0.6 percentage points to growth and saves 3.1 per cent of GDP. The Consensus is not wrong about the direction.

The developmental-state critique. This is not a simple efficiency case. Fuel and electricity are intermediate inputs, and the state may have a legitimate reason to price them below cost if there are network externalities or if a strategic sector needs time to build capacity. The critique also targets sequencing and ownership: adjustment programmes designed abroad and imposed under a quarterly review undermine domestic institutional learning and produce a states-versus-market framing in which the state's own developmental capacity is never built. The East Asian record suggests that successful adjusters combined price reform with targeted industrial policy and public investment, not with retreat.

Where the evidence lands. The regressiveness of Namura's subsidy is decisive against the strongest version of the developmental argument. A subsidy that benefits the rich twice as much as the poor cannot be defended as pro-poor industrial policy; it is a transfer to organised, politically connected consumers. So the developmental critique fails on this specific programme even if it succeeds as a general argument about conditionality.

Conclusion. The dilemma supports a narrow Consensus - fiscal correction, price signals, a credible nominal anchor - while supporting the developmental critique on process: ownership, pre-announced sequencing, and a compensatory transfer designed domestically rather than conceded to a reviewer. The interesting question is not whether to adjust but who designs the adjustment and whether the state comes out of it with more capacity or less. Namura's answer depends on whether the transfer system it builds in month one outlives the programme in year four.