Lusaka, Tuesday (July 2, 2024)

International Monetary Fund (IMF) Resident Representative for Zambia Eric Lautier says IMF research studies have shown that subsidies such as those on fuel benefit rich people more than the less fortunate. 

“Ultimately discussions around subsidies are about discussing on how best to allocate limited resources in an economy. We at the IMF have done a lot of research on fuel subsidies and their welfare impact in developing countries. Past research has shown the richest 20 percent of households benefit more from fuel subsidies, on average by a factor of 6 than the poorest 20 percent. Essentially when you provide something below cost, the more you consume of it the more you benefit from these subsidies. So large firms, people that are driving large cars, having big houses are all benefiting more from subsidised fuel than less fortunate people,” he said.

Mr Lautier said subsidies are also not good for climate, especially in the current period where Zambia is struggling with drought.

“Then of course they are very bad for the climate, and we are dealing with the impact of climate change here in Zambia as we speak,” he said. 

He said the cost of subsidies is high thereby impacting budget sustainability. 

“But most importantly because it is about resource allocation, you have to look at the cost of these subsidies which are very high and ultimately impact what you can do with the budget,” he said. 

Mr Lautier said spending a large share of the budget on fuel subsidies means that a country cannot afford the needed investment to grow the economy and create jobs. 

He said without this reallocation, it would have been difficult for the government to double social spending as a share of GDP, hire more teachers, and health workers, and provide free lunch at school.

“And we have to acknowledge that even though removal of subsidies will benefit the poorest, they are also the less able to absorb some of the additional cost brought by the removal of the subsidy, both through higher energy costs of cooking, heating, lighting, and personal transport and through higher prices for other goods and services, including food,” he said.

The IMF Resident Representative for Zambia said it is, therefore, important to ensure that the support is well calibrated to cushion the impact on people with the lowest real disposable income.

He said to address more pressing issues, the IMF will participate in the Economics Association of Zambia (EAZ) 2024 Economic Summit on July 25th and 26th at Ciela Resort in Chongwe District, Lusaka, where stakeholders will analyze strategies to navigate the disaster and foster economic resilience. 

The theme of this year’s summit is “Pioneering Zambia’s Sustainable Economic Transformation through Climate Change Adaptation and Sustainable Financing Mechanisms after Debt Restructuring.”

This is contained in a statement issued by the Economics Association of Zambia (EAZ) Acting Chief Executive Officer Tendai Posiana.

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