Government subsidies adopted in response to the COVID-19 crisis

Written by Marina Andrade, International Policy Centre for Inclusive Growth (IPC-IG)

 

Overview

In response to the COVID-19 crisis, 94 out of 130 (72%) countries in the Global South adopted subsidies or adapted features of existing subsides. In fact, when factored in as part of national social protection responses to COVID-19, subsidy responses were among top policy instruments adopted in the Global South (Figure 1). The majority (53%) of such initiatives took place in Africa and Middle East, encompassing both Middle-East and North Africa (MENA) and Sub-Saharan Africa (SSA) sub-regions (Figure 2). A higher proportion of fragile and conflict-affected states (FCAS) adopted subsidies, namely 24 of 28 (or 86%).

Figure 1: Top social protection instruments adopted in response to the COVID-19 crisis in the Global South

Source: IPC-IG 2021.

 

Figure 2: Distribution of subsidy responses adopted in response to the COVID-19 crisis by sub-region

Source: IPC-IG 2021.

 

The following types of subsidies were introduced or adapted as  mapped by the IPC-IG in the ‘Social Protection Responses to COVID-19 in the Global South: Online Dashboard’,:

• Public utility subsidy, e.g. water, electricity: deferral of payment (the payment obligation remains)
• Public utility subsidy, e.g. water, electricity: reduction or waiver of payment
• Food subsidy or voucher or staples; price control or freeze in food items
• Other subsidies, e.g., fuel, transport
• Housing subsidy or rent reduction/waiver
• Rent or tax deferral, or loan moratorium (the payment obligation remains)
• Tax or loan reduction or waiver
• Fee waiver on mobile money or internet subsidy (increase in connectivity)

Figure 3 shows the distribution of subsidy responses adopted in the Global South in response to the COVID-19 crisis by type of subsidy. Subsidies to utilities, e.g. electricity or water, consisting in partial or total price waivers, were the most common, followed by fee waivers of mobile money or internet services, and other subsidies, e.g. to fuel or public transportation.

 

Figure 3: Total subsidy responses adopted in response to COVID-19 in the Global South by type

Source: IPC-IG 2021.

Most subsidy responses consisted in coverage increases, either via existing subsidies or through introduction of new ones (Figure 4). A small proportion of subsidy responses comprised increases in the level subsidized through existing programmes. A few initiatives consisted in both increases in value subsidized and number of persons covered. Moreover, most subsidy responses in the Global South, around 60%, were universal while the remaining were targeted (Figure 5). Over 15% of subsidy responses were targeted based on consumption levels of units, e.g., when certain levels of consumption can be subsidized.

 

Figure 4: Distribution of subsidy responses by type of adaptation

Source: IPC-IG 2021.

 

Figure 5: Distribution of subsidy responses by type of targeting

Source: IPC-IG 2021.

 

Regional findings

Similarly, across the sub-regions analyzed, subsidies to utilities, involving discounts, full waivers or deferrals, were if not the most common, among the top 2 (Figure 6). In Central America and the Caribbean, utilities, food, rent and housing prices were temporarily, and to varying extents, subsidized by national governments. Moreover, in Barbados, commercial banks provided borrowers with loan moratoriums on a case-to case basis. For governments in South Asia, COVID-19 social protection responses involved use of food, utilities, tax or loan subsidies, and mobile money or internet fee waivers. Food price ceilings or freezes, or increase in subsidy for basic items were adopted in countries like Sri Lanka, Pakistan, Bhutan and Bangladesh.

In East Asia and Pacific, utilities subsidies, which waived customers’ payment obligations either partially or entirely, were by far the most frequently adopted. In fact, the region has the highest share of this type of utility subsidy among the sub-regions analyzed. Countries like Cook Islands, Fiji, Indonesia, Lao PDR, Malaysia, Myanmar, Solomon Islands, Thailand, Timor-leste, Tonga and Viet Nam adopted such measures. Fee waivers to mobile money or internet services were less common but were adopted in Fiji and Malaysia, for example. In the former, remittances could be made via a mobile money platform at no cost for 2 months, and in the latter costumers benefited from free internet services provided by the telecommunication companies collaborating with the government.

In MENA, utilities, food, medicine and fuel subsidies were the most commonly adopted in response to COVID-19 followed by flexibilization of conditions for loan payments. Countries like  Iran, Bahrain, Jordan and the Occupied Palestinian Territories are among those that had said flexibilization measures. Other subsidies, such as to medicine or fuel were adopted in Lebanon and Qatar and adapted in Oman.

In South America, utility subsidies and reduction or full waivers of loan or tax commitments were among the most common types of subsidies used. Argentina, Bolivia, Brazil, Colombia, Ecuador, Paraguay, Suriname and Uruguay have implemented utility subsidies that involved discounts or full waivers of services costs. At the same time, Colombia, Paraguay and Peru also put in place utilities subsidies which only deferred payment obligations to a later point in time. Countries like Aruba, Bolivia, Colombia, Guiana and Suriname either adopted or removed existing taxation to alleviate financial needs of vulnerable families.

In Sub-Saharan Africa, the sub-region where subsidy responses were relatively more frequent, mobile money fee exemptions and subsidies to utilities were the most common. Overall, 35 countries adopted 64 types of subsidy measures. Countries like Guinea and Burkina Faso introduced a range of subsidy responses, for instance, but the majority of countries in SSA adopted only one subsidy response. Other than basic utilities, e.g., electricity or water, countries like Ethiopia, Gabon and Guinea offered subsidies to public transportation. Some countries adopted moratorium on loan or tax payments, like Angola, Burkina Faso, Cape Verde, Lesotho, Namibia and Nigeria.

 

Figure 6: Number of subsidy responses adopted in response to the COVID-19 in the Global South by type of subsidy and sub-region

Source: IPC-IG 2021.

Although there have been several reforms across developing countries to reduce universal subsidies and introduce more targeted cash transfer programmes in recent years, these subsidies seem to remain as an important social protection instrument in times of shocks, and relatively more so for FCAS. In some countries, especially those with incipient or less scalable social protection identification, targeting and delivery systems, it can be administratively simpler, as well as quicker, for governments to reduce or waive costs of utlities, for instance, in order to reach and provide support to vulnerable families during or after covariate shocks, than to implement means-tested cash transfers. There are downsides to adopting subsidy responses, on the other hand. Utility subsidies, for instance, can be regressive in practice, i.e., benefit the wealthier more than the poorer households, and policy makers should work towards reducing this effect. Also, utility subsidies may not directly reach poorer households who do not own themselves the land or house where they live in. In these cases, intermediaries or landlords may benefit instead (Berkouer et al. 2022).

 

References

• Berkouwer, Susanna, Pierre Biscaye, Geetika Pandya and Steve Puller. 2022. Emergency utility subsidies can help citizens weather economic crises, but may exclude the poorest citizens. World Bank Blogs. https://blogs.worldbank.org/energy/emergency-utility-subsidies-can-help-citizens-weather-economic-crises-may-exclude-poorest. Accessed 27 October 2022.
• IPC-IG. 2021. Social Protection Responses to COVID-19 in the Global South. https://socialprotection.org/social-protection-responses-covid-19-global-south. Accessed 27 October 2022.

 

This post is part of the ‘COVID-19 Social Protection response series’, a 12-piece blog series featuring discussions based on data and evidence from the interactive dashboard ‘Social protection responses to COVID-19 in the Global South’, developed by the International Policy Centre for Inclusive Growth (IPC-IG) in partnership with SPACE and sponsored by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) and UNDP Brazil. The dashboard illustrates part of the data compiled in the COVID-19 tracking matrix and provides detailed insights into countries’ social protection responses to the crisis, working as a repository of experiences and government practices in shock-responsive social protection taking place in developing countries worldwide. Its indicators are divided into seven thematic sections: overview of responses, type of adaptation, timeliness, identification of beneficiaries and application tools; delivery mechanisms; coverage; and adequacy of benefits. This blog series is supported by the Department of Foreign Affairs and Trade (DFAT) of Australia.