Many developing countries are reliant on fuel imports for their energy supply. This is often the case even for countries that have substantial upstream energy reserves. There are countries with large oil reserves that export crude oil while importing refined oil products, because they have no refining capacity of their own. Additionally, many of these countries also subsidise energy, and fossil fuels in particular; subsidies are sometimes applied to end-user prices and are sometimes applied further upstream.
These characteristics of a country’s energy sector can have negative economic consequences: a reliance on imports can have an adverse impact on a country’s current account, while heavy use of subsidies can hit government budgets hard, reducing the public sector resources available for other priority spending. This discussion paper:
- Analyses these issues and identifies countries where the signs of resultant economic stress are most evident,
- Discusses the causes of and some of the effects of these challenges, using DFID’s Whole System Approach (WSA) for the energy sector, and
- Proposes strategies and solutions that could be deployed in countries where DFID operates to mitigate the risks outlined in this paper.