Why the Subsidy State Keeps Reappearing

The subsidy state is not limited to one region or one ideology. Its logic is simple. Essentials are politically sensitive. Supply chains are fragile. Wages are often weak. When external prices spike or currencies wobble, governments reach for the fastest tool that feels protective: they freeze prices, cap tariffs, or subsidise imports. The relief is immediate and visible. The cost is delayed and diffuse.

This is why subsidy cycles recur even where officials understand the macro risks. Relief buys time. It can prevent unrest. It can protect wages that are already falling behind prices. It can reduce contagion from fuel into transport and food distribution. Yet if the underlying production base remains narrow and the import bill remains large, relief becomes a recurrent claim on scarce foreign exchange.

Over time, the subsidy becomes less a policy and more a governing method: a substitute for productivity, a substitute for competition, and a substitute for credible social protection systems.

Mauritius: Food Dependence and the Currency Pressure You Can See

Mauritius offers a clean illustration because it is a small, highly import dependent economy with a narrow foreign exchange base. The budget documents do not suggest ignorance of food security or macro risk. They suggest something more stubborn: a political preference for comfort and continuity over structural change.

Consider the sugar paradox. Mauritius remains a recognised sugar producer, yet the industry no longer exists to feed the population. It survives primarily as an export sector sustained through public support mechanisms, restructuring funds, and policy protection. These arrangements are financed by taxpayers and amount to several billions of rupees annually, while sugar contributes a small share of GDP and absorbs a disproportionate share of agricultural resources.

The contradiction is not subtle. Mauritius can produce sugar, yet imports sugar for domestic consumption, including from Brazil. Households therefore subsidise the export ecosystem and then pay again to consume imported sugar, which is taxed through VAT and related charges. This is not a market failure. It is a policy architecture that protects an old model while leaving the consumption corridor exposed to the exchange rate.

The same pattern extends across the food system. Mauritius produces less than a quarter of its food needs domestically. More than three quarters of food consumption depends on imports. Meat imports are costly while local beef production remains minimal. Fish imports are large despite the country's vast exclusive economic zone. Dairy products, animal feed, fertilisers, and staples follow the same path. Food dependence then becomes macro dependence, because food imports are paid for in foreign currency.

Once that is understood, currency pressure is no longer a mystery. Every imported tonne increases FX demand. If inflows remain narrow and cyclical, the exchange rate becomes the release valve. Households feel it as higher prices. Policymakers often respond with more relief. The loop tightens.

Mauritius also illustrates the fiscal constraint that makes this loop harder to escape. By the end of 2024, domestic public debt was around Rs 481.7 billion. Debt service does not wait for better times. It matures and must be rolled over. In that environment, the state's options narrow, and the central bank and FX market are repeatedly pulled into the role of shock absorber.

Nigeria: An Oil Producer That Subsidised Fuel Like an Importer

The subsidy state becomes most surreal when a country subsidises what it ostensibly produces. Nigeria's fuel subsidy saga became a textbook case of how a resource economy can still behave like an import economy. The core issue was not crude oil supply. The issue was refining capacity, distribution governance, and the political economy of the downstream corridor.

When domestic refining is weak and import dependence persists, the state ends up subsidising imported refined products, even if it exports crude. The result is a familiar set of pressures: a large fiscal and quasi fiscal bill, chronic rent seeking at the import and distribution layer, and repeated FX stress because the subsidy implicitly underwrites foreign currency demand.

The political trap is predictable. Fuel prices shape transport, food distribution, and urban stability. Removing subsidy without visible protection risks disorder. Keeping subsidy drains the state and tightens FX. The longer it persists, the more intermediaries organise around it. What begins as protection can become a subsidy ecosystem with powerful beneficiaries.

Nigeria is not alone. Similar subsidy dynamics have appeared across the Global South in different forms: energy subsidies that hollow out utilities, bread subsidies that become fiscal anchors, and fertiliser or food price stabilisation schemes that drift into permanent leakage. The goods differ. The logic stays the same.

Corruption, Bad Governance, or an Old Economic Model

Sometimes it is corruption in the narrow sense: stolen funds, inflated invoices, and tenders designed for the right winner. More often it is something harder to prosecute and easier to normalise: an equilibrium that manufactures rent because the system is built on discretion, opacity, and emergency logic. Even when legal, it behaves like corruption in its effects, because it transfers value through channels that cannot be properly audited by citizens.

The first driver is political survival. Essentials are emotionally charged and electorally dangerous. A government may know that blanket subsidies are expensive and regressive, yet still maintain them because the alternative is politically costly. Reform fails not because officials cannot do the arithmetic, but because they do not trust the transition. If price relief is removed before targeted protection is visible, opposition narratives become lethal. Leaders therefore keep the blunt instrument, then postpone the harder work of building registries, delivery systems, and credibility.

The second driver is state machinery. Targeted protection requires more than a slogan. It requires a verified social registry, reliable identity systems, payment rails that work at scale, enforcement that is consistent, and audits that bite. Many states do not have those tools in working condition, or have them in fragments across agencies that do not share data. In that setting, blanket subsidy is not only political. It is administrative. It is the only mechanism that functions without high institutional coordination.

The third driver is the coalition economy. Subsidies rarely exist only for the poor. They also protect firms and intermediaries that have organised influence. Transport lobbies, importers, distributors, milling and refining chains, and politically connected contractors often sit between the subsidy budget and the citizen. Once a subsidy becomes an income stream for a well placed ecosystem, it ceases to be social policy and becomes a political contract. Reform then threatens not only voters, but also financing networks, patronage arrangements, and the informal architecture of power.

The fourth driver is macro vulnerability. High debt service, thin reserves, and import dependence compress policy space. Governments do not reform from strength. They reform in crisis. That is exactly when households are least able to absorb price moves and the state is least trusted to compensate fairly. In such conditions, leaders often choose the least explosive option rather than the most efficient one. They preserve visible relief, even if it pushes cost into arrears, delayed payments, central bank balance sheets, or currency depreciation.

These forces are structural, which is why the same pattern recurs across countries with different ideologies. Subsidies persist not only because of theft, but because they are the default language of stability when the state lacks the machinery, credibility, and fiscal room to stabilise people in a more intelligent way.

Cheap Prices Today, Expensive Currencies Tomorrow

Subsidies exist because essentials are politically sensitive. Fuel prices shape transport costs, food distribution, and commuting affordability. Bread and staples are not only consumption goods; they are social stability goods. Electricity tariffs affect the cost of living, but also the survival margin of small firms. In fragile environments, governments treat these prices as ceiling points. When they rise too fast, unrest becomes a rational risk.

The mistake is to treat subsidies as only a budget line. They are a financing structure. If protection is blanket, it is expensive. If it is expensive, it must be financed, and the financing rarely comes from free money. It comes through channels that shift the burden into debt, arrears, monetary stress, or foreign exchange pressure.

In import dependent economies, the currency channel is the most brutal. Every subsidised shipment still must be paid for in dollars, euros, or pounds. If the subsidy boosts volume or delays adjustment, it increases foreign exchange demand precisely when reserves may already be thin. When foreign exchange demand rises faster than supply, the exchange rate adjusts. That is arithmetic, not ideology.

Depreciation then raises the local currency cost of imports. This pushes up the very items the subsidy was meant to stabilise. The state responds with larger subsidies to keep prices down. The cycle tightens. What begins as protection becomes, over time, a mechanism that quietly erodes purchasing power.

A competent subsidy regime is therefore not defined by generosity. It is defined by targeting, financing discipline, and a clear exit structure. Without those, price relief becomes a temporary anaesthetic that leaves the underlying condition worse.

How States Make Growth Convincing Again

Governments often respond to legitimacy crises with speeches. Households respond to queues, outages, and the weekly bill. Repair is therefore not rhetorical. It is operational. Sequence matters because people cannot wait for long term transformation while essentials deteriorate. The point is not perfection. The point is credible movement that citizens can observe and verify.

The first step is to make the essentials corridor auditable. Publish the real subsidy bill and the hidden bill. That means subsidy costs, procurement contracts, pricing formulas, arrears inside state entities, and balance sheet exposures used to keep relief alive. A country cannot regain trust in its price policy if citizens cannot see who benefits, who pays, and who sits in the middle. Transparency here is not theatre. It is stabilisation.

The second step is to move from blanket relief to targeted protection, but do it visibly and fast. Targeting should not be promised as a future reform. It should arrive as transfers, vouchers, or digital credits that work cleanly. The political economy becomes manageable only when households believe the state can protect the vulnerable without subsidising everyone, including those who do not need protection.

The third step is to restore reliability in the systems people use daily. Citizens may tolerate higher tariffs if electricity becomes stable, if basic services stop collapsing, and if the state is not asking for sacrifice while delivering decay. Reliability is a form of income. It reduces coping costs and time loss. Many governments try to reform prices without reforming delivery. That fails because citizens experience it as extraction.

The final step is to explain reform as a contract, not a lecture. People tolerate adjustment when they can see where money goes, who is protected, and why prices move. They revolt when they suspect that sacrifices are socialised and gains are privatised. Growth becomes convincing again when the state can do two things at once: protect households in the short term and upgrade systems in the medium term. Countries that manage this sequence do not eliminate hardship. They make hardship governable.

The Subsidy State Is Not a Moral Failure. It Is a Capability Test.

The subsidy state persists because it is the easiest visible promise a government can make: essentials will remain affordable. But affordability achieved through opacity is fragile. It relies on financing tricks, discretionary allocations, and a hope that FX inflows will remain sufficient. When that hope fails, the exchange rate does the adjustment work, and citizens pay the bill in real time.

There is a clean test for whether a country is ready to exit the cycle. It is not whether leaders announce reform. It is whether the state can identify households, deliver targeted protection quickly, run utilities with auditable accounts, and publish corridor data that citizens can verify. Subsidy reform is therefore not merely economic. It is institutional maturity.

Cheap prices can be a legitimate choice when financed honestly and targeted intelligently. Cheap prices maintained through blurred accounts, weak delivery, and permanent emergency logic are not protection. They are postponement. And the currency, sooner or later, will translate postponement into a number everyone understands.