The Washington-headquartered IMF called for action across the Middle East to reduce generalised subsidies and direct government assistance to the poor and vulnerable in a report published on 10 July.

The report – Subsidy Reform in the Middle East & North Africa – was issued five days after the government of Egypt raised retail petroleum prices in the most swingeing increase in a basic commodity ever implemented in the Middle East.

“In Middle East and North Africa [Mena] countries, generalised price subsidies have for many years been part of the “social compact” and are still common, especially on food and fuels,” the report says. “Yet, generalised price subsidies are neither well targeted nor cost-effective as a social protection tool. Although subsidies may reach the poor and vulnerable to some extent, they bene?t mostly the better off, who consume more of subsidised goods, particularly energy products: for example, in Egypt in 2008, the poorest 40 per cent of the population received only 3 per cent of gasoline subsidies. “

The report says subsidies:

• Are inefficient in supporting the poor
• Impose a “much heavier burden” on public finances than more targeted social protection tools
• Distort relative prices and foster overconsumption, particularly in energy
• Reduce exportable resources, limit wealth accumulation and weaken the current account of energy-importing countries
• Lead to negative effects on traffic congestion, health and the environment
• Cause inefficient specialisation in domestic production, often in less labour-intensive industries
• Discourage investment in the energy sector
• Crown out growth-enhancing public spending
• Encourage smuggling and black market activity

“All this has a dampening effect on growth potential, deriving from price distortions, which reduce ef?ciency in the allocation of resources, crowding out productive spending on human and physical capital, and higher inequality linked to inef?cient support of the poor,” the report says. “Mena countries spend, on average, much more on subsidies than other regions, and have increasing dif?culty ?nancing them.

The IMF said that, in 2011, total pre-tax energy subsidies in the Mena region cost $237bn, equivalent to 48 per cent of the world total; 8.6 per cent of Middle East GDP and 22 per cent of government revenue. The report said the subsidies totalled $204bn in Middle East oil-exporting nations and $33bn in Middle East oil-importing countries.

“For 2012, preliminary IMF estimates show that pre-tax subsidies for diesel and gasoline only, which represent about half of total energy subsidies in MENA, were 3.8 per cent of regional GDP,” the report said. “Food subsidies are also common in MENA countries, though less costly. In 2011, they amounted to 0.7 per cent of GDP for the region, though they were distributed unevenly among countries.”

”Subsidy spending has risen in response to commodity price increases and the greater social demands that have accompanied the wave of political transitions in the region,” the report said. “In many oil-importing countries, cheap subsidised prices have contributed to a widening of current and ?scal de?cits, often against the backdrop of relatively large or rising public debt levels. In these countries, ?scal consolidation through subsidy reform is needed to avoid risking solvency crises, which would be socially and economically costly. At the same time, rapidly rising ?scal breakeven oil prices in oil-exporting countries have also highlighted rising ?scal pressures.”

The report said Middle East oil importers should align energy prices closer to world market or cost recovery levels. Governments should make a commitment to subsidy reform, build consensus for price changes and explain why action is needed. The introduction and expansion of social safety nets will be required.

According to the report, subsidy reform will be facilitated in circumstances of higher economic growth and where there is a multi-party government that builds consensus for reform and makes reform less likely to be reversed.

Source: Subsidy Reform in the Middle East & North Africa, IMF, 10 July 2014