Targeted subsidies in Gulf and Mena region to aid poorest families

Governments in the GCC and wider Mena region are considering introducing more targeted subsidies to lower income families as they seek to wean consumers off cheap fuel.

A driver fills up his car at a gas station in Amman, Jordan, Thursday, August, 13, 2009,as the government issued new fuel prices. (AP Photo/Nader Daoud)
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Governments in the GCC and wider Mena region are considering introducing more targeted subsidies to lower-income families as they seek to wean consumers off cheap fuel.

Jordan and Tunisia have moved ahead with trimming costly subsidies in the past year in a bid to ease fiscal pressures. In both nations the move sparked a wave of protests and strikes.

Against a tricky social backdrop, so called "smart subsidies", involving channelling assistance to poorer members of society, could prove an alternative to scrapping subsidies altogether, said Joe Saddi, the chairman of the consultancy Booz and Company, in an interview.

"Given the social and economic fabric and levels of income, I don't know if you can dispense with subsidies completely. But in the very least you can do a better job of targeting them to those that need help and not giving it to those that don't," he said.

Booz and Company was in talks with a couple of governments, both within the GCC and wider Mena region, about such an initiative, he said.

"The issue is whether there will be the will to go ahead with this," he said.

Governments in the Mena region spent close to US$240 billion on energy subsidies in 2011, about one half of the total global bill.

The need for reform has become more pressing in oil-importing nations as they seek to trim public spending to boost flagging growth in the wake of instability. In oil-exporting nations, cheap fuel has been blamed as one of the reasons for some of the world's highest rates of energy consumption.

"Subsidies distort price signals and fail to allow the market to allocate resources in the most efficient manner. This will act as a constraint on productivity growth, which ultimately determines the standard of living in the long run," according to the latest ICAEW Middle East economic insight report, released this week.

The IMF has made an easing of subsidies a cornerstone of its funding programmes with Jordan and Tunisia. Jordan last year raised the price of a range of fuels including bottled gas by more than 50 per cent and 33 per cent for diesel, while offering cash transfers to the poorest consumers in return. Tunisia in March raised most fuel prices for the second time in six months.

One of the fund's main criticisms of subsidies is that the bulk of their benefit goes to wealthier consumers, who tend to use more energy.

"The cost of energy is a huge drain on government spending, accounting for about 22 per cent of government revenue," said Masood Ahmed, the director of the IMF's Middle East and Central Asia department. In many regional countries public spending on energy subsidies is double or more the level of government investment in education.

Among oil-exporting countries, the UAE and Iran are among the few that have started to lift energy prices closer to market levels.