Subsidies are still widely used around the Middle East and North Africa (MENA) region, but there is growing consensus that urgent reforms are needed to address the economic effects of energy subsidies. In a recent report by the International Monetary Fund (IMF), Subsidies Reforms in the Middle East and North Africa: Recent Progress and Challenges Ahead, the Fund makes recommendations on how to best implement energy subsidy reforms aimed at reducing state budgets while advocating for social safety nets to replace subsidies.
For decades, governments in the region have used food and energy subsidies as part of the social contract.
Following the 2011 Arab uprisings, most governments increased expenditures on subsidies to placate protesters calling for social justice and greater economic opportunities.
The IMF estimates that in 2011, pre-tax energy subsidies in the region, which arise when consumers of energy pay less than the supply cost of energy, accounted for nearly half of all energy subsidies globally, 8.6 per cent of regional GDP, and 22 per cent of government revenue. In 2012, subsidies for diesel and petrol alone accounted for almost 4 per cent of regional GDP.
The IMF acknowledges that reforming energy subsidy policy is a difficult task, both technically and politically. Therefore, it says, the timing and duration of reforms should be carefully planned in advance of undertaking subsidy reductions. Another important factor to ensure the success of subsidy reforms lies in conducting a media campaign to spread awareness and educate consumers as to the cost of subsidies and the benefits of reform. This step is essential in harnessing the largest possible political and public support for reforms.
Although policymakers widely recognise the adverse consequences of energy subsidies, some countries hesitate to implement reforms.
In Egypt, following the overthrow of Hosni Mubarak, successive governments refused to undertake subsidy cuts, fearing a political backlash.
It was not until last weekend, that Abdel Fattah El Sisi finally decided to lift energy subsidies by increasing prices on various petroleum products.
Similarly, Tunisia has cut spending on subsidies in the state budget for the current year and raised prices on a select number of petroleum products.
Other transitional countries, such as Yemen, have yet to move towards reducing subsidies despite deteriorated public finances. This week, the Yemeni government announced austerity cuts, described by president Abd Rabbu Mansour Hadi as belt-tightening measures.
Subsidies account for 30 per cent of state revenues and more than 20 per cent of expenditures, costing Yemen more than $3 billion a year. If Yemen hopes to salvage its budget and cut expenditures, it has few options but to cut subsidies. But in a country where a third of the population lives on less than $2 a day, such a political decision will be met with popular resistance.
Opposition to reform will primarily come from the middle and upper classes and industrial users who benefit the most from energy subsidies. Given that subsidy reform is a necessary component to macroeconomic stability and growth, regional governments can leverage strategies proposed by international institutions like the IMF and emphasise transparency to convince all segments of the population that removal of what is perceived as social entitlements is a necessary action.
Svetlana Milbert is an assistant director at the Atlantic Council
This piece originally appeared on the Atlantic Council’s MENASource blog
