Costly Mideast Subsidies Need Better Targeting

Generalized price subsidies are often costly, inefficient

Targeted social safety nets give better support, allow more priority spending

Subsidy reform should be among steps to cut poverty, boost inclusive growth

These well-intended social protection policies are increasingly weighing on government budgets and debt levels and are not necessarily the most efficient way to channel aid to the most vulnerable, participants at a recent IMF seminar said.

The unprecedented social and political transitions under way in many countries of the region underscore the widespread desire to shift away from the status quo and to embrace new socioeconomic policies. “For political transition to be successful, the economic underpinnings have to be strong…and we would be dishonest if we pretend that the current economic strategies are going to deliver on the hopes of those young people who sacrificed for change to come,” said Nemat Shafik, IMF Deputy Managing Director.

At a seminar held last month on the sidelines of the 2012 IMF–World Bank Spring Meetings in Washington, DC, and moderated by Al-Jazeera, panelists discussed the experience of countries from the region and beyond in reforming subsidies, which in the MENA region are both unsustainably costly and inefficient. Panelists considered how governments can address the challenges of phasing out universal price subsidies and introducing more targeted forms of social protection.

Costly endeavor with limited benefit

Compared with other regions, MENA stands out because of its heavy reliance on generalized price subsidies, especially on food and fuel. The IMF’s Middle East and Central Asia department estimates the cost of subsidies at about $212 billion in 2011, or over 7 percent of regional GDP, of which about 80 percent reflect fuel subsidies (see chart).

According to the International Energy Agency, the MENA region accounted for almost two-thirds of petroleum price subsidies worldwide in 2009. “Most of the price subsidies in the world are in this region…as many countries elsewhere have abandoned price subsides and moved to better systems of social protection,” Shafik said.

Oil-exporting countries fare the worst, since cheap fuel is seen as an entitlement in light of the natural resource wealth of these countries. While the region’s oil importers, in general, do better, estimates show that subsidies still represent a fiscal challenge; for example, IMF estimates show that overall food and fuel...