IMF Sees Big Gains from Energy Subsidies Reform

Estimates put cost of subsidies at $1.9 trillion in 2011

Measures to protect poor are essential

Reforms can remove impediments to economic growth

Subsidies are intended to protect consumers by keeping prices low. But many argue subsidies are inefficient and could be replaced with better means of protecting consumers in need. This, according to the IMF, is possible if governments undertake the right reform path, and will in the process also help alleviate budgetary pressures being faced by governments.

The IMF work was carried out by regional and fiscal affairs experts from across the organization. In an interview, Carlo Cottarelli, Director of the IMF’s Fiscal Affairs Department, Masood Ahmed, Director of the Middle East and Central Asia Department, and Antoinette Sayeh, Director of the African Department spoke about what the paper will mean for the IMF’s work in countries and for the countries themselves.

IMF Survey: Your department led the effort to produce the paper. What are the main results? Do the recommendations apply across all countries that maintain subsidies?

Cottarelli: Subsidies are a problem in practically every country in the world. Even where countries impose taxes on energy, they’re rarely high enough to account for all of the adverse effects of excessive energy consumption, including on the environment. Based on a new database for 176 countries, we estimate that subsidies in 2011 amounted to $1.9 trillion, the equivalent of about 2½ percent of world GDP, or 8 percent of all government revenues.

Since energy subsidies are pervasive and costly for governments to maintain, we see scope for reform not only in emerging market and developing countries, but also in advanced economies. The top three subsidizers across the world are the United States at $502 billion, China at $279 billion, and Russia at $116 billion. Clearly, when a country embarks on subsidy reform, there is a need to be mindful of possible adverse effects on the poor, and mitigating measures to protect the poor have to be built into the reform plan. This applies to all countries.

IMF Survey: Subsidies essentially lower the costs paid by energy consumers—a result that many might argue is beneficial, especially for the poor. Why is the IMF recommending reforms?

Cottarelli: Subsidies are expensive and ultimately must be paid by someone. This is of course true for any spending but there are several problems that are specific to energy subsidies. First...