Mideast Makes Progress on Subsidy Reform

  • New IMF paper highlights progress in subsidy reform in the MENA region
  • Vested interests and other political factors pose challenges to reform
  • Measures to protect poor, strong communication are essential to success
  • In a study, an IMF team led by Carlo Sdralevich and comprising Randa Sab, Younes Zouhar, and Giorgia Albertin looks at recent episodes of subsidy reform in the Middle East and North Africa and the challenges ahead. In the following interview, the authors discuss the experience of countries from the region and beyond in reforming subsidies.

    IMF Survey: Can you tell us what the paper is about?

    Sdralevich: The IMF has been contributing to the debate on subsidy reform with a book last year that looked at subsidies from a global point of view. This year, staff of the IMF’s Middle East and Central Asia Department focused on the MENA region—where the issue is particularly acute—with a paper that aims at helping countries in the region tackle subsidies. To do so, we review the recent experience of subsidy reform in several countries in the region and lay out forward-looking recommendations based both on these cases and an empirical analysis of 25 reform episodes worldwide.

    IMF Survey: In your view, what are the disadvantages of energy subsidies?

    Zouhar: The stated objective of subsidies is to make certain products such as fuels or food affordable to the population, especially the most vulnerable. However, this form of social protection is, in fact, biased against the poor who end up receiving only a small fraction of the subsidy benefits. In countries like Egypt, Iran, Jordan, and Lebanon, the poorest 20 percent receives between only 1 and 8 percent of the total spending on gasoline subsidies, while the richest 20 percent receives between 40 and 86 percent. For this reason, generalized subsidies do not necessarily lead to improvements in social indicators.

    Albertin: Subsidies are also a major impediment to growth, because they crowd out public spending that can boost growth, including on infrastructure, education, and health. Cheap energy can also lead to the overconsumption of energy, which aggravates environmental problems, such as pollution and climate change. Finally, subsidies encourage greater consumption and, in oil exporters, greater resource extraction and depletion——leaving fewer resources for future generations.

    IMF Survey: Why is it so challenging to reform subsidies in the Middle East and North Africa region?

    Sab:...

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