IMF reiterates call for reducing energy subsidies in the MENA region

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The IMF issued a report on Wednesday calling on Middle Eastern and North African countries to reduce or eliminate energy subsidies, since subsidies have adverse effects on public finances, economic growth, equity and the environment. Photo-Daniel Cheong

The International Monetary Fund has once again called for countries in the Middle East and North Africa to withdraw heavy energy subsidies and instead, focus on social spending.

The IMF believes that such subsidies, amounting to about USD 240 billion annually, place severe stress on public funds and do not help to improve the lives of poor people in these countries. Removal of these subsidies may allow governments to increase their their spending on healthcare and education.

According to Gulf News, Masood Ahmed, the director of the IMF’s Middle East and Central Asia department, says in his blog; “Energy subsidies are very costly, explicitly and implicitly. In 2011, they amounted to about $240bn, more than 8.5 per cent of regional GDP. Particularly in the region’s oil-importing countries, subsidies eat up a large part of government budgets, which often leads to higher deficit and debt levels.”

Further to this, IMF released a report on the need for global energy subsidy reforms, in which it details the need for energy subsidy removal:

  • Subsidies encourage excessive energy consumption, which accelerate the depletion of natural resources
  • Subsidies reduce the incentive for investment in cleaner energy
  • Governments (and ultimately, taxpayers) could get more “bang for their buck” by removing or reducing subsidies and targeting the money directly to programs that help only the poor — instead of having a subsidized price for everyone (including the rich)

IMF numbers suggest that in 2011, governments all over the world spent an estimated USD 1.9 trillion on energy subsidies. The Middle East and North Africa (MENA) region has relied on these subsidies more than other parts of the world. Fearing a strong public reaction in the wake of Arab Spring, MENA governments are not keen to undertake energy subsidy reforms that may reduce their popularity and cause social unrest.

Even so, some governments have started to take the issue seriously, taking active measures to move prices closer to market levels. While Jordan has surmounted public pressure and raised prices of fuel, Egypt may also be forced to reduce the subsidy if it is to seek a USD 4.8 billion loan from the IMF. By limiting energy subsidies, the IMF foresees an opportunity to lift investment in health care, education and infrastructure to improve the long-term economic prospects of the region.

See the video below, in which Masood Ahmed, the director of the IMF’s Middle East and Central Asia department, explained the need for MENA countries to cut down on energy subsidies and increase social spending.

[tubepress video=”u4VjlnGgByA” theme=”youtube” embeddedHeight=”450″ embeddedWidth=”640″]

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