x Abu Dhabi, UAEFriday 28 July 2017

IMF urges region to axe energy subsidies

The IMF has renewed its call for the Middle East and North Africa to withdraw US$240 billion (Dh881.54bn) in energy subsidies, which drain public funds and unfairly benefit the rich more than the poor.

Jordan raised the price of petrol and diesel last year, prompting public protests. Majed Jaber / Reuters
Jordan raised the price of petrol and diesel last year, prompting public protests. Majed Jaber / Reuters

The IMF has renewed its call for the Middle East and North Africa to withdraw US$240 billion (Dh881.54bn) in energy subsidies, which drain public funds and unfairly benefit the rich more than the poor.

It is urging governments to replace subsidies with social spending on areas such as education and health care.

"Energy subsidies are very costly, explicitly and implicitly," said Masood Ahmed, the director of the IMF's Middle East and Central Asia department. "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 governments' budgets, which often leads to higher deficit and debt levels."

According to IMF estimates, $1.9 trillion was spent by governments around the world in 2011 on energy subsidies. The Middle East and North Africa (Mena) region relied on them more than any other region in the world, said Mr Ahmed in a blog post to accompany a global IMF report about the need for energy subsidy reform, released yesterday.

The IMF has for years been calling upon the region to find other ways of supporting its citizens after decades of offsetting the price of goods ranging from fuel to food. But the issue has become thornier for many governments as a result of a wave of popular unrest that has swept through the region in the past two-and-a-half years.

Still, several crude importers are moving towards subsidy reform as a way to avert the risk of a fiscal crunch caused by high oil prices.

Jordan in September raised prices of petrol and diesel, a step that prompted public protests. Egypt is under pressure to curb its subsidy bill as it seeks to secure a $4.8bn loan from the IMF.

Among oil-exporting countries, the UAE and Iran are among the few that have started to lift energy prices closer to market levels.

The IMF says the money spent on energy subsidies could be more effectively channelled.

"There is a clear opportunity cost to providing energy subsidies - spending money there means limiting valuable investments elsewhere," said Mr Ahmed.

"Areas such as health care, education, infrastructure that are essential to improving the long-term economic prospects of the region can easily end up neglected, thus dampening growth."

Energy subsidies also tended to benefit the rich, he said.

"In oil-exporting and oil-importing countries alike, energy subsidies are highly inequitable," he said.

"If we look at who actually benefits from those subsidies, it's clear that the bulk of the benefit goes to the better-off, who use energy the most — people with automobiles, air-conditioned houses and electrical appliances."

Cheap goods could also distort the economy by encouraging people to buy more than they need, he said.

"Furthermore, subsidies can also lower profits, or cause losses, for energy companies, making it less likely that they will invest in the energy sector and potentially leading to energy shortages. And subsidies encourage capital-intensive investment rather than job-creating investment."

Fuel prices in the UAE have been raised by the government on several occasions since 2010. Still, the country has the fifth-cheapest petrol in the world at $1.77 per gallon, according to the Bloomberg Gas Price Ranking. Venezuela and Saudi Arabia were rated as the two cheapest countries for petrol.

 

tarnold@thenational.ae