The IMF’s recommendations on energy subsidies in the MENA region and the example of Egypt

Last Thursday the IMF released a new publication advocating for a continued reduction of price subsidies, particularly energy subsidies, in the Middle East and North Africa (MENA) region.

The report also recommended specific measures governments should take to address the "political economy challenges" that such reforms entail.

The report focuses on the MENA region because, according to IMF figures, energy subsidies represent 8.6 per cent of the region’s GDP, versus a global average of 0.7 per cent.

The book states that energy subsidies represent 22 per cent of government revenue on average in the MENA region and are therefore an important source of fiscal deficits in many countries.

Although the report also deals with food price subsidies, it acknowledges that they are far less costly: 0.7 per cent of GDP for food versus 8.6 per cent of GDP for fuel subsidies in MENA.

IMF programmes in current and recent borrowing countries such as Jordan, Tunisia, Morocco and Mauritania have included substantial increases of domestic energy prices.

Also, earlier this month, the government of Egypt, which is currently negotiating a possible loan programme with the IMF, implemented large fuel price hikes without advance notice.

In many countries, fuel price rises have led to significant social unrest, particularly when they are not accompanied by the expanded social protection programmes and increased wages, especially for lower-income workers, that trade unions in the MENA region have demanded.

The frequency of "fuel-price riots" explains why the new IMF book devotes considerable space to the aforementioned political economy challenges of reducing energy subsidies.

The report attributes protest movements against increased energy prices, which sometimes lead to their reversal, to "the tension between the immediate loss of subsidies and the future benefit from more targeted and efficient social spending, and the lack of trust in the state’s capacity to introduce and manage social safety nets".

In reality, as was the case in Egypt earlier this month, the price increases are often not accompanied by compensatory measures such as cash transfers to low-income people.

Even though most energy subsidies tend to be regressive (i.e. they proportionately benefit high-income consumers more) their removal usually does lead to substantial real income losses for low-income households, for example through increased prices for cooking gas and public transit.

The IMF report recommends that governments should take measures including "building consensus for reform, involving key stakeholders such as ... civil society" and "scaling up of effective social safety nets to mitigate the impact of subsidy reform on the vulnerable".

However no such measures were taken in Egypt and there is no indication that the IMF demanded mitigating actions be taken as a pre-condition for its possible new loan to that country.