IMF wants Mena countries to follow subsidy reform with more measures to aid the needy

Egypt the latest to act, but more needs to be done on a social scale.

Subsidy reform in the Middle East and North Africa has been ad hoc and not backed up with social safety net measures to help the poorest in society, the IMF says in a new report.

Egypt is the most recent country to move ahead with cutting subsidies after earlier moves by Jordan, Mauritania, Morocco, Tunisia and Yemen.

The IMF said the progress needed to be sustained in those countries and potential obstacles to reform needed to be removed in parts of the region where governments had yet to take any steps at all towards raising prices.

“Subsidies play a special role in the region because they replace almost inexistent social safety nets,” said Randa Sab, one of the authors of the IMF report. “In oil-exporting countries, low energy prices are also seen as a way to distribute natural wealth to the citizens, and so are considered a right of citizenship and a key element of legitimacy, which can even substitute for political participation.”

Mena governments spend on average much more on subsidies than other regions. Total pre-tax energy subsidies in 2011 cost US$237 billion, equivalent to 48 per cent of world subsidies, 8.6 per cent of regional GDP, or 22 per cent of government revenue.

Yet the IMF says subsidies disproportionately benefit the rich. In Egypt, Iran, Jordan and Lebanon, the poorest 20 per cent of the population receives between only 1 and 8 per cent of the total spending on petrol subsidies. In contrast, the richest 20 per cent nets between 40 and 86 per cent of the total spending.

The Egyptian president Abdel Fattah El Sisi last week approved the cutting of subsidies for car fuel and natural gas, raising their prices by more than 70 per cent. The measures fall in line with the government’s effort to ease its deficit to 10 per cent of GDP in the next fiscal year compared with a an anticipated 12 per cent deficit in 2013-14.

On Wednesday, the Egyptian newspaper Al Mal reported that the country’s government would seek to restart negotiations with the IMF before the fund’s annual meetings later this year in Washington DC should subsidy cuts not spark public protests. Talks with the IMF over a potential US$4.8 billion loan broke down last year, partly because of the government’s reluctance to press ahead with politically contentious subsidy reforms.

The report acknowledged that in oil-exporting countries the sheer size of subsidy programmes made them particularly difficult to change. In addition, instability in Libya and Iraq posed even greater challenges to reform efforts.

Instead of subsidies, the IMF would like to see more targeted financial aid to help the neediest, such as cash transfers. Egypt is among governments considering bringing in so-called “smart subsides”, which channel assistance to poorer social groups.

“International experience shows that reforms are more successful when governments immediately introduce measures to mitigate the impact of the price increases on the poor,” said Younes Zouhar, another of the IMF report’s authors.

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