Chapter 1. Introduction
- Carlo Sdralevich, Randa Sab, Younes Zouhar, and Giorgia Albertin
- Published Date:
- July 2014
The Middle East and North Africa (MENA) region is going through a period of unprecedented change.1 Political transitions—ranging in intensity from gradual reforms of the existing order to full-fledged transitions—are under way in a number of countries as their populations seek more voice and broader participation in political and economic life.
Governments are under pressure to urgently address the need for greater access to economic opportunity. The momentum for political reform has been driven in part by widespread dissatisfaction with social outcomes and frustration at the lack of economic opportunities. As a result, governments are expected to promote policies that will help achieve economic inclusion and afford more effective support to the poor and vulnerable.
At the same time, the region is confronting an adverse economic environment. In many countries, increased uncertainty and insecurity—short-term costs associated with the ongoing political transformations—have weighed on investment, tourism, and economic activity more generally. In addition, MENA oil importers have had to grapple with high commodity prices, lower global growth, and negative spillovers from the crisis in the euro area.
The challenging economic environment and rising social demands have increased risks to macroeconomic stability. Governments have responded to high commodity prices and growing social hardship by increasing current spending—including on wages and food and fuel subsidies—even as revenues faltered. As a result, fiscal deficits in oil-importing countries increased in 2012 to about 8.5 percent of GDP on average from 5 percent in 2009, levels that are increasingly difficult to sustain.2 Even in oil-exporting countries, which have performed relatively well, expansionary policies have pushed fiscal and current account breakeven oil prices upwards.
Subsidy reform could help reconcile the two seemingly conflicting needs of strengthening social protection and consolidating fiscal positions. Price subsidies are large in most MENA countries, because they often constitute governments’ main instrument for providing social protection and support for certain industrial sectors and, in oil exporters, a way to share the wealth. At the same time, however, a large share of the subsidies does not reach the neediest segments of the population, and their cost has become a burden that many countries cannot afford. Furthermore, subsidies introduce distortions that weigh on economic potential, employment, and the environment. Governments could improve social protection, generate substantial fiscal savings, and build the basis for stronger growth by replacing subsidies with better-targeted social safety net instruments, especially cash transfers.
This paper focuses on subsidy reform in MENA countries, building on the work by Clements and others (2013), which was based on an IMF Board paper on energy subsidy reform, prepared jointly by the Fiscal Affairs department, the African department, and the Middle East and Central Asia department. That study fully brought subsidy reform into the fold of fiscal policy recommendations. It presented estimates of energy subsidies for all countries in the world for 2011, summarized the negative consequences of subsidies, reviewed experience with subsidy reform, and identified the ingredients for successful subsidy reform. Further analyzing key themes of the joint paper, the present study:
- Reviews the main features of fuel, electricity, and food subsidies in the MENA region, and provides estimates for subsidies on diesel and gasoline for 2012;
- Refines the analysis of the “factors for success” and the policy recommendations through an empirical analysis that relies on 25 episodes of subsidy reform in 15 countries in MENA and elsewhere;
- Looks at recent and ongoing reform episodes in the MENA region prompted by the social and fiscal pressures partly associated with the Arab transition, investigates the extent to which the recent reforms incorporate the “factors of success,” and lays out recommendations for deepening and extending subsidy reform;
- Examines in more depth selected topics of particular interest to the MENA region, namely social safety nets, the macroeconomic impact of subsidy reform, effects on the productive sector, and the political economy of subsidy reform.