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Subsidy Reform in MENA: Recent Progress and Challenges Ahead (EN)
- 1. Subsidy Reform inMENA: Recent Progress and Challenges Ahead Presented by Gazi Shbaikat Middle East and Central Asia Department IMF Sept 8, 2014
- 2. Plan of presentation I. Measuring Subsidies II. Subsides in MENA: Stylized Facts III. Investigating the Determinants of Successful Subsidy Reform IV. Recent Experiences of Subsidy Reform in MENA V. Policy Issues: Topics of Special Interest to MENA 2
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- 4. Subsidies, what arethey and how are they measured? • Subsidy arises when government keeps price of a product below the market price • Explicit vs implicit subsidy • Pre tax vs Post tax subsidy
- 5. Measuring subsidies •Price gap methodology: the gap between the subsidized price and a benchmark price PG = RP – BP Pretax subsidy per unit = - PG = BP - RP, if RP < BP; = 0 otherwise Where: PG: Price Gap RP: Retail Price BP: Retail Price
- 6. Measuring subsidies Posttaxsubsidy per unit = BP + T* - RP, if RP < BP + T *; = 0 otherwise Where T* is the desirable taxation
- 7. Accounting Vs EconomicCost of Subsidies • Macroeconomic stability • Growth • Poverty reduction • Income distribution • Economic distortions
- 8. 8 II. Subsidiesin MENA: Stylized Facts
- 9. MENA countries arethe biggest subsidizers in the world in pre-tax terms… Total pre-tax subsidies in MENA: • Close to $240 billion in 2011–half of the total – Oil exporters:$204 billion – Oil importers: $33 billion • 8.6 percent of regional GDP • 22 percent of government revenue • Subsidy costs have been rising since 2009 9 Total Pre-Tax Energy Subsidies by Region, 2011 1/ Advanced Economies $25.4 billion 0.1% GDP Central and Eastern Europe and Commonwealth of Independent States $72.1 billion 1.7% GDP Emerging and Developing Asia $102.3 billion 0.9% GDP Latin America and Caribbean $36.2 billion 0.6% GDP Sub-Saharan Africa $19.3 billion 1.6% GDP Middle East and North Africa $236.5 billion 8.6% GDP $492 billion; 0.7% GDP Source: Clements and others (2013). 1/ Includes petroleum, electricity, natural gas, and coal subsidies.
- 10. Often, reflecting reluctanceto adjust retail prices 2.0 1.5 1.0 0.5 0.0 -‐0.5 EU US OMN SYR EGY ALG SAU TUN BHR IRAQ KWT LBY MAR QAT UAE SDN YEM IRN MRT DJI JOR LBN MENA: Diesel Pass-‐through to Domestic Price Mar. 2009 -‐ Dec. 2012 MENA Average Source: National authorities;IMF staff estimates. 0.0 0.5 1.0 1.5 2.0 EU Europe and Central Asia Sub-‐Saharan Africa Latin America US East Asia and Pacific South Asia MENA Average Diesel Price, end-‐December 2011 (US$ per liter) Source: GIZ and IMF.
- 11. Why do countriesin the region subsidize energy? • To protect real incomes and fight poverty – social safety net • Shield population from external price fluctuations • Distribute wealth – oil exporting countries • Support national industries
- 12. 12 Cost ofenergy subsidy
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- 15. 15 Cost offood subsidy
- 16. Disadvantages of GeneralizedSubsidies: High fiscal burden
- 17. Subsidies benefit mainlythe upper income groups 17 50 40 30 20 10 0 Share of Energy Subsidies Benefitingthe Bottom Forty Percent of the Population 1/ (Direct effect) Diesel/Gasoline LPG Electricity Even hand-‐out Sources: ESMAP (2005); IMF and World Bank reports; Salehi-‐Isfahani and others (2013); and IMF staff calculations. 1/ Latest available data. Share of Food Subsidies Benefiting the Bottom Forty Percent of the Population 1/ 60 50 40 30 20 10 0 Cooking oil Sugar Wheat Local rice Wheat flour Even hand-‐out Sugar (Direct effect) Baladi bread Oil Rice Sugar Tea Wheat Iran Jordan Lebanon Mauritania Morocco Egypt Bread Sources: Diverse IMF and World Bank reports; and IMF staff calculations. 1/ Latest available data.
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- 19. Subsidies crowd outpriority public spending 19
- 20. Subsidies crowd outpriority public spending 20
- 21. DZA BHR Public Health Expenditure and Diesel Price DJI EGY IRN IRQ JOR KWT LBN LBY MRT OMN MAR PAK QAT SAU SYR TUN ARE 10 9 8 7 6 5 4 3 2 1 0 0.0 0.5 1.0 1.5 2.0 Public health expenditure (% of GDP) Diesel price (average, 2006-‐11, US$ per liter)
- 22. Subsidies are asource of distortions 2011 High Energy Intensity Exports and Gasoline DZA EGY IRN JOR BHR LBN MAR MRT OMN PAK QAT SAU TUN YEM 100 90 80 70 60 50 40 30 20 10 0 energy-‐intensive exports in percent of manufactured exports Price1/ 0 0.5 1 1.5 2 2.5 High Gasoline price (average, 2006-‐2011, US$ per liter) Sources: COMTRADE and IMF staff calculations. 1/ Excludes petroleum production and refining.
- 23. 23 III. Investigatingthe Determinants of Successful Subsidy Reform
- 24. Methodology q Combinesa narrative-based country-case studies with quantitative analysis q Covers 25 episodes of food and fuel subsidy reforms in 15 low- and middle-income countries including seven MENA countries q Considers three possible outcomes for reform episodes (failed/ partially successful/successful) based on three criteria: (i) Change in the price gap (ii) Magnitude of domestic price adjustment in local currency (iii) Qualitative review of country experience (fiscal savings…). q Each reform episode has 23 questions, coded using binary (0-1) or simple rank order (0-2) values, and grouped in eight themes 24
- 25. Success Rates forSelected Questions ( in percent) 25 Yes No Time and scope of the reform Preparation** Was an incidence of subsidy removal study conducted prior to the reform? 86 20 Pace of adjustment Was the price adjustment higher than 50 percent? 33 75 Breadth of the reform** Was this a comprehensive reform of most/all products? 78 0 Ownership, communication and consultation Government leadership** Was there a strong ownership and commitment of the government to the reform? 100 33 Consensus building* Did the government tried to build a consensus to win adoption of the reform? 100 43 Communication strategy**Did the government undertake an information campaign to support the reform? 100 50 External factors Role of partners** Was the reform undertaken with technical assistance from development partners? 88 0 Macroeconomic cycle indicators Economic conditions** Was the reform undertaken in the context of slower growth/economic contraction? 0 78 Socio-‐economic context of reform and mitigating measures Mitigating measures Was wage increase granted as a mitigating measure? 50 67 ** Were cash and in-‐kind transfers granted as a mitigating measure? 100 17 * Were subsidies targeted at a specific group? 100 38 ** Were there other programs/social safety nets? 100 0 Did the mitigating measures target/benefit the middle class? 33 67 Political context of reform Government composition Was the government a fragmented coalition? 75 50 Government control of Was there a single party majority in the parliament? 67 33 parliament Source: IMF staff calculations. 1/Success rate are calculated using only failed and successful reform episodes. 2/ Higher scores are associated with better outcomes. (*) means that the difference in success rates is significant at the 10 percent confidence level; (**) means that the difference is significant at the 5 percent confidence level.
- 26. 26 IV. Recent Experiences of Subsidy Reform in MENA
- 27. Large external andfiscal deficits and high debt ratios triggered recent reforms 27 40 30 20 10 0 -‐10 -‐20 -‐30 -‐40 Real GDP growth (percent) Selected Macroeconomic Variables, 2012 1/ (In percent of GDP, unless otherwise specified) Inflation rate (percent) Fiscal balance Current account balance Oil imports Max Min Median 1/ Include Egypt, Jordan, Mauritania, Morocco, Sudan, Tunisia, and Yemen. Source: IMF World Economic Outlook. 120 100 80 60 40 20 0 Public Debt (In percent of GDP) 2009 2012 Egypt Jordan Mauritania Morocco Sudan Tunisia Yemen
- 28. Progress made butreforms differed across countries 28 Implementation Status of Most Recent Subsidy Reforms in MENA Based on Key Factors for Success Preparation Gradual Pace of Adjustment Breadth of Reform Consensus Building and Communications Strategy Role of Partners Mitigating Measures Egypt ü ü ü Jordan ü ü ü ü ü ü Mauritania ü ü ü ü ü Morocco ü ü ü ü ü ü Sudan ü ü Tunisia ü ü ü ü ü ü Yemen ü ü ü Source: IMF staff reports for Article IV Consultations.
- 29. • Fiscal deteriorationbrought subsidy reform on the policy agenda • Iran only major oil exporter to undertake comprehensive reform • Dubai, Qatar, Bahrain undertook limited reform • In oil exporters with smaller reserves—Algeria, Bahrain, and Oman—the urgency to reform is higher 29 Limited progress in oil exporters 0 50 100 150 200 250 YMN IRN DZA BHR IRQ OMN UAE SAU QAT LBY KWT Figure 20. Fiscal Break-‐Even Oil Prices (In dollars per barrel) 2009 2012 Average petroleum spot oil price Source: MCD Regional Economic Outlook.
- 30. 30 V. PolicyIssues: Topics of Special Interest to MENA
- 31. Strengthening social safetynets 31 Social safety nets (excluding subsidies) • Small at 0.7% of GDP • Cash transfers not widely used or underfunded • SSN fragmented and suffering from leakages Ø 23% of benefits accrue to bottom quintile • Limited impact on poverty and inequality Strengthening social safety nets: • Improve targeting to the neediest Ø Even targeted, subsidies less cost effective than other SSNs • Cash transfers are more effective Ø Do not distort prices Ø Provide flexibility to recipients Ø Relatively low administrative cost
- 32. Managing the politicaleconomy of subsidy reform 32 Challenges: • Lags in the timing of costs and benefits • Weak administrative capacity of governments • Long duration of the reform effort Designing political economy-robust reforms: • Build an objective case for reform • Increase transparency and implementation capacity of the state • Create public concern through a communication campaign • Create coalitions with those who will benefit from reforms • Embed subsidy reform in a wider policy reform plan
- 33. Conclusions: recent subsidyreform in MENA —good progress but challenges ahead Good progress achieved more recently in seven countries Ø Fiscal and external pressures were the common factor for reform Ø Reform was comprehensive (fuel products and electricity tariffs) Ø Mitigating measures often accompanied reform Ø Few countries adopted automatic price mechanism (Jordan, Mauritania, Morocco, and Tunisia) 33 Challenges ahead Ø Historically part of social compact Ø Potential source of unrest Ø Beneficiaries resist losing benefit Ø Difficult under political and security instability Ø Inflationary effect and possible negative impact on economic activity
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