10 July 2014: A report by the International Monetary Fund (IMF) on subsidy reform in the Middle East and North Africa (MENA) region explores recent progress, challenges ahead, and outlines the characteristics of successful subsidy reform. The report recommends that countries in the region focus on enhanced social safety nets, automatic price-setting mechanisms, energy sector restructuring and awareness raising on the cost of subsidies.

The paper, titled ‘Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead,’ examines the challenges of replacing generalized price subsidies with equitable social safety net instruments in the countries of the region. It finds that price subsidies, which are common in the MENA countries, are badly targeted and ineffective as a social protection tool, often benefiting those better off. It observes that the cost of subsidies in the MENA region has been rising due to commodity price increases and rising social demands, creating a new momentum for a subsidy reform, in particular in oil-importing countries.

Based on regional and global reform experiences over the past two decades, the paper identifies the elements of successful subsidy reform, namely: thorough preparation with technical assistance from international stakeholders; a multi-party government, and strong commitment by the government through pro-reform consensus-building; the strengthening of social safety nets to protect the vulnerable; and favorable economic conditions, in particular economic growth.

The report notes that subsidies of energy products, particularly common in the MENA region, which represent the largest share of cost subsidies in the region, totalled US$236.5 billion and were equivalent to 48% of world subsidies in 2011. It notes that these subsidies, inter alia: distort relative prices; foster overconsumption and misallocation; discourage investment in the sector; cause inefficient specialization of domestic production; have adverse traffic, health and environmental impacts; and impede economic growth overall. Energy and other subsidies also lead to reduced exportable resources, which in turn limits revenues for energy-exporting countries and weakens the current account of energy-importing countries.

The IMF formulates recommendations for governments in the region that have initiated energy subsidy reform, including tackling sectoral subsidies that incur losses to state-owned electricity companies, including through restructuring of the sector. Other key recommendations relating to subsidy reform in the MENA countries in general include: strengthening or completing the scaling-up of social safety nets, including through data-gathering; setting clear timelines for raising prices; depolitization of pricing reforms through automatic price-setting mechanisms; ensuring transparency on subsidy costs and beneficiaries; and carefully chosing reform instruments and their sequencing. [IMF Press Release] [Publication Website] [Publication: Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead] [IMF Blog Posts on Energy Subsidies]