8 October 2014: A study by the World Bank finds evidence of a positive relationship between fuel prices, per capita gross domestic product (GDP) growth and job creation, and encourages the governments of the Middle East and North Africa (MENA) region to cut energy subsidies in order to build dynamic, employment-intensive economies. The study, titled ‘Corrosive Subsidies,’ also projects economic growth in the MENA transition countries to be hampered by macroeconomic imbalances and unfinished subsidy reform.

In the context of a mixed outlook for the global economy, the World Bank study projects economic growth for the MENA region on average to grow by 3% in 2014. Important differences exist between the region’s high-income and developing countries, with the former expected to grow by 4.9% and latter 0.7% in the same year. In 2015, the Bank forecasts higher growth, of up to 5.2% in an optimistic scenario in which consumption and investments increase owing to expansionary fiscal policies and subsidy reforms, among other factors.

While in the transition countries of Egypt and Morocco the reduction in fuel subsidies is expected to create more space for growth-promoting investment in 2015, in the Persian Gulf hydrocarbon-exporting countries the level of subsidies and public sector wage bill, in light of current oil price projections, are expected to lead to the disappearance of budget surpluses in Saudi Arabia and their halving in Qatar.

Regarding subsidies, the report explains that the MENA has 5.5% of the world’s population and generates 3.3% of its GDP, while paying an amount equal to 48% of the world’s energy subsidies. It notes that, while subsidies deplete government budgets and benefit the rich more than the poor, there is political resistance to reform. According to the study, energy subsidies have contributed to some of the region’s major development challenges, including: growth below potential; high unemployment due to capital-intensive production; air pollution, traffic accidents and congestion; and declining renewable water availability, combined with water-intensive agriculture.

The World Bank notes there is emerging evidence on “a positive relationship between fuel prices and per capita GDP growth, job creation and performance of the transport and water sectors.” Consequently, the report concludes that reforming energy subsidies should be among the highest priorities of the region’s policymakers. Reduction of subsidies, according to the Bank, would “create dynamic, employment-intensive economies supported by managed urbanization and a productive agricultural sector.”

The report is part of the MENA Economic Monitor series, which supplements the World Bank’s biannual MENA Quarterly Economic Brief. Publications in the series present a short-term, macroeconomic outlook and discuss economic challenges faced by the countries of the region. [World Bank Press Release] [MENA Economic Monitor Webpage] [Publication: MENA Economic Monitor October 2014: Corrosive Subsidies]