## Executive Summary

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---

### Overview
- Energy subsidies remain prevalent across the Arab world; most Arab countries still have some form of energy subsidies in place.
- Subsidies are intended to lower energy costs for households, support energy-intensive industries, or, in hydrocarbon-producing countries, serve as a form of hydrocarbon wealth redistribution.

### Fiscal, Social, and Environmental Costs
- Subsidies in the Arab region are nearly eight times higher than in the rest of the world.
- Retail energy price comparisons (2023):
  - Average gasoline and diesel price in the region: "$0.77 per liter".
  - Global average gasoline and diesel price: "$1.3 per liter".
  - Natural gas and electricity prices in Arab countries: approximately half of global averages.
- Fiscal burden and scale:
  - Spending on energy subsidies in Arab countries averaged "7 percent of GDP" during 2021–23.
  - Arab countries accounted for approximately "$206 billion, or 21 percent of global energy subsidies".
  - Hydrocarbon-exporting countries accounted for nearly "74 percent of subsidies" in the region.
- Budgetary trade-offs:
  - Budget spending on subsidies was about "70 and 37 percent higher than on healthcare and education, respectively".
- Distributional impacts:
  - Subsidies are regressive—benefiting larger users and wealthier segments of society disproportionately; only a fraction reaches lower income deciles.
- Economic distortions:
  - Subsidies lead to overconsumption of energy, favor expansion of energy- and capital-intensive industries, support potentially nonviable firms, and reduce incentives for efficiency and productivity.
  - Countries with higher energy subsidies tend to have lower GDP and TFP growth; output growth in such countries depends more on capital accumulation than employment growth.
- Environmental and public health impacts:
  - Low prices encourage reliance on fossil fuels, discourage investments in cleaner energy, and contribute to higher greenhouse gas emissions and poorer air quality.
  - All Arab countries are signatories to the Paris Agreement; reducing subsidies can materially contribute to emissions reductions (example noted: eliminating subsidies in Saudi Arabia would contribute to one-third of an emissions reduction target in related analytical work).
- Effects on energy SOEs and other sectors:
  - Where budgets absorb only part of subsidy costs, losses fall on energy SOEs, reducing profits, investment, and service delivery.
  - Cross-subsidization can transfer subsidy costs to other users (for example, industry), raising their energy costs and undermining competitiveness.

### Recent Reforms and Outcomes
- Countries that have made progress in reducing subsidies by pricing energy closer to or in line with international prices: "Bahrain, Egypt, Iraq, Jordan, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)".
- Fiscal savings from subsidy reforms have created space to increase priority public spending.
- Price alignment has encouraged investments in renewable energy and diversification away from fossil fuels.

### Reform Design to Maximize Success
- Evidence from reforms shows success when accompanied by measures addressing social and economic concerns:
  - Compensatory measures such as cash transfers can provide more effective income support to low-income households.
  - Tiered pricing can alleviate burdens on low-income households while targeting full price adjustments to higher-income households.
  - Reallocating subsidy savings to social and development spending—including human capital—can enhance public support for reforms.
- Including energy subsidy reform within a broader reform strategy can support social welfare and economic growth and maximize public buy-in.
- Complementary reforms to consider:
  - Measures to improve governance and the business environment.
  - Policies to facilitate an efficient allocation of resources.
  - Clear and proactive communication strategies.

### Complementary Actions and Structural Reforms
- Complementary actions to support flexible reform include establishing effective compensatory schemes and targeted pricing mechanisms.
- Structural reforms highlighted:
  - Reforms to promote efficient allocation of resources across the economy.
  - Reforms of state-owned enterprises (SOEs) to reduce distortions from subsidized pricing and to improve investment and service delivery.
  - Strengthening communication and accountability to build and sustain public acceptance of reforms.

### Concluding Remarks
- Energy subsidy reform in the Arab region is both necessary and feasible.
- Well-designed reforms—paired with targeted compensation, reallocation of savings to priority spending, broader structural reforms, and strong communication—can reduce fiscal costs, improve equity, enhance economic efficiency, and support environmental objectives.

### Box 1. Defining Energy Subsidies — Definition and Measurement
- Energy subsidies arise when retail energy prices are below supply costs.
- Energy subsidies are measured as a product of the price gap (the difference between the retail price and supply costs) and consumption volumes.
- For tradeable products (for example, oil), the supply cost is the international price, which also reflects the opportunity costs for hydrocarbon exporters of consuming the product domestically rather than selling it in global markets.
- For non-traded products like electricity, the supply cost is the cost-recovery price for domestic producers, including distribution costs and margins.
- Retail prices include all non-recoverable charges, such as consumption and other relevant taxes.
- For finished petroleum products, a shipping and distribution margin of $0.15–0.22 per liter is added to the international price.
- The price gap approach provides a comprehensive measure beyond what may be captured in fiscal accounts.
- Best international practice requires that subsidy costs are transparently reflected in fiscal accounts (Government Finance Statistics Manual 2014).
- In some cases the price gap may manifest as energy SOE losses from production or the sale of energy products—not compensated by budgeted subsidies—resulting in lower overall profits and investment, or weaker service delivery.
- For hydrocarbon exporters, pricing energy below export parity results in foregone revenue, while for hydrocarbon importers pricing below import parity results in outright losses.

### Box 1. Defining Energy Subsidies — Recent Reforms, Social Support, and Investment Trends
- Hydrocarbon-exporting countries have implemented substantial energy subsidy reforms over the past decade, including:
  - Saudi Arabia: significant price increases for gasoline and electricity, followed by targeted increases in diesel and other fuel prices, although all from a low base.
  - Bahrain, Iraq, Oman and Qatar: similar energy subsidy reductions.
  - UAE: deregulated gasoline and diesel prices in 2015; fuel prices were frozen after the onset of the coronavirus pandemic, but controls were removed swiftly in March 2021.
- Hydrocarbon-importing countries’ examples:
  - Jordan and Morrocco reformed fuel price structures to better reflect international price variations while adjusting electricity tariffs for higher consumption, with fuel prices indexed to global prices.
  - Egypt: implemented a substantial 30 percent fuel price increase in 2016 after initially cutting subsidies; in 2024 further reforms resulted in weighted fuel prices rising by some 54 percent.
  - Lebanon: energy subsidy removal was implicit through the removal of the exchange rate subsidy.
  - Comoros and Mauritania: energy prices adjusted on an ad hoc basis in response to recent global energy price increases.
- Social support accompanying reforms:
  - Bahrain, Oman and Saudi Arabia: rolled out cash transfer programs to alleviate impacts on low to middle-income families.
  - Iraq: initiated pilot programs to assist families most affected by subsidy cuts.
  - Morocco: 10 percent of savings from the fuel subsidy reform were allocated to existing social assistance programs.
  - Egypt: expanded social safety net programs to cover 21 million citizens, allocating around $970 million for cash assistance to low-income families in the FY 2023/2024.
  - Saudi Arabia: introduced unique social identifiers to target assistance to intended beneficiaries.
- Investment trends:
  - Investment in renewables is rising; GCC countries channel funds and attract FDI into solar and wind energy initiatives.
  - Djibouti, Egypt and Morocco are actively exploring ways to diversify energy portfolios and reduce dependency on imported fossil fuels.
  - Hydrocarbon importers face limited fiscal space to expand investments in renewables and need to enhance business environments and regulatory frameworks to attract FDI and domestic investments.

### Box 1. Defining Energy Subsidies — Reform Design, Targeting, and Delivery
- Challenges:
  - Removing or reducing energy subsidies can lead to sizable price increases, affecting households and sectors reliant on cheap energy and potentially contributing to public discontent and social unrest.
- Design choices to garner social acceptance:
  - Target products consumed by the wealthiest:
    - Kuwait: the 2016 price increase for the highest grade of fuel was twice that for low-octane gasoline (83 percent versus 42 percent).
    - Iraq: 2024 gasoline price reform led to a 25 to 30 percent increase in premium fuels, keeping the price of regular petrol constant.
  - Target largest users:
    - Several countries (Bahrain, Egypt, Iraq, Jordan, Morocco, Qatar, Saudi Arabia, and Tunisia) have introduced tiered electricity tariff structures concentrating price increases on the highest consumption baskets.
    - Tiered pricing could be implemented for fuel products through fuel subsidy cards; policymakers could consider reducing subsidies on diesel (used for commercial and industrial purposes), as was done in Saudi Arabia and Yemen.
  - Compensation mechanisms:
    - Cash or near-cash transfers can help promote social acceptance.
    - A 2023 World Bank survey of 37 thousand individuals across 12 middle-income countries (Hoy and others 2023) found limited support (less than one-third of respondents) for subsidy reforms, particularly among the middle class compared to the poor; support could more than double with alternative policies using fiscal gains from subsidy removal.
    - In Egypt, average support for energy subsidy reforms could jump from under 40 percent to over 80 percent if compensatory measures were introduced.
  - Communication and compensation strategies (IMF April 2025 Fiscal Monitor):
    - (i) introducing or scaling up targeted cash transfers ahead of energy price adjustments can help cushion adverse impacts on household sentiment;
    - (ii) where feasible, adopting a gradual, extended reform path provides households and firms time to adapt, facilitating broader acceptance;
    - (iii) advancing reforms during periods of robust economic growth can support a phased approach and mitigate social resistance.
- Identifying and reaching vulnerable groups:
  - Critical to identify eligible population for targeted transfers to avoid excluding poor households.
  - Evaluation of Egypt’s cash transfer programs (Breisinger and others 2018) recommended expanding coverage due to exclusion errors from income-proxying methods.
  - Community-based targeting or exclusion criteria can help in contexts with prevalent informal work (Hanna and Olken 2018).
- Leveraging technology and delivery mechanisms:
  - In some Arab countries, leveraging the banking sector may be ineffective with a substantial unbanked population (60 percent of the adult population does not own a bank account).
  - Mobile transfer platforms can serve as foundations for robust social protection systems; examples include DRC and Togo using mobile money platforms to pay eligible households (Bird and Hanedar, 2023).
  - Digital social registries and online dashboards can enhance transparency and monitoring of distributions; Egypt, Oman, Saudi Arabia, and Tunisia are making progress on social registries.
- Simpler compensation mechanisms where administrative capacity is limited:
  - Wider cash transfer programs that include part of the middle class and exclude only the most affluent consumers may be preferred short-term (Coady and Prady 2018), saving starting costs and garnering broader support while building social protection capacity.
- Timing and pacing:
  - Ideally implement reforms during periods of economic growth and low inflation; in practice reforms often occur under economic pressure to preserve or restore debt sustainability.
  - Several reforms among hydrocarbon exporters occurred between 2014 and 2020 when commodity prices were low.
  - Phased price increases and gradual removal of subsidies give time to adapt and allow assessment and scaling up of social assistance (example: Indonesia gradual gasoline reforms in mid-2013).

### Box 1. Defining Energy Subsidies — SOE Reform, Communication, and Institutional Design
- SOE losses from low regulated prices are often exacerbated by bottlenecks and inefficiencies: high transmission losses, outdated infrastructure, poor management, weak payment culture, limited enforcement capacity.
- Reforms can introduce accountability and performance metrics to improve operational efficiency and reduce cost-recovery prices.
- Examples:
  - Pakistan: reforms aim to align energy prices with actual costs and improve governance and efficiency (performance-based contracts and reductions in transmission losses).
  - Oman: merged electricity distribution and supply companies under a comprehensive SOE reform agenda to lower costs, boost system efficiency, and develop services.
- Putting energy SOEs on a sound financial footing will improve services and increase investment to reduce supply cost of energy.
- Communication, accountability, and institutional design:
  - Transparent and widely communicated energy price adjustments and subsidy reforms are critical.
  - Communication should explain reasons for reform, expected outcomes, timelines, eligibility criteria, and application procedures.
  - Use traditional media, social media, public forums, and channels for public input (consultation, surveys, community meetings).
  - Governments should report use of public money for compensation programs, assess effectiveness, and conduct regular audits.
  - Shifting from in-kind subsidies to cash transfers can reduce leakages and corruption (example: India’s Direct Cash Transfer system reduced leakages and improved efficiency).
  - Medium-term objectives and depoliticizing pricing:
    - Options include granting pricing mandate to an independent energy regulator and introducing automatic pricing mechanisms that adjust domestic prices to international market developments.
    - Longer-term aim: fully liberalize pricing so private sector suppliers determine prices that move with international prices. Automatic pricing mechanisms can facilitate transition toward full liberalization.

### Annex 1. Cross-Country Energy Subsidy Reform
- Measures
  - (Heading present: "Measures")
- Energy Reform and Steps Timeline In Arab Countries
  - (Heading present: "Energy Reform and Steps Timeline In Arab Countries")
- Oil Exporting Countries
  - (Heading present: "Oil Exporting Countries")
- Oil Importing Countries
  - (Heading present: "Oil Importing Countries")
- References (selected entries preserved verbatim from source):
  - Banerjee, Abhijit, Paul Niehaus, and Tavneet Suri. 2019. "Universal Basic Income in the Developing World." Annual Review of Economics 11:959–983.
  - Baig, Taimur, Amine Mati, David Coady, and Joseph Ntamatungiro. 2007. “Domestic Petroleum Product Prices and Subsidies: Recent Developments and Reform Strategies.” IMF Working Paper 07/71, International Monetary Fund, Washington, DC.
  - Bird, Nicole, and Emine Hanedar. 2023. “Expanding and Improving Social Safety Nets Through Digitalization.” IMF Note 2023/007, International Monetary Fund, Washington, DC.
  - Black, Simon, Antung A. Liu, and Ian Parry., and Nate Vernon 2023. “IMF Fossil Fuel Subsidies Data: 2023 Update.” IMF Working Paper 2023/169, International Monetary Fund, Washington, DC.
  - Breisinger, Clemens, Daniel Gilligan, Naureen Karachiwalla, Sikandra Kurdi, Hoda El-Enbaby, Ami Hamza Jilani, and Giang Thai. 2018. “Impact evaluation study for Egypt's Takaful and Karama cash transfer program: Part 1: Quantitative report.” MENA RP Working Paper 14, International Food Policy Research Institute, Washington, DC.
  - Clements, Benedict, David Coady, Stefania Fabrizio, Baoping Shang, Alvar Kangur, Masahiro Nozaki, Ian Parry, and others. 2013. “Energy Subsidy Reform : Lessons and Implications.” IMF Policy Paper, International Monetary Fund, Washington, DC.
  - Coady, David, Ian Parry, and Baoping Shang. 2018. “Energy Price Reform: Lessons for Policymakers.” Review of Environmental Economics and Policy 12(2): 197–219.
  - Coady, David, and Delphine Prady. 2018. “Universal Basic Income in Developing Countries: Issues, Options, and Illustration for India.” IMF Working Paper 2018/174, International Monetary Fund, Washington, DC.
  - Davidovic, Sonja., Soheib Nunhuck, Delphine Prady, and Herve Tourpe. 2020. “Beyond the COVID-19 Crisis: A Framework for Sustainable Government-to-Person Mobile Money Transfer.” IMF Working Paper 2020/198, International Monetary Fund.
  - Hanna, Rema, and Benjamin A. Olken. 2018. "Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries." Journal of Economic Perspectives 32(4): 201–26.
  - Hoy, Christopher Alexander, Yeon Soo Kim, Minh Cong Nguyen, Mariano Ernesto Sosa, and Sailesh Tiwari. 2023. "Building Public Support for Reducing Fossil Fuel Subsidies : Evidence across 12 Middle-Income Countries." Policy Research Working Paper Series 10615, World Bank, Washington, DC.
  - International Monetary Fund (IMF). 2015a. Fiscal Monitor: Now Is the Time—Fiscal Policies for Sustainable Growth. Washington, DC, April.
  - International Monetary Fund (IMF). 2015b. “Energy Price Reforms in the GCC—What Can Be Learned From International Experience?” IMF Policy Paper, International Monetary Fund, Washington, DC.
  - International Monetary Fund (IMF) 2024. “Understanding the Social Acceptability of Structural Reforms” (Chapter 3). In World Economic Outlook: Policy Pivot, Rising Threats, Washington, DC, October.
  - International Monetary Fund (IMF).(2025.    “Public Sentiment Matters: The Essence of Successful Energy Subsidies and Pension Reforms” (Chapter 2). In Fiscal Monitor: Fiscal Policy under Uncertainty, Washington, DC, April.
  - Kpodar, Kangni, and Boya Liu. 2022. “The Distributional Implications of the Impact of Fuel Price Increases on Inflation.” Energy Economics 108.
  - Lowe, Christina, Jamele Rigolini, Lucia Solbes Castro, and Francesca Bastagli. 2023. “Pathways toward digitalization in Social Protection and Labor (SPL) service delivery.” Social Protection & Jobs Discussion Paper No. 2307, World Bank, Washington, DC.
  - Lowder, Sarah K., Raffaele Bertini, and Andre Croppenstedt. 2017. “Poverty, social protection and agriculture: Levels and trends in data.” Global Food Security 15: 94–107.
  - Dar, Vandita, Madhvi Sethi, and Saina Baby. 2022. “Direct Cash Transfers in Emerging Economies: The Case of India.” Business Perspectives and Research 11(2).
  - Salehi-Isfahani, Djavad. 2014. “Iran’s subsidy reform: From promise to disappointment.” Policy Perspective 13: 1–11.
  - Sapienza, Emanuele. 2021. “Trust in public institutions. A conceptual framework and insights for improved governance programming.” Policy Brief, United Nations Development Programme Oslo Governance Centre.
  - Sdralevich, Carlo A., Randa Sab, Younes Zouhar, and Giorgia Albertin. 2014. “Subsidy Reform in the Middle East and North Africa: Recent Progress and Challenges Ahead.” IMF Departmental Paper 2014/008, International Monetary Fund, Washington, DC.
  - Zarepour, Zahra, and Natascha Wagner. 2022. “Cash instead of subsidy: Assessing the impact of the Iranian energy subsidy reform on households.” Energy Policy 168.

*Reforming Energy Subsidies in the Arab Region — Jeong Dae Lee, Jarin Nashin, Bilal Tabti, and Haytem Troug; October 2025*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview
- Energy subsidies remain prevalent across the Arab world; most Arab countries still have some form of energy subsidies in place.
- Subsidies are intended to lower energy costs for households, support energy-intensive industries, or, in hydrocarbon-producing countries, serve as a form of hydrocarbon wealth redistribution.

### Fiscal, Social, and Environmental Costs
- Subsidies in the Arab region are nearly eight times higher than in the rest of the world.
- Retail energy price comparisons (2023):
  - Average gasoline and diesel price in the region: "$0.77 per liter".
  - Global average gasoline and diesel price: "$1.3 per liter".
  - Natural gas and electricity prices in Arab countries: approximately half of global averages.
- Fiscal burden and scale:
  - Spending on energy subsidies in Arab countries averaged "7 percent of GDP" during 2021–23.
  - Arab countries accounted for approximately "$206 billion, or 21 percent of global energy subsidies".
  - Hydrocarbon-exporting countries accounted for nearly "74 percent of subsidies" in the region.
- Budgetary trade-offs:
  - Budget spending on subsidies was about "70 and 37 percent higher than on healthcare and education, respectively".
- Distributional impacts:
  - Subsidies are regressive—benefiting larger users and wealthier segments of society disproportionately; only a fraction reaches lower income deciles.
- Economic distortions:
  - Subsidies lead to overconsumption of energy, favor expansion of energy- and capital-intensive industries, support potentially nonviable firms, and reduce incentives for efficiency and productivity.
  - Countries with higher energy subsidies tend to have lower GDP and TFP growth; output growth in such countries depends more on capital accumulation than employment growth.
- Environmental and public health impacts:
  - Low prices encourage reliance on fossil fuels, discourage investments in cleaner energy, and contribute to higher greenhouse gas emissions and poorer air quality.
  - All Arab countries are signatories to the Paris Agreement; reducing subsidies can materially contribute to emissions reductions (example noted: eliminating subsidies in Saudi Arabia would contribute to one-third of an emissions reduction target in related analytical work).
- Effects on energy SOEs and other sectors:
  - Where budgets absorb only part of subsidy costs, losses fall on energy SOEs, reducing profits, investment, and service delivery.
  - Cross-subsidization can transfer subsidy costs to other users (for example, industry), raising their energy costs and undermining competitiveness.

### Recent Reforms and Outcomes
- Countries that have made progress in reducing subsidies by pricing energy closer to or in line with international prices: "Bahrain, Egypt, Iraq, Jordan, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)".
- Fiscal savings from subsidy reforms have created space to increase priority public spending.
- Price alignment has encouraged investments in renewable energy and diversification away from fossil fuels.

### Reform Design to Maximize Success
- Evidence from reforms shows success when accompanied by measures addressing social and economic concerns:
  - Compensatory measures such as cash transfers can provide more effective income support to low-income households.
  - Tiered pricing can alleviate burdens on low-income households while targeting full price adjustments to higher-income households.
  - Reallocating subsidy savings to social and development spending—including human capital—can enhance public support for reforms.
- Including energy subsidy reform within a broader reform strategy can support social welfare and economic growth and maximize public buy-in.
- Complementary reforms to consider:
  - Measures to improve governance and the business environment.
  - Policies to facilitate an efficient allocation of resources.
  - Clear and proactive communication strategies.

### Complementary Actions and Structural Reforms
- Complementary actions to support flexible reform include establishing effective compensatory schemes and targeted pricing mechanisms.
- Structural reforms highlighted:
  - Reforms to promote efficient allocation of resources across the economy.
  - Reforms of state-owned enterprises (SOEs) to reduce distortions from subsidized pricing and to improve investment and service delivery.
  - Strengthening communication and accountability to build and sustain public acceptance of reforms.

### Concluding Remarks
- Energy subsidy reform in the Arab region is both necessary and feasible.
- Well-designed reforms—paired with targeted compensation, reallocation of savings to priority spending, broader structural reforms, and strong communication—can reduce fiscal costs, improve equity, enhance economic efficiency, and support environmental objectives.

*Reforming Energy Subsidies in the Arab Region — Jeong Dae Lee, Jarin Nashin, Bilal Tabti, and Haytem Troug; October 2025*

### Box 1. Defining Energy Subsidies

### Box 1. Defining Energy Subsidies

### Definition and measurement
- Energy subsidies arise when retail energy prices are below supply costs.
- Energy subsidies are measured as a product of the price gap (the difference between the retail price and supply costs) and consumption volumes.
- For tradeable products (for example, oil), the supply cost is the international price, which also reflects the opportunity costs for hydrocarbon exporters of consuming the product domestically rather than selling it in global markets.
- For non-traded products like electricity, the supply cost is the cost-recovery price for domestic producers, including distribution costs and margins.
- Retail prices include all non-recoverable charges, such as consumption and other relevant taxes.
- For finished petroleum products, a shipping and distribution margin of $0.15–0.22 per liter is added to the international price.
- The price gap approach provides a comprehensive measure beyond what may be captured in fiscal accounts.
- Best international practice requires that subsidy costs are transparently reflected in fiscal accounts (Government Finance Statistics Manual 2014).
- In some cases the price gap may manifest as energy SOE losses from production or the sale of energy products—not compensated by budgeted subsidies—resulting in lower overall profits and investment, or weaker service delivery.
- For hydrocarbon exporters, pricing energy below export parity results in foregone revenue, while for hydrocarbon importers pricing below import parity results in outright losses.

### Recent reforms—progress and examples
- Hydrocarbon-exporting countries have implemented substantial energy subsidy reforms over the past decade, including:
  - Saudi Arabia: significant price increases for gasoline and electricity, followed by targeted increases in diesel and other fuel prices, although all from a low base.
  - Bahrain, Iraq, Oman and Qatar: similar energy subsidy reductions.
  - UAE: deregulated gasoline and diesel prices in 2015; fuel prices were frozen after the onset of the coronavirus pandemic, but controls were removed swiftly in March 2021.
- Hydrocarbon-importing countries’ examples:
  - Jordan and Morrocco reformed fuel price structures to better reflect international price variations while adjusting electricity tariffs for higher consumption, with fuel prices indexed to global prices.
  - Egypt: implemented a substantial 30 percent fuel price increase in 2016 after initially cutting subsidies; in 2024 further reforms resulted in weighted fuel prices rising by some 54 percent.
  - Lebanon: energy subsidy removal was implicit through the removal of the exchange rate subsidy.
  - Comoros and Mauritania: energy prices adjusted on an ad hoc basis in response to recent global energy price increases.
- Social support accompanying reforms:
  - Bahrain, Oman and Saudi Arabia: rolled out cash transfer programs to alleviate impacts on low to middle-income families.
  - Iraq: initiated pilot programs to assist families most affected by subsidy cuts.
  - Morocco: 10 percent of savings from the fuel subsidy reform were allocated to existing social assistance programs.
  - Egypt: expanded social safety net programs to cover 21 million citizens, allocating around $970 million for cash assistance to low-income families in the FY 2023/2024.
  - Saudi Arabia: introduced unique social identifiers to target assistance to intended beneficiaries.
- Investment trends:
  - Investment in renewables is rising; GCC countries channel funds and attract FDI into solar and wind energy initiatives.
  - Djibouti, Egypt and Morocco are actively exploring ways to diversify energy portfolios and reduce dependency on imported fossil fuels.
  - Hydrocarbon importers face limited fiscal space to expand investments in renewables and need to enhance business environments and regulatory frameworks to attract FDI and domestic investments.

### Reform design to maximize success — policy lessons and measures
- Challenges:
  - Removing or reducing energy subsidies can lead to sizable price increases, affecting households and sectors reliant on cheap energy and potentially contributing to public discontent and social unrest.
- Design choices to garner social acceptance:
  - Target products consumed by the wealthiest:
    - Kuwait: the 2016 price increase for the highest grade of fuel was twice that for low-octane gasoline (83 percent versus 42 percent).
    - Iraq: 2024 gasoline price reform led to a 25 to 30 percent increase in premium fuels, keeping the price of regular petrol constant.
  - Target largest users:
    - Several countries (Bahrain, Egypt, Iraq, Jordan, Morocco, Qatar, Saudi Arabia, and Tunisia) have introduced tiered electricity tariff structures concentrating price increases on the highest consumption baskets.
    - Tiered pricing could be implemented for fuel products through fuel subsidy cards; policymakers could consider reducing subsidies on diesel (used for commercial and industrial purposes), as was done in Saudi Arabia and Yemen.
  - Compensation mechanisms:
    - Cash or near-cash transfers can help promote social acceptance.
    - A 2023 World Bank survey of 37 thousand individuals across 12 middle-income countries (Hoy and others 2023) found limited support (less than one-third of respondents) for subsidy reforms, particularly among the middle class compared to the poor; support could more than double with alternative policies using fiscal gains from subsidy removal.
    - In Egypt, average support for energy subsidy reforms could jump from under 40 percent to over 80 percent if compensatory measures were introduced.
  - Communication and compensation strategies (IMF April 2025 Fiscal Monitor):
    - (i) introducing or scaling up targeted cash transfers ahead of energy price adjustments can help cushion adverse impacts on household sentiment;
    - (ii) where feasible, adopting a gradual, extended reform path provides households and firms time to adapt, facilitating broader acceptance;
    - (iii) advancing reforms during periods of robust economic growth can support a phased approach and mitigate social resistance.
- Identifying and reaching vulnerable groups:
  - Critical to identify eligible population for targeted transfers to avoid excluding poor households.
  - Evaluation of Egypt’s cash transfer programs (Breisinger and others 2018) recommended expanding coverage due to exclusion errors from income-proxying methods.
  - Community-based targeting or exclusion criteria can help in contexts with prevalent informal work (Hanna and Olken 2018).
- Leveraging technology and delivery mechanisms:
  - In some Arab countries, leveraging the banking sector may be ineffective with a substantial unbanked population (60 percent of the adult population does not own a bank account).
  - Mobile transfer platforms can serve as foundations for robust social protection systems; examples include DRC and Togo using mobile money platforms to pay eligible households (Bird and Hanedar, 2023).
  - Digital social registries and online dashboards can enhance transparency and monitoring of distributions; Egypt, Oman, Saudi Arabia, and Tunisia are making progress on social registries.
- Simpler compensation mechanisms where administrative capacity is limited:
  - Wider cash transfer programs that include part of the middle class and exclude only the most affluent consumers may be preferred short-term (Coady and Prady 2018), saving starting costs and garnering broader support while building social protection capacity.
- Timing and pacing:
  - Ideally implement reforms during periods of economic growth and low inflation; in practice reforms often occur under economic pressure to preserve or restore debt sustainability.
  - Several reforms among hydrocarbon exporters occurred between 2014 and 2020 when commodity prices were low.
  - Phased price increases and gradual removal of subsidies give time to adapt and allow assessment and scaling up of social assistance (example: Indonesia gradual gasoline reforms in mid-2013).

### Complementary actions and structural reforms
- Including subsidy reform in broader reform strategy supports social welfare, economic growth, and public buy-in.
  - 2023 World Bank survey indicates stronger support for reforms when part of a broader package; in Egypt, 87 percent would support subsidy reform if complemented with expenditure reprioritization.
  - Popular allocation choices for fiscal savings include schools, roads, and hospitals.
- Structural reforms to maximize macroeconomic benefits:
  - Removing subsidies reallocates resources from energy-intensive to less energy-intensive sectors, potentially boosting growth and job creation.
  - Complementary measures: reduce red tape, improve business environment, reduce trade restrictions, improve mobility of capital and labor, improve access to credit, and promote education and reskilling.

### Reforming State-Owned Enterprises (SOEs)
- SOE losses from low regulated prices are often exacerbated by bottlenecks and inefficiencies: high transmission losses, outdated infrastructure, poor management, weak payment culture, limited enforcement capacity.
- Reforms can introduce accountability and performance metrics to improve operational efficiency and reduce cost-recovery prices.
- Examples:
  - Pakistan: reforms aim to align energy prices with actual costs and improve governance and efficiency (performance-based contracts and reductions in transmission losses).
  - Oman: merged electricity distribution and supply companies under a comprehensive SOE reform agenda to lower costs, boost system efficiency, and develop services.
- Putting energy SOEs on a sound financial footing will improve services and increase investment to reduce supply cost of energy.

### Communication, accountability, and institutional design
- Transparent and widely communicated energy price adjustments and subsidy reforms are critical.
  - Communication should explain reasons for reform, expected outcomes, timelines, eligibility criteria, and application procedures.
  - Use traditional media, social media, public forums, and channels for public input (consultation, surveys, community meetings).
  - Colombian government example: extensive public consultations before implementing energy subsidy reforms.
- Reporting and accountability:
  - Governments should report use of public money for compensation programs, assess effectiveness, and conduct regular audits.
  - Stronger institutional frameworks and trust in government actions are associated with improvements in sentiment following fuel price reforms (April 2025 Fiscal Monitor).
  - Shifting from in-kind subsidies to cash transfers can reduce leakages and corruption (example: India’s Direct Cash Transfer system reduced leakages and improved efficiency).
- Medium-term objectives and depoliticizing pricing:
  - Reforms should be part of clear medium-term objectives and institutional reforms to depoliticize energy pricing.
  - Options include granting pricing mandate to an independent energy regulator and introducing automatic pricing mechanisms that adjust domestic prices to international market developments.
  - Longer-term aim: fully liberalize pricing so private sector suppliers determine prices that move with international prices. Automatic pricing mechanisms can facilitate transition toward full liberalization.

### Concluding remarks
- Reforming energy subsidies in the Arab region offers a pathway to a more sustainable and equitable future by addressing fiscal burdens and social inequities.
- Targeting higher-income groups and large consumers while protecting vulnerable populations through well-calibrated compensation mechanisms (such as direct cash transfers) can enhance social acceptability.
- Effective communication, transparency, appropriate pacing, and complementing subsidy reform with investments in renewable energy and social safety nets enhance long-term impact.
- The IMF supports these efforts through policy advice, technical assistance, and financial resources via instruments such as the Extended Fund Facility and the Resilience and Sustainability Facility.

*Source: insea2025003 - Box 1. Defining Energy Subsidies*

### Annex 1. Cross-Country Energy Subsidy Reform

### Annex 1. Cross-Country Energy Subsidy Reform

### Measures
- (Heading present: "Measures")

### Energy Reform and Steps Timeline In Arab Countries
- (Heading present: "Energy Reform and Steps Timeline In Arab Countries")

### Oil Exporting Countries
- (Heading present: "Oil Exporting Countries")

### Oil Importing Countries
- (Heading present: "Oil Importing Countries")

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*Annex 1. Cross-Country Energy Subsidy Reform — extracted from insea2025003*

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_Source: https://www.imf.org/-/media/files/publications/imf-notes/2025/english/insea2025003.pdf_