## _1403mcd

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### Executive Summary
- Generalized price subsidies in MENA are widespread, particularly on food and fuels, and are neither well targeted nor cost-effective as social protection.
- Example incidence: in Egypt in 2008, the poorest 40 percent of the population received only 3 percent of gasoline subsidies.
- Macroeconomic and fiscal impacts:
  - Total pretax energy subsidies in 2011: $237 billion (48 percent of world subsidies; 8.6 percent of regional GDP; 22 percent of government revenue).
  - Pretax energy subsidies in 2011: $204 billion (8.4 percent of GDP) in oil exporters; $33 billion (6.3 percent of GDP) in oil importers.
  - Preliminary IMF 2012 estimate: pretax subsidies for diesel and gasoline only ≈ 3.8 percent of regional GDP.
  - Food subsidies in 2011: 0.7 percent of regional GDP ($21.6 billion).
- Reform payoff: removing generalized price subsidies and replacing them with targeted social safety nets can produce substantial fiscal savings and stronger social protection, though short-term inflationary and competitiveness costs may occur.

### Key Findings on Costs, Roles, and Effects
- Prevalence and composition (2011):
  - Petroleum: $119.3 billion (50.4 percent of subsidies).
  - Natural gas: $55.2 billion or 2 percent of GDP (23.4 percent of subsidies).
  - Electricity: $62 billion or 2.3 percent of GDP (26.2 percent of subsidies).
  - Aggregate energy subsidies: $236.5 billion; 8.6 percent of GDP; 22 percent of revenues.
- Distributional incidence (household survey evidence, 2003–2010):
  - Poorest quintile in Egypt, Iran, Jordan, Lebanon: 1 percent to 8 percent of gasoline subsidies; richest quintile: 38–86 percent.
  - Poorest quintile in Egypt, Jordan, Mauritania, Morocco, Yemen: about 1 percent to 7 percent of diesel subsidies (direct effect); richest quintile: 42–77 percent.
  - Egypt (2008–09 survey): poorest 40 percent received 3 percent of gasoline subsidies, 7 percent of natural gas subsidies, 10 percent of diesel subsidies.
  - Tunisia: highest-income households benefit almost 40 times more from energy subsidies than lowest-income households.
- Fiscal crowding out and volatility:
  - In about half of MENA countries, total pretax energy subsidies were higher than capital spending in 2011.
  - In all oil exporters, total pretax energy subsidies exceeded spending on education and health.
  - Oil-importing countries: average public debt rose from 70 percent of GDP in 2009 to 79 percent in 2012.
  - Oil-importing countries’ fiscal deficit: about 8.5 percent of GDP in 2012 vs 5 percent in 2009 (fiscal balances include grants).
- Environmental and governance effects:
  - MENA is the second-largest world producer of carbon dioxide emissions per capita; Gulf Cooperation Council per capita emissions above 15 metric tons in 2010 vs world average about 5 metric tons.
  - Groundwater depletion: estimated wealth loss as much as 1–2 percent of GDP for some countries.
  - Subsidies foster smuggling, corruption, and vested interests resisting reform.

### Measurement: Price- Gap Methodology and Quantitative Findings (Box 2.1)
- Price-gap notation and per-unit subsidy:
  - (1) PG = RP − BP
  - (2) Pretax subsidy per unit = −PG = BP − RP, if RP < BP; = 0 otherwise
  - (3) Posttax subsidy per unit = BP + T* − RP, if RP < BP + T*; = 0 otherwise
- Posttax illustration: posttax subsidies for MENA calculated using a 20 percent share of fuel taxes in the retail price (illustrative assumption).
- Quantitative 2011 breakdown:
  - Petroleum: $119.3 billion (50.4 percent of pretax energy subsidies).
  - Natural gas: $55.2 billion or 2 percent of GDP (23.4 percent).
  - Electricity: $62 billion or 2.3 percent of GDP (26.2 percent).
  - Food subsidies in 2011: $21.6 billion or 0.7 percent of GDP.
- Trend: pretax diesel and gasoline subsidies rose from 2.9 percent of regional GDP in 2009 to 3.8 percent in 2012 (preliminary IMF estimates).

### Determinants of Successful Reform (Empirical and Case Evidence, Box 3.1)
- Success definition: reforms delivering better support to the poor, significant and durable budgetary/quasi-fiscal savings, and avoiding disruptive reversals.
- Six key factors associated with success:
  - Good reform preparation, gradual pace of adjustment, and breadth of reform.
  - Strong government leadership and consensus building.
  - Support from international partners, particularly technical assistance.
  - Introduction of mitigating measures to soften impacts on the poor.
  - Favorable economic conditions, particularly higher economic growth.
  - Presence of a coalition government at the time of reform.
- Selected Spearman rank correlations with reform outcome:
  - Preparation: 0.4438**.
  - Breadth of the reform: 0.4702**.
  - Role of partners (technical assistance): 0.613**.
  - Cash and in-kind transfers as mitigating measures: 0.559**.
  - Economic downturn (growth one standard deviation below five-year average): −0.4869**.
  - (Note: * significant at 10 percent; ** significant at 5 percent.)
- Selected success rates (Yes vs No):
  - Preparation: Yes = 86, No = 20.
  - Breadth of reform (comprehensive): Yes = 78, No = 0.
  - Government leadership (strong): Yes = 100, No = 33.
  - Technical assistance from development partners: Yes = 88, No = 0.
  - Cash and/or in-kind transfers as mitigating measure: Yes = 100, No = 17.

### Policy Recommendations and Reform Design Elements
- Replace generalized price subsidies with targeted social safety net instruments:
  - Conditional or unconditional cash transfers; in-kind transfers; nongeneralized price subsidies.
- Introduce automatic price-setting mechanisms for fuel with smoothing mechanisms to avoid sharp domestic volatility.
- Tackle energy subsidies to enterprises and restructure the energy sector (including state-owned enterprises).
- Use fiscal savings from subsidy removal to increase priority spending (infrastructure, education, health).
- Ensure social safety nets are well targeted and adequately resourced prior to or concurrent with reform.
- Sequencing guidance:
  - Prepare diagnostics and incidence analysis before launch.
  - Scale up or introduce cash/in-kind transfers to protect vulnerable households.
  - Communicate transparently about costs, beneficiaries, and alternatives.

### Political Economy Challenges and Mitigation
- Common obstacles:
  - Resistance from organized losers (middle class, vested corporate interests).
  - Immediate visible losses vs future diffuse gains.
  - Lack of trust in state capacity to manage social safety nets.
  - Weak administrative capacity to implement targeting.
- Mitigation measures:
  - Transparency about subsidy costs and beneficiaries.
  - Clear, consistent communication and public awareness campaigns.
  - Broad-based stakeholder consultation (political parties, civil society, private sector).
  - Embed subsidy reform within a wider reform program to link savings to popular policies.
  - Regional coordination to limit smuggling and cross-border arbitrage.

### Implementation Timing, Macroeconomic Effects, and Expectations
- Preparation horizon: reforms require several years for preparation, consensus building, and implementation.
- Inflationary considerations:
  - First‑round effect: direct rise in food and/or fuel inflation depending on weights in CPI.
  - Second‑round effects: depend on expectations and indexation; food price hikes have higher second‑round effects than fuel hikes.
  - Policy guidance: monetary policy should accommodate one‑off realignment and respond to second‑round effects if a wage-price spiral emerges.
- Macro‑fiscal impacts:
  - Short term: subsidy removal is a reduction in current public spending and can be contractionary if savings are not recycled; fiscal multipliers may be higher in recessionary environments.
  - Long term: reform improves growth by removing distortions, rationalizing energy use, increasing export revenues in oil exporters, enhancing competitiveness, and strengthening the budget structure.
- Example quantified impact (country case; text truncated in source for Morocco study):
  - Estimated slowdown: 0.2 percent in 2013 and 0.5 percent in 2014 by slowing domestic demand (context continued in source).
  - Energy subsidy reduction expected to improve budget deficit by 0.2 percent of GDP in 2013 and 0.6 percent in 2014; same measures would hike domestic consumer prices by 0.4 percent in 2013 and 1.1 percent in 2014 (estimates assume no countermeasures).

### Country Experiences, Mitigating Measures, and Fiscal Effects (selected episodes)
- Jordan:
  - 2011–2012 reductions of pretax gasoline and diesel subsidies: reduction cumulative (in percent of GDP) — 2011: 1.4; 2012: 2.4.
  - New cash transfer targets 630,000 families with annual income below JD 10,000 (US$14,100); transfer ≈ US$100 per person per year; 2013 cost estimated at 0.8 percent of GDP.
- Mauritania:
  - 2011 reforms: diesel price formula introduced May 2012; domestic fuel prices aligned with international prices by June 2012.
  - Fiscal effect (Table 4.3): Mauritania 2011: 3.0; 2012: 5.6 (percent of GDP, cumulative reductions of pretax subsidies on gasoline and diesel due to retail price adjustments).
  - Cash transfer pilot in Nouakchott: UM 15,000 monthly or $51 per household.
- Morocco:
  - Partial indexation adopted July 2013; September 15, 2013 increases: diesel +8.5 percent; gasoline +4.8 percent; fuel +14.2 percent.
  - January 2014: subsidies on gasoline and industrial fuel eliminated; prices reviewed bimonthly.
  - Objective: reduce untargeted subsidies to 3 percent of GDP by 2016; 2014 budget seeks subsidy envelope reduction to 3.7 percent of GDP.
- Tunisia:
  - Energy subsidies cost rose from average 0.9 percent of GDP before 2010 to 2.8 percent in 2012.
  - Measures: lifeline electricity tariff for <100 kwh/month; increases in tariffs during 2012–2014 including a new automatic price formula for gasoline (January 2014).
  - Planned fuel price increase average 6 percent by July 2014.
- Yemen:
  - Subsidy bill >9 percent of GDP in 2012 (peak 14 percent in 2008).
  - 2011–12: gasoline price +66 percent; diesel and kerosene prices doubled.
  - Social Welfare Fund coverage expanded by 500,000 families; Social Welfare Fund established in 1996 provides conditional cash transfers to >1.5 million households.
- Iran (2010 reform):
  - Implicit energy subsidies estimated at about 13 percent of GDP (pretax).
  - Monthly cash transfers of 445,000 rials (about US$45 at reform launch) per person; transfers doubled incomes for many large and poor families.
- Nigeria (2012 episode):
  - January 1, 2012 gasoline price increase: 117 percent (to cost recovery); kerosene price unchanged.
  - Widespread protests; partial reversal on January 15 left price 40 percent above end-2011 level.
- Annex and cross-country lessons:
  - Successful episodes combined diagnostics, gradualism, targeted mitigation (cash/in-kind transfers), strong communication, and technical assistance.
  - Sudden, poorly communicated large price increases triggered reversals (e.g., Tunisia 1983).

### Social Safety Nets, Targeting, and Delivery
- Current status: social safety nets (excluding subsidies) in MENA attract public resources equivalent to less than 0.7 percent of GDP on average; average program allocates 23 percent of benefits to bottom quintile (vs 59 percent in Latin America and Eastern Europe/Central Asia).
- Targeting methods and examples:
  - Means testing (ideal but data and administrative capacity intensive).
  - Proxy means tests, categorical targeting, self-targeting.
  - Lifeline tariffs and quantity limits (Jordan and Egypt electricity; Iran gasoline electronic rationing).
- Cash transfer advantages and examples:
  - IMF estimates: well-designed cash transfer systems in MENA can typically direct about 50–75 percent of spending to the bottom 40 percent (vs 20 percent for fuel subsidies and 35 percent for food subsidies).
  - Country examples: Iran (2010), Jordan (National Aid Fund), Mauritania (UM 15,000 monthly pilot), Morocco (TAYSSIR), Yemen (Social Welfare Fund).
- Delivery channels:
  - Direct distribution, checks, vouchers, direct deposits, smart cards, cell phones.
  - Electronic transfers reduce leakages and costs but require upfront regulatory and financial infrastructure.

### Conclusions and Way Forward
- Conformity to prescription for success:
  - MENA reforms often well prepared and supported by international partners, but mitigating measures not always adequate or well targeted; price increases not always gradual; communication often weak.
  - Few countries, mostly oil importers, undertook comprehensive reform; many oil exporters have yet to act.
- Recommended priorities:
  - Scale up well-targeted social safety nets prior to or alongside subsidy removal.
  - Set clear timelines for gradual price convergence to international levels with predictable mechanisms (automatic price-setting with smoothing).
  - Tackle subsidies causing losses to state-owned electricity companies and combine tariff increases with sector restructuring.
  - Use preparation time to improve transparency on subsidy costs and beneficiaries and gather household consumption and poverty data.
- Political timing and sequencing:
  - Manage social impacts carefully, especially during political transitions.
  - Consider reform sequencing that balances fiscal returns and social opposition (e.g., prioritize fuel reforms with accompanying public transport measures over socially sensitive food subsidy changes).

*Italic: Source: IMF study "Subsidy Reform in the Middle East and North Africa" (content unit _1403mcd).*

### 1.    Subsidies—Middle    East.    2.    Subsidies—Africa,    North.

### Subsidy Reform in the Middle East and North Africa

### Executive Summary
- Generalized price subsidies in MENA are widespread, particularly on food and fuels, and are neither well targeted nor cost-effective as social protection.
- Subsidies tend to benefit the better off more than the poor; example: in Egypt in 2008, the poorest 40 percent of the population received only 3 percent of gasoline subsidies.
- Subsidies impose heavy fiscal costs, distort relative prices, foster overconsumption, reduce exportable resources in energy exporters, weaken current accounts in energy importers, and generate adverse congestion, health, and environmental outcomes.
- Total pretax energy subsidies in 2011 cost $237 billion—equivalent to 48 percent of world subsidies, 8.6 percent of regional GDP, or 22 percent of government revenue.
- Pretax energy subsidies amounted to $204 billion (8.4 percent of GDP) in oil exporters and $33 billion in oil importers (6.3 percent of GDP) in 2011.
- Preliminary IMF estimates for 2012 show pretax subsidies for diesel and gasoline only (about half of total energy subsidies in MENA) were 3.8 percent of regional GDP.
- Food subsidies in 2011 amounted to 0.7 percent of GDP for the region, with uneven distribution across countries.
- Subsidy spending rose with commodity prices and political transitions, increasing fiscal and current-account pressures; fiscal deficits in oil-importing countries rose to about 8.5 percent of GDP in 2012 from 5 percent in 2009.
- Removing generalized price subsidies and replacing them with targeted social safety nets can produce substantial fiscal savings and stronger social protection, though short-term inflationary and competitiveness costs may occur.

### Key Findings on Costs, Roles, and Effects
- Subsidies are common across MENA for petroleum, electricity, natural gas, and coal.
- Subsidies reduce incentives to invest in the energy sector and crowd out growth-enhancing public spending.
- Subsidies encourage smuggling and black market activity, which can create shortages of subsidized products.
- Overconsumption induced by subsidies leads to inefficient specialization of domestic production, often in less labor-intensive industries.
- In the medium term, subsidy reform improves growth by eliminating distortions, rationalizing energy use, increasing export revenues in oil exporters, enhancing competitiveness, and strengthening budget structure.

### Fiscal and Economic Context
- MENA pretax energy subsidies in 2011: $237 billion (48 percent of world subsidies; 8.6 percent of regional GDP; 22 percent of government revenue).
- Breakdown 2011: $204 billion (8.4 percent of GDP) in oil exporters; $33 billion (6.3 percent of GDP) in oil importers.
- 2012 preliminary estimate: diesel and gasoline pretax subsidies ≈ 3.8 percent of regional GDP.
- Food subsidies 2011: 0.7 percent of regional GDP.
- Fiscal deficit: oil-importing countries average about 8.5 percent of GDP in 2012 vs 5 percent in 2009 (fiscal balances include grants).
- Rising fiscal breakeven oil prices in oil exporters signal increasing fiscal pressures.

### Determinants of Successful Reform (Empirical and Case Evidence)
- Success is defined as reforms that deliver better support to the poor, achieve significant and durable budgetary or quasi-fiscal savings, and avoid social/political disruptions that could reverse reform.
- Factors that often accompany successful episodes:
  - Thorough preparation, including clear diagnostics and careful planning of pace and breadth of reform.
  - Strong ownership and commitment by government, including building consensus and involving key stakeholders (political parties, civil society, private sector).
  - Effective communication and transparency about the cost and beneficiaries of subsidies and the benefits of reform.
  - Introduction or scaling up of effective social safety nets to mitigate impacts on the vulnerable.
  - Favorable economic conditions, particularly higher economic growth.
  - Multiparty governments that build cross-party consensus, making reforms less likely to be reversed.
- Preparatory measures that can be implemented before comprehensive reform:
  - Improve transparency and public awareness of subsidy costs and beneficiaries.
  - Gather household consumption and poverty data to design or improve social safety nets.
  - Seek technical assistance from international partners to design, sequence, and implement reforms.

### Policy Recommendations and Reform Design Elements
- Replace generalized price subsidies with targeted social safety net instruments (conditional or unconditional cash transfers, in-kind transfers, or nongeneralized price subsidies).
- Introduce or implement automatic price-setting mechanisms for fuel that can be coupled with smoothing mechanisms to avoid sharp domestic fuel price volatility.
- Extend reform scope to tackle energy subsidies to enterprises and restructure the energy sector.
- Use fiscal savings from subsidy removal to increase priority spending (infrastructure, education, health) that benefits the wider population.
- Ensure social safety nets are well targeted and adequately resourced to cushion vulnerable households during transition.

### Political Economy Challenges and Mitigation
- Major obstacles include resistance from organized losers of reform, the trade-off between immediate losses and future gains, and lack of trust in state capacity to manage social safety nets.
- Key mitigation measures:
  - Transparency about subsidy costs and beneficiaries.
  - Clear, consistent communication of reform benefits.
  - Building broad-based consensus by engaging political parties, civil society, and the private sector.
  - Sequencing reforms to allow preparation of social safety nets and information campaigns.

### Implementation Timing and Expectations
- Well-designed subsidy reforms require several years for preparation, consensus building, and implementation.
- Governments are advised to start preparatory actions now to create conditions for successful and durable reform later.

*Source: IMF study "Subsidy Reform in the Middle East and North Africa" (excerpts and executive summary, 2011–2012 data as reported in the source content).*

### Box 2.1.  What are Price Subsidies and How are They Measured?

### Box 2.1.  What are Price Subsidies and How are They Measured?

### Definition and measurement challenges
- A consumer subsidy arises when government intervention reduces the price of a product below the market price that would otherwise have prevailed.
- Measuring the cost of subsidies uniformly across countries is challenging because:
  - some of their cost may be borne by entities other than the general budget (“implicit subsidies”),
  - fiscal reporting may follow different methodologies across countries or suffer from weaknesses,
  - limited data availability.
- The unit subsidy is calculated, in general, as the difference (“gap”) between the actual selling price of a product or service and a benchmark price that reflects the free market value.
- Determining the appropriate benchmark price is often a challenge:
  - For products not easily traded (e.g., electricity), the relevant benchmark is the cost recovery price, including a normal return to capital and distribution costs.
  - For widely traded commodities, such as fuels, the appropriate benchmark price must be chosen carefully; in oil-producing countries the appropriate benchmark price is the international or border fuel price because the country would generally incur an opportunity cost if it simply sold the fuel at the domestic production cost.
- Taxation affects subsidy measurement:
  - A product may cover production and other costs but not the tax that would normally prevail. In “pretax” terms the good is not subsidized, but in “posttax” terms it is, because the government forgoes tax revenues.
- Visibility of subsidies:
  - Subsidies can be explicit (budget transfers directly to consumers or producers) or implicit (administrative setting of prices without compensating budget appropriations).
  - The cost of implicit subsidies is borne by (often state-owned) producers and distribution companies and, if persistent, will affect their financial position, investment and maintenance capacities, and the quality of service.

### Price-gap methodology (energy subsidies)
- The gap between the subsidized price and a benchmark price (the latter defined as the supply cost of an energy product, including transport and distribution costs), which reflects the opportunity cost or the straight loss, is a measure of price subsidy, whether implicit or explicit (Koplow, 2009).
- Price-gap notation:
  - (1) PG = RP − BP  
    - where PG is the price gap, RP the retail or consumer price of a product, and BP the product’s benchmark price.
  - A pretax subsidy arises whenever retail (consumer) prices are lower than the benchmark price.
  - (2) Pretax subsidy per unit = −PG = BP − RP, if RP < BP; = 0 otherwise
  - When the tax on the energy product is set below the desirable taxation levels, this can give rise to posttax subsidy.
  - (3) Posttax subsidy per unit = BP + T* − RP, if RP < BP + T*; = 0 otherwise
- The total cost of subsidies is obtained by multiplying the per unit subsidy with the estimated consumption volume over the period under consideration (e.g., one quarter or one year).
- Desirable taxation:
  - In some approaches, desirable taxation of fuel is set at the efficient level that encompasses a tax for externalities and a revenue component (Clements and others, 2013).
  - In practice, the share of taxes in consumer prices varies widely, reaching 11 percent in the United States and almost 50 percent on average among European Union countries.
  - For illustration, posttax subsidies for Middle East and North Africa countries are calculated using a 20 percent share of fuel taxes in the retail price, abstracting from assumptions on the breakdown between fiscal revenue and externality components.

### Quantitative findings for MENA (2011 and trends)
- In MENA, energy subsidies account for the bulk of subsidies. About 50 percent of the total cost of pretax energy subsidies ($119.3 billion or 4.3 percent of GDP) is related to petroleum products.
- Additional pretax energy subsidy breakdown:
  - natural gas: $55.2 billion or 2 percent of GDP (23 percent of total pretax energy subsidies)
  - electricity: $62 billion or 2.3 percent of GDP (26 percent of total pretax energy subsidies)
- Food subsidies amounted to $21.6 billion or 0.7 percent of GDP in 2011.
- Many countries maintain subsidies on water, financial products, medicines, housing, and other products and services that are difficult to measure and are not included in the overall estimate above.
- Trend since 2009:
  - The cost of providing subsidies has been rising since 2009 after the fall in commodity prices in the aftermath of the global financial crisis.
  - For 2012, preliminary IMF estimates show that pretax subsidies on diesel and gasoline, which represent about half of total energy subsidies, reached 3.8 percent of regional GDP, up from 2.9 percent in 2009.
- Footnote on calculations:
  - Calculations are based on annual average of quarterly domestic petroleum prices.

*Source: Box 2.1. What are Price Subsidies and How are They Measured?*

### Box 2.1. (concluded)

### Box 2.1. (concluded)

### Objectives and taxonomy of subsidies
- Governments rely on subsidies to:
  - Support real incomes and fight poverty through low prices on widely consumed products.
  - Shield the population from shocks caused by large swings in commodity prices, particularly in fuel-importing countries.
  - In oil-producing countries, distribute natural resource wealth among the population as generalized “in-kind” transfers.
  - Boost certain industries and support employment through producer subsidies, including below-market-price energy inputs; subsidies can also arise from losses incurred by state-owned enterprises due to inefficiencies and provision of goods and services at subsidized prices.
- Taxonomy of subsidizing countries:
  - Prices below import/domestic production cost, leading to pretax subsidies covered by fiscal or quasi-fiscal resources (example products cited: electricity in Lebanon and petroleum products in Egypt).
  - Prices covering supply costs but not prevailing tax rates, giving rise to posttax subsidies in the form of foregone tax revenues (see Figure 2.4). Some countries have automatic price adjustment mechanisms (Jordan, Mauritania, Morocco) producing posttax subsidies; others have high taxation but fixed-price-setting or ad hoc mechanisms (Tunisia, until recently), which can lead to erosion of tax revenues and pretax subsidies.
  - Natural resource–rich countries where domestic fuel prices are below international prices due to low cost of domestic extraction; subsidization arises from the double opportunity cost of not exporting at international prices and not taxing domestic consumption. Some of these countries incur fiscal losses on imported refined products such as gasoline.

### Fuels: prevalence, pass-through, and magnitude
- Total pretax energy subsidies by product, 2011:
  - Natural gas: $55.2 billion (23.4 percent of subsidies)
  - Petroleum: $119.3 billion (50.4 percent of subsidies)
  - Electricity: $62 billion (26.2 percent of subsidies)
  - Aggregate: $236.5 billion; 8.6 percent of GDP; 22 percent of revenues
- Fuel prices and pass-through:
  - On average, diesel and gasoline prices in MENA are lower than in any other region (Figure 2.5). Gasoline and diesel prices are below the lowest price in the European Union; in a majority of countries prices at the pump are lower than the United States.
  - Since the global petroleum trough in March 2009, most MENA countries passed only a small portion of the price increase to domestic markets; by comparison, prices were fully passed through in the United States, and in the European Union prices at the pump rose 50 percent more than international prices due to ad valorem fuel taxes (Figures 2.6 and 2.7).
- Dispersion and fiscal significance:
  - In 2012, pretax subsidies on diesel and gasoline exceeded 3 percent of GDP in 40 percent of countries in the region, while posttax subsidies exceeded 3 percent of GDP in 75 percent of the countries.
  - Figure 2.8 highlights a wide dispersion with subsidies more prevalent in oil exporters.

### Electricity: prevalence and measurement challenges
- Electricity subsidies are widespread; magnitude is difficult to estimate due to data gaps and complex modalities.
- Causes of pretax electricity subsidies:
  - Tariffs set below cost recovery.
  - Illegal connections and leakages.
  - Low revenue collection (nontechnical losses).
- Pretax electricity subsidies were above 2 percent of GDP in close to half of MENA countries in 2011; Lebanon and Jordan bore the highest subsidy bill in 2011 (Figure 2.9).

### Food subsidies: scope and examples
- Three-fourths of MENA countries record food subsidies on their budgets.
- In 2011, food subsidies were generally less costly than fuel and electricity subsidies; in nine countries they represented less than 1 percent of GDP, but in Iraq, Syria, and Egypt they represented more than 2 percent of GDP (Figure 2.10).
- Modalities include government-managed sale of foodstuffs at below-market prices, in-kind transfers, and government production and distribution.
- Country examples:
  - Iraq: Public Distribution System staple ration to every household; costs recorded in the budget and in 2012 amounted to almost $5 billion, equivalent to more than 2 percent of GDP, down from over 3 percent in 2011.
  - Djibouti (2008): exempted five basic food items from indirect taxes, implying a loss in indirect tax revenue of about 0.5 percent of GDP.
  - A program cultivating agricultural land in Ethiopia and Sudan (2009) estimated cost by IMF at 0.1 percent of GDP.
- Note on measurement: cost estimates are mostly based on spending recorded in national budgets; actual costs likely higher due to subsidies absorbed by nonbudget institutions or borne by private producers.

### Disadvantages of generalized subsidies

- Limited effectiveness as social protection:
  - Generalized price subsidies often do not reach the most vulnerable; benefits frequently accrue disproportionately to higher-income groups.
  - Evidence from household surveys (2003–2010):
    - Poorest quintile in Egypt, Iran, Jordan, and Lebanon received only 1 percent to 8 percent of total gasoline subsidies; the richest quintile received 38–86 percent.
    - Poorest quintile in Egypt, Jordan, Mauritania, Morocco, and Yemen received about 1 percent to 7 percent of total diesel subsidies (direct effect); the richest quintile received 42–77 percent.
    - In Egypt (2008–09 survey), the poorest 40 percent received 3 percent of direct gasoline subsidies, 7 percent of natural gas subsidies, and 10 percent of diesel subsidies.
    - Jordan (2008 survey): richest quintile received nearly 6½ times more in gasoline subsidies and 12 times more in diesel subsidies than the poorest quintile.
  - Product variation: kerosene, liquefied petroleum gas, and food subsidies tend to have a higher share accruing to the poor than diesel, gasoline, and electricity, but variation across countries is wide (Figures 2.11–2.14).
  - Food subsidies are better targeted than energy subsidies but still often benefit the nonpoor (example: in Egypt nearly 50 percent of the baladi bread subsidy goes to the top 40 percent).
  - Tunisia: highest-income households benefit almost 40 times more from energy subsidies than lowest-income households.
- High fiscal burden and crowding out:
  - In about half of MENA countries, total pretax energy subsidies were higher than capital spending in 2011.
  - In all oil exporters, total pretax energy subsidies exceeded spending on education and on health; in Egypt, Jordan, and Lebanon total pretax energy subsidies were higher than capital, health, or education spending (Figures 2.15 and 2.16).
  - Generalized subsidy schemes create budgetary uncertainty because fiscal costs fluctuate with global commodity prices.
  - Generalized subsidy schemes are unlikely to be sustainable as they weigh heavily on vulnerable fiscal positions (Figure 2.17).
  - In oil-importing countries, average public debt level increased from 70 percent of GDP in 2009 to 79 percent in 2012; fiscal consolidation and gradual rationalization and better targeting of social protection spending are needed (Figures 2.18–2.19).
  - In oil-exporting countries, generous handouts have pushed up fiscal breakeven oil prices to unprecedented levels, increasing vulnerability if oil prices fall (Figure 2.20). Foregone tax revenues on oil products contribute to this vulnerability.
- Procyclicality:
  - Energy subsidies are procyclical in MENA. Over 1980–2011, elasticity of energy consumption to growth:
    - All (163 countries): 0.764
    - Middle East and North Africa: 1.080
    - Total oil exporters: 1.293
    - Oil importers: 0.924
  - Higher elasticity in MENA oil exporters reflects lack of incentives for energy efficiency due to large subsidies.
  - In many MENA countries, energy subsidies increase during booms and decline during downturns, which can push fiscal stance in a procyclical direction.
  - In oil importers with pretax subsidies, government spending increases when consumption and growth accelerate, adding to domestic demand as an automatic destabilizer.
  - In oil exporters, subsidies generally constitute an opportunity cost rather than direct fiscal spending; fiscal stance does not change with consumption and government spending does not add to domestic demand in the same way.
- Economic and environmental distortions:
  - Energy intensity in MENA (2010 consumption at constant 2005 PPP) is high for both oil-importing and oil-exporting countries; energy intensity has increased significantly in oil-exporting countries during the past decade while declining in other regions (Figures 2.21–2.22).
  - Generous energy subsidies encourage excessive energy consumption and promote energy-intensive industries (petrochemicals, fertilizers), contributing to high energy intensity (Figure 2.23).
  - Overconsumption leads to higher fuel imports or lower exports, deteriorating the balance of payments (Figure 2.24).
  - Subsidized fuels often result in large losses for national oil and electricity companies or local distributors, discouraging improvements in energy production, access to utility services, and private sector investment; this results in poor service quality and shortages.
  - Subsidies distort production towards capital-intensive sectors, biasing against labor—a problem for MENA countries with growing labor forces.
  - Food subsidies can lead to waste and leakage; example: Egypt’s leakage of subsidized food items estimated at 28 percent on average, implying it costs the government $1.39 to deliver $1 in food subsidies to end-consumers.
  - Negative environmental externalities are substantial: overconsumption of petroleum products, coal, and natural gas reduces incentives for energy efficiency, public transport, and renewable energy, aggravating local pollution, traffic congestion, and global warming. MENA is the second largest world producer of carbon dioxide emissions per capita (see Box 2.2).
- Governance issues:
  - Low prices create opportunities for corruption and smuggling, where subsidy benefits are captured by foreigners or smugglers, undermining governance and creating vested interests that resist reform.

*International Monetary Fund.*

### Box 2.2 . Environmental Impact of Fossil Fuel Subsidies

### Box 2.2. Environmental Impact of Fossil Fuel Subsidies

### Overview
- Energy subsidies lead to fuel overconsumption, which aggravates global warming and worsens local pollution.
- Subsidies exacerbate the Middle East and North Africa (MENA) region’s vulnerabilities to regional scarcity of water, adding to land, coastal, and marine environment degradation.

### Regional carbon emissions
- The MENA region is the second-largest producer of carbon dioxide emissions per capita after the Organization for Economic Cooperation and Development countries.
- Carbon emissions per capita in the MENA region have almost doubled in the past 30 years.
- There is wide dispersion of emissions across the region; oil-rich countries lead mainly because of inefficient energy use.
- Carbon dioxide per capita emissions for the Gulf Cooperation Council were all above 15 metric tons in 2010 compared to about 5 metric tons for the world average.
- MENA carbon dioxide emissions from transportation were only 8 percent of the world total in 2010.
- Most emissions derive from excessive gas production, air conditioning, electricity generation, and water desalination—an energy-intensive activity.
- Regional per capita figures cited (from World Bank, World Development Indicators database): East Asia and the Pacific, 5.5; Middle East and North Africa, 5.9; Sub-Saharan Africa, 0.8; Latin America and the Caribbean, 2.9; Organization for Economic Cooperation and Development, 10.1.

### Water use, groundwater depletion, and economic cost
- Energy subsidies lower the cost of groundwater pumping and irrigation, which may cause farmers to cultivate crops that offer low value-added in relation to the water used.
- Under-pricing of fuels used in ground water extraction, in addition to under-pricing of water, has led the majority of MENA countries to extract water in excess of renewable water resources.
- Groundwater depletion represents an estimated wealth loss of as much as 1–2 percent of GDP for some countries.

### Impact on renewable energy and energy efficiency
- Fuel subsidies can deter development of renewable and clean energy technologies—such as solar and wind—because they cannot compete with cheaper subsidized fossil fuels.
- In addition to addressing subsidies, energy and water efficiency measures would reduce energy consumption.
- A Chatham House study (Lahn, Stevens, and Preston, 2013) recommended measures that could be studied at the Gulf Cooperation Council level, including:
  - (1) agreement on common prices for electricity trading and fuel among countries; and
  - (2) setting a common building code and building materials standard, as well as common efficiency standards for buildings, appliances, vehicles, and air conditioning.
- Some countries in the region, such as Saudi Arabia, are already taking steps toward better energy efficiency through stronger building and appliance standards, diversification of energy sources (e.g., gas and solar energy), and development of public transportation options.

### Health impacts and economic costs of air pollution
- Energy subsidies’ impact on health, resulting from the deteriorating environment, is substantial and mostly felt by the poor.
- The estimated number of deaths per year caused by air pollution, which is partly caused by high fuel consumption, varies significantly in the region, with Egypt, Iran, Iraq, Saudi Arabia, and Sudan each incurring more than 2,000 fatalities per year.
- In Cairo and Alexandria, the overall cost—including mortality, morbidity, and potential loss of tourism revenue—from urban air pollution has been estimated at about 2 percent of GDP.

*Source: Box 2.2. Environmental Impact of Fossil Fuel Subsidies, Subsidy Reform in the Middle East and North Africa (figures and data from World Bank, World Development Indicators database; air pollution deaths from World Health Organization).*

### Box 3.1. (concluded)

### Box 3.1. (concluded)

### Methodology and coding
- Seven reform themes coded using binary (0–1) or simple rank order (0–2) values: (1) time and scope of the reform; (2) ownership, communication, and consultation; (3) external factors; (4) macroeconomic cycle indicators; (5) fiscal pressures; (6) socioeconomic context of reform and mitigating measures; and (7) political context of reform.
- Example coding: preparation = 1 if an assessment of the incidence of subsidy removal was conducted before the reform; = 0 otherwise.
- Sources for coding: IMF staff reports and selected issues papers, Clements and others (2013), World Bank and Organization for Economic Cooperation and Development studies, Deutsche Gesellschaft für Internationale Zusammenarbeit papers, press articles, and IMF staff calculations.
- Reform outcomes assessed on three criteria: (1) qualitative review of country experiences; (2) change in the gap between domestic and international prices (for fuels); and (3) magnitude of domestic price adjustments in local currency.
- Outcome scoring: unsuccessful = 0 (including rollbacks); partially successful = 1 (initial adjustments not followed by further adjustments or insufficient to reduce price gap); successful = 2 (initial adjustment followed by additional adjustments leading to significant reduction of subsidy burden and the price gap).
- Based on this methodology: 7 episodes judged successful, 13 partially successful, and 5 unsuccessful.

### Empirical approach
- Small sample and ordinal independent variables; analysis conducted via:
  - Spearman rank correlation analysis to measure strength and direction of links between reform outcomes and potential factors. Many indicators significant at the 5 percent or 10 percent level.
  - “Bucket” approach: computing success rates among episodes where a given factor was present versus where it was not.

### Selected Spearman rank correlations (Correlation with the Reform Outcome)
- Preparation (assessment of incidence before reform): 0.4438**
- Pace of adjustment (= 2 if price adjustment at start >50%; = 0 if <20%; = 1 otherwise): 0.3727*
- Breadth of the reform (comprehensive of most/all products = 1): 0.4702**
- Government leadership (strong/public commitment = 1): 0.3683*
- Consensus building (tried to build consensus = 1): 0.3581
- Communication strategy (information campaign undertaken = 1): 0.2440
- Role of partners (technical assistance provided = 1): 0.613**
- IMF arrangement at time of reform: 0.0994
- Economic downturn (growth rate one standard deviation below five-year average = 1): 0.4869**
- Ongoing fiscal consolidation (subsidy reform part of broader reform = 1): 0.1995
- Fiscal pressures composite indicator: 0.0072
- Resource richness (fuel reforms; = 2 net oil exporter; = 1 significant production but net importer; = 0 none/marginal): 0.1579
- Existing social safety nets (cash and in-kind transfers at time of reform = 1): 0.0000
- Cash and in-kind transfers as mitigating measures (=1): 0.559**
- Subsidies targeted at a specific group (=1): 0.4175**
- Other programs/social safety nets (=1): 0.6866**
- Mitigating measures targeting/benefiting the middle class (=1): 0.2033
- Government composition (0 fragmented coalition; 1 dominant party coalition; 2 single-party government): 0.2867
- Government control of parliament composite indicator: 0.1887
(Note: * significant at the 10 percent level; ** significant at the 5 percent level.)

### Selected success rates (Table 3.3) — percentage of successful cases when factor was Yes vs No
- Preparation (incidence study carried out prior): Yes = 86, No = 20
- Pace of adjustment (price adjustment >50 percent): Yes = 33, No = 75
- Breadth of reform (comprehensive): Yes = 78, No = 0
- Government leadership (strong ownership/commitment): Yes = 100, No = 33
- Consensus building (government tried to build consensus): Yes = 100, No = 43
- Communication strategy (information campaign): Yes = 100, No = 50
- Technical assistance from development partners: Yes = 88, No = 0
- IMF arrangement at time of reform: Yes = 63, No = 50
- Economic conditions (reform during slower growth/economic contraction): Yes = 0, No = 78
- Cash and/or in-kind transfers as mitigating measure: Yes = 100, No = 17
- Subsidies targeted at a specific group: Yes = 100, No = 38
- Other programs/social safety nets in place/introduced: Yes = 100, No = 0
- Government composition fragmented coalition (Was the government a fragmented coalition?): Yes = 75, No = 50
- Government single-party majority in parliament: Yes = 67, No = 33
(Notes: Success rates calculated using only failed and successful episodes. * difference significant at 10 percent; ** at 5 percent.)

### Six key factors associated with successful subsidy reform
- Good reform preparation, gradual pace of adjustment, and breadth of the reform.
- Strong government leadership and consensus building.
- Support from international partners, particularly technical assistance.
- Introduction of mitigating measures to soften the impact on the poor.
- Favorable economic conditions, particularly higher economic growth.
- Presence of a coalition government at the time of the reform.

### Reform preparation, pace, and breadth — empirical and case evidence
- Well-prepared reforms drawing on accurate diagnostics and allowing gradual pacing and adequate implementation time tend to be more successful.
- Case failures from poor preparation/communication:
  - Bolivia 2010: a 20 percent price increase rolled back within five days.
  - Tunisia 1983 cereals subsidy reform: 100 percent price increase announced 24 hours in advance led to riots and cancellation within a month.
- Incidence analysis mattered: 86 percent of cases with an incidence analysis were associated with successful outcomes; only 20 percent without an incidence analysis were successful.
- Gradual pace: defined in the sample as price increase <50 percent at start. Success rates: 75 percent of cases with gradual increases were successful; 33 percent of cases with initial increases >50 percent were successful.
- Breadth: Successful cases tended to be more comprehensive (most/all products) and sometimes triggered broader reform programs. Examples of complementary measures include substitution/adoption of alternative energy sources (Indonesia: kerosene to LPG; Morocco: solar for rural electrification; Mauritania: diesel to fuel oil and LPG for electricity; Yemen: kerosene to LPG and diesel to natural gas for electricity).

### Ownership, communication, consensus building, and transparency
- Strong government leadership and visible commitment are crucial determinants of success.
- Effective communication should:
  - Highlight subsidy costs and distortions (pollution, misallocation, inefficiency, smuggling).
  - Explain who benefits from subsidies and the benefits of reform versus costs of nonreform.
  - Present alternatives for assisting the poor and comparisons with peer countries.
- Examples:
  - Tunisia 1991 food subsidy reform was preceded by a government awareness campaign and press focus on subsidy weight and regional price comparisons.
- Stakeholder consultation and parliamentary outreach play positive roles in building consensus and managing vested interests.
- Transparency of subsidy systems and social safety nets supports credible communication and should precede reform launch. Transparency helps depoliticize price setting and identify beneficiaries and vested interests.

### Role of international partners
- International partners (IFIs, multilateral agencies, donors) provide political legitimacy, peer pressure, research, technical assistance, financial support, and increased accountability.
- Technical assistance for fuel subsidy reform (magnitude analysis, mitigation options, gradual elimination strategy) made a positive and statistically significant contribution.
- Empirical evidence: 88 percent of cases with technical assistance were associated with successful outcomes.
- IMF financial arrangements and policy advice have often helped reforms; Article IV Consultations have pushed the subsidy reform agenda.

*Source: IMF staff calculations and analysis in Box 3.1 (concluded).*

### Introduction of  mitigating measures:  Our analysis shows that reforms

### _1403mcd - Introduction of  mitigating measures:  Our analysis shows that reforms

### Mitigating measures and social protection
- Reforms were more successful when governments introduced measures to mitigate the impact of the price increase on the poor and most vulnerable.
- Previous studies stress introducing appropriate social protection tools to compensate for the removal of subsidies, which disproportionately affects the poor because of the larger share of subsidized goods in poor households’ consumption basket.
- The sudden loss of benefits for the middle class can weaken their support for reform; reforms might also impose an unfair burden on a narrow group of vulnerable categories that could mobilize and block the overall reform.
- Priority recommendation:
  - Protect the poor by compensating the immediate impact of subsidy removal in the short term and replace the subsidy model of social support with a model centered on targeted social safety nets in the longer term.
- Mitigating instruments noted:
  - Cash and in-kind transfers.
  - Expansion of existing programs is easier and quicker than setting up new instruments.
- Empirical association from the reviewed cases:
  - Of the cases where cash and in-kind transfers were introduced, 100 percent were associated with a successful outcome.
  - Of the cases where these transfers were not introduced, 17 percent of the cases resulted in a successful reform.
- Measures aimed at the middle class:
  - Examples: generalized cash compensation (Iran, 2010), public sector wage increases (Sudan, 2013), tax reductions.
  - Cautions: such measures often suffer from lack of targeting, are difficult to reverse, and in the reviewed episodes were not associated with better reform outcomes.

### Reform follow-up and implementation dynamics
- Subsidy reform, especially when accompanied by mitigating measures, can be long and complex and requires prolonged attention after the initial phase.
- Key follow-up actions:
  - Maintain reform momentum to resist push-back from vested interests.
  - Continue communication and transparency campaigns to sustain consensus.
  - Adjust pace of reform and revise price-setting mechanisms in response to changing circumstances (volatile prices, exchange rate fluctuations, or inflation).
  - Implement transparent monitoring and periodic assessment of reform impact (for example, measurement of food intake among vulnerable households) to enable policy adjustments.
- Case example:
  - Iran: broad communications campaign preceded the reform to educate the population on costs and benefits; however, after implementation the government did not provide equally extensive public official information about de facto implementation and outcome.

### Initial conditions associated with reform success
- Growth:
  - Reforms launched in the context of low growth were less successful than reforms undertaken with higher economic activity; a statistically significant Spearman correlation confirmed this result.
  - Policy implication: governments should capitalize on favorable economic conditions when implementing subsidy reforms.
- Inflation and international commodity prices:
  - High initial inflation was associated with least successful outcomes, possibly due to limited tolerance for further erosion of real incomes.
  - Commodity prices did not seem to play a significant role in reform outcome.
- Public finances:
  - Fiscal pressure helps undertake subsidy reforms. Reforms were more successful when part of a broad-based fiscal strategy to reduce fiscal deficits and free resources toward social spending and infrastructure.
  - This is generally the case in program or near-program countries and in recent MENA experiences.
- Political conditions:
  - Political indicators reflecting government composition and strength vis-à-vis parliament affected reform outcomes.
  - More successful reforms were associated with a multiparty government.
  - Consistent with OECD (2009): under a minority government more negotiation may be required, but reforms are less likely to be reversed because implementation required opposition support.

### Conclusions: Ideal situation for subsidy reform
- Highest likelihood of success combines:
  - A well-prepared reform that enjoys strong ownership by the government.
  - Technical assistance from international partners.
  - A gradual increase in prices compensated by mitigating measures.
  - Part of a wider reform effort led by a committed government in a multiparty political system.
  - Implementation under favorable economic conditions.

*International Monetary Fund.*

### Introduction of  an

### _1403mcd - Introduction of  an

### Reform measures implemented
- Introduction of an additional lifeline electricity tariff for households consuming less than 100 kwh per month.
- Creation of a new social housing program for needy families.
- Increase of income tax deduction for the poorest household.
- Gradually phase out energy subsidies by increasing electricity tariffs and fuel prices.
- Introduce a new targeted household support strategy.
- Prepare a new unified registry system for vulnerable households.
- In Tunisia: introduced a new lifeline electricity tariff to protect households consuming less than 100 kwh per month; new social housing program for needy families; increased income tax deduction for the poorest households; finalizing a new targeted household strategy to expand beneficiaries in PNAFN from 220,000 to 250,000 and broaden the definition of vulnerable families and increase school allowances for children and university students.
- In Yemen: further reduce energy subsidies by gradually increasing fuel prices and strengthen support through an expansion of the Social Welfare Fund.

### Country experiences and key adjustments
- Yemen 2011–12: gasoline prices increased by 66 percent and diesel and kerosene prices doubled.
- 2013 (Yemen): diesel price unified across users, including the electricity sector.
- Coverage of the Social Welfare Fund (Yemen) was expanded to 500,000 additional families.
- Jordan resumed a monthly fuel price adjustment mechanism in January 2013.
- Tunisia increased fuel prices on an ad hoc basis in 2012–13, and re-introduced an automatic price formula for gasoline in January 2014.
- Mauritania adopted a new automatic diesel price formula in May 2012.
- Morocco started implementation of a partial indexation mechanism for certain petroleum products in September 2013, eliminated subsidies on gasoline and industrial fuel in January 2014, and introduced bimonthly review of these prices.
- Egypt, Jordan, Mauritania, Tunisia: increased electricity tariffs and began plans for restructuring state-owned electricity companies (Mauritania at an incipient stage; Tunisia completed an audit of the three state-owned energy companies).
- Some countries increased prices sharply but gains were often wiped out by high international oil prices and exchange rate depreciation; others followed price adjustment mechanisms to converge to international levels.

### Fiscal effects and quantified savings
- Table 4.3: Reduction of Pretax Subsidies on Gasoline and Diesel due to Adjustments in Retail Prices in Local Currency (In percent of GDP, cumulative)
  - Jordan: 2011 1.4; 2012 2.4
  - Mauritania: 2011 3.0; 2012 5.6
  - Morocco: 2011 n.a.; 2012 0.7
  - Tunisia: 2011 n.a.; 2012 0.3
  - Yemen: 2011 2.3; 2012 5.5
- Jordan: new cash transfer system targets 630,000 families with an annual income below JD 10,000 (US$14,100) if the oil price is above US$100 per barrel; the transfer amounts to about US$100 per person per year and is capped at a maximum of six family members; for 2013, its cost was estimated at 0.8 percent of GDP.
- Iran (Box 4.1 excerpt): implicit subsidies on energy estimated at about 13 percent of GDP on a pretax basis; monthly cash transfers of 445,000 rials (about US$45 when the reform was launched) per person doubled incomes for many large and poor families.
- Oil exporters: average fiscal balance of MENA oil exporters expected to turn into a deficit starting in 2017, compared to a surplus of about 7 percent in 2012.
- Public debt (Figure 4.2) and selected macro variables (Figure 4.1) referenced for Egypt, Jordan, Mauritania, Morocco, Sudan, Tunisia, Yemen (figures not reproduced here).

### Mitigating measures and social protection adjustments
- Most countries complemented fuel price increases with mitigating measures, mainly through introduction or scaling-up of cash transfer programs.
- Yemen: expansion of Social Welfare Fund coverage to 500,000 additional families (with World Bank assistance).
- Sudan increased civil service wages as a mitigating measure, creating recurrent spending.
- Mauritania relied on dedicated shops selling subsidized basic foodstuffs (rice, cooking oil, and sugar); experience was disappointing due to location, cash constraints of the poor, administrative issues, governance risks, and moral hazard.
- Tunisia: introduced lifeline electricity tariff for <100 kwh/month households; social housing program; increased income tax deduction for poorest households; expanding PNAFN beneficiaries from 220,000 to 250,000; increasing school allowances.
- Morocco: strengthened programs and targeting—expanded coverage of TAYSSIR education program and RAMED health insurance program; increased resources of the social cohesion fund to finance assistance for poor widows and the disabled; measures to support public transport to ease impact of fuel price hikes.

### Communication, implementation practices, and IMF role
- Communication strategies: reform generally accompanied by public communication campaigns and media coverage showcasing government commitment. In Mauritania, Sudan, and Yemen, price increases were enacted without forewarning or prior public debate.
- Role of the IMF: supported subsidy reform with policy advice and technical assistance; subsidy reform measures were explicitly part of IMF-supported programs in Jordan (Stand-by Arrangement in 2012), Mauritania (Extended Credit Facility in 2010), Morocco (Precautionary and Liquidity Line in 2013), Tunisia (Stand-by Arrangement in 2013), and Yemen (Extended Credit Facility in 2010).

### Plans ahead and country intentions
- Egypt: plans to introduce a targeted cash transfer and considering plans for energy subsidy reform over the medium term while protecting sensitive sectors, including public transportation and food industries.
- Jordan: plans to gradually increase electricity tariffs and develop new energy sources with lower generation costs.
- Mauritania: plans to eliminate the general electricity and gas subsidy and is developing a nationwide cash transfer program with the World Bank to be deployed after the results of the 2014 household survey.
- Morocco: plans to implement a comprehensive subsidy reform, which could be combined with cash transfers and other social assistance programs.
- Sudan: aims at gradually phasing out remaining subsidies on oil and other staples while enhancing social protection.
- Tunisia: aims at gradually phasing out energy price subsidies and replacing them with well-targeted social safety nets enabled by a new unified registry system for vulnerable households under preparation; plans to increase fuel prices by 6 percent on average by July 2014.
- Yemen: plans to further reduce energy subsidies through gradual increase in fuel prices and strengthen support to the poor through expansion of the Social Welfare Fund.

### Oil exporters: emerging agenda and fiscal urgency
- Subsidy reform in oil exporters has proceeded slowly; Iran was the only major oil exporter to undertake a comprehensive subsidy reform among the group discussed.
- Examples of limited actions in oil exporters:
  - Dubai raised water and electricity tariffs by about 15 percent in January 2011.
  - Qatar raised pump prices of gasoline by 25 percent and of diesel by 30 percent in January 2011.
  - Bahrain increased industrial tariffs for gas by 50 percent on January 1, 2012.
  - Oman agreed with industrial users to double feedstock gas prices to $3 per million British thermal units by 2015.
- Fiscal trends: in many oil exporters breakeven oil prices are rising and fiscal surpluses are shrinking; in 2014, 7 out of 12 MENA oil exporters (Algeria, Bahrain, Iran, Iraq, Libya, Sudan, Yemen) are expected to run fiscal deficits.
- Country vulnerabilities:
  - Algeria: nonhydrocarbon primary deficit well above long-term sustainable level; public finances not on a sustainable path absent reforms.
  - Bahrain: fiscal deficits projected to widen; public debt estimated to rise to 63 percent of GDP in 2018 from about 37 percent of GDP in 2012; need for medium-term fiscal strategy to retarget subsidies, contain public sector wages, raise non-oil revenues, rationalize capital expenditures, and reform the pension fund.
  - Oman: as crude oil production starts to decline, accumulated fiscal buffers could erode quickly if wage bill and current spending, including subsidies, are not contained.

*Source: IMF staff reports for Article IV Consultations; excerpts from "Recent Experiences of Subsidy Reform in the Middle East and North Africa."*

### Conclusions

### Conclusions

### Conformity of MENA reforms to the prescription for success
- Reforms in the MENA region have generally been well prepared and supported by international partners.
- Mitigating measures were introduced or strengthened to varying degrees, but were not always adequate or sufficiently targeted.
- Price increases were not gradual in all cases.
- Few countries effectively communicated to the public and insiders the need for reform.
- Reforms were often enacted under fiscal and external pressures, when growth was lower than in the previous decade.
- Ad hoc price increases not linked to pricing formulae exposed fiscal savings to erosion from higher international fuel prices and exchange rate movements.
- The reform effort was limited to a relatively small number of countries, almost all oil importers; many countries, particularly oil exporters in MENA, have yet to act on subsidy reform.

### Social safety nets: current status and rationale for reform
- MENA historically relied heavily on food and fuel price subsidies as social protection rather than social safety net instruments and social insurance.
- Social safety nets (excluding subsidies) in the region attract public resources equivalent to less than 0.7 percent of GDP on average.
- These programs are fragmented among several small programs with large overlaps, and suffer from high leakages.
- The average social safety net program (excluding subsidies) in MENA allocates only 23 percent of its total benefits to the bottom quintile, against 59 percent in Latin America and the Caribbean and in Eastern Europe and Central Asia.
- Social safety net programs in MENA have limited impact on poverty and inequality because of low coverage, inefficient targeting, and poor or absent monitoring and evaluation systems.
- Governments in MENA tend to cope with crises by scaling up subsidies or increasing public sector employment; during the Arab Spring several countries expanded subsidies or reduced taxes on food and fuel products.
- Generalized price subsidies do not target those most in need, strain public finances, and foster overconsumption, particularly of energy.
- Social safety nets, including targeted price subsidies, are better at supporting poor households and are more cost-effective, freeing fiscal resources for infrastructure, education, and health.

### Evidence from simulations and country examples
- World Bank simulations: Poverty in Egypt could be cut by one-third if energy subsidies were reduced by 50 percent and the savings distributed uniformly in cash to the population (a targeted transfer would reduce poverty even more).
- IMF staff simulations in 2011 for Jordan: Gradual elimination of price subsidies on energy products, bread, and water, and replacement through a well-targeted cash transfer system could improve the welfare of the poorest 40 percent of the population, while producing fiscal savings of 5 percent of GDP.

### Improving targeting
- Targeting reduces errors of exclusion and inclusion and is key to cost-effective social protection.
- Lebanon launched a central targeting program in 2009 (National Poverty Targeting Program) providing a basket of benefits including partial medical bill payment, school fee waiver, and free books.
- Means testing is ideal for targeting but requires significant administrative capacity and good-quality data (poverty and consumption surveys) and is costly.
- Where means testing is not practical, alternative targeting methods include proxy means tests, categorical targeting, and self-targeting.
- Yemen reformed its Social Welfare Fund by improving poverty targeting with a proxy means-test formula, strengthening capacity for service delivery, and adopting a new legal policy framework.
- Self-targeting examples:
  - Tunisia in the early 1990s improved food-subsidy targeting by using differentiated (less attractive) packaging and selling products such as cooking oil from bulk containers.
  - In Morocco and Egypt, higher octane fuel used predominantly by more expensive cars and sport utility vehicles is less subsidized than diesel fuel used in public transport.
- Limiting subsidized product quantities (thresholds) helps reduce benefit leakages:
  - Jordan and Egypt provide cheap electricity to households for consumption up to a certain threshold (lifeline tariffs).
  - Iran’s June 2007 electronic card system for gasoline rationing created a multi-tier energy pricing structure with subsidized rationed gasoline priced below full market price; rationing required comprehensive vehicle registration and personalized distribution of gasoline quotas.
  - In Egypt, subsidized food is provided in limited quantities through ration cards/coupons used by almost 68 percent of households.
  - In Jordan, subsidized food provided through ration cards/coupons is planned for review in the course of 2014 to prevent abuse.

### Cash transfers: advantages, examples, and implementation issues
- Cash or near-cash transfers, especially when means-tested, offer advantages over subsidies:
  - Do not directly distort prices.
  - Provide flexibility and choice to recipients.
  - Have relatively low administrative cost once infrastructure is set up.
  - Can be easily scaled up in crises.
- IMF estimates: Well-designed cash transfer systems in MENA can typically result in about 50–75 percent of spending reaching the bottom 40 percent of the population, compared with 20 percent of the amount spent to subsidize fuel prices and 35 percent to subsidize food prices.
- Several MENA country examples of cash-transfer programs (Box 5.1):
  - Iran: December 2010 cut indirect subsidies and implemented an across-the-board cash transfer program with cash deposited in new bank accounts for households and released with the reform launch.
  - Jordan: National Aid Fund (established 1986) provides means-tested recurrent cash assistance; monthly cash transfers ranging from JD 40 (US$56) to JD 180 (US$254) depending on income, plus emergency assistance, disability and health benefits, and vocational training.
  - Mauritania: Cash transfer program targeting 10,000 vulnerable households in Nouakchott; each household receives UM 15,000 monthly or about US$51 via bank transfer.
  - Morocco: Conditional cash transfer pilot to encourage education launched in second half of 2007 reaching more than 160,000 households and nearly 300,000 students.
  - Yemen: Social Welfare Fund established in 1996 provides conditional cash transfers to more than 1.5 million households; coverage and transfers have been gradually increased and were partly meant to mitigate the impact of fuel subsidy reforms.
- Conditional cash transfers can be conditioned on actions such as children attending school or receiving immunizations and can help increase future earnings potential and reduce intergenerational transmission of poverty.
- Delivery methods for cash and in-kind benefits:
  - Direct distribution by agencies; or
  - Access through checks, vouchers, direct deposits, smart cards, cell phones, redeemable at distributing agencies.
- Electronic transfers can cut costs, reduce leakages, promote financial services access, and improve security, but require up-front investment in regulatory and financial infrastructure.
- Implementation drawbacks of cash transfers:
  - Require precise household censuses and verification methodologies.
  - Risk of abuse when governance is weak (channeling resources to unintended beneficiaries for political support).
  - May create disincentives to work for recipients.

### Macroeconomic impact of subsidy reform

Inflationary effects
- Subsidy reform can increase inflationary pressures if price increases are large.
- First-round effect: increase in food and/or fuel inflation depending on their weights in the consumer price index.
- Second-round effects on core inflation depend on expectations and indexation mechanisms; empirical evidence indicates hikes in food prices have higher second-round effects than hikes in fuel prices.
- Price increases limited to a narrow range of food products during subsidy removal may have a more limited impact on household incomes.
- Policy guidance:
  - Monetary policy should accommodate the first-round one-off realignment of relative prices to avoid output loss from mistakenly tightening policy.
  - Government should address erosion of real incomes for poor households by introducing or strengthening social safety nets in parallel.
  - Monetary policy should respond to second-round effects if inflation expectations and indexation play an important role; central banks should focus on noncore inflation and tighten policy if a wage-price spiral is emerging.
  - A strong anti-inflationary stance before reform can help contain second-round effects by anchoring inflation expectations.
- Country examples:
  - Tunisia: Inflation increased from 5.1 percent in January 2012 to 6.4 percent in April 2013, mainly explained by higher food and energy prices; energy increases reflected recent rises in administered prices of petroleum products and energy tariffs, while food price rises reflected increases in nonadministered prices.
  - Mauritania: Inflation fell from 5.5 percent at end-2011 to 3.4 percent at end-2012, significantly lower than projected, as regular increases in retail fuel prices were more than offset by the decline in food prices (food makes up 49 percent of the consumption basket).

Macro-fiscal impact
- Long-term: Subsidy reform has a positive effect on growth through elimination of distortions, rationalization of energy use, increased export revenues in oil exporters, enhanced competitiveness, and a stronger budget structure.
- Short-term: Removal of subsidies is equivalent to a reduction in current public spending and can have a contractionary effect if it produces net budgetary savings, assuming a positive fiscal multiplier.
- Recent IMF work shows fiscal multipliers may be higher in recessionary environments; these results suggest subsidy reform can be less growth-damaging if undertaken when the economy is doing well.
- Dampening effects on growth can be minimized if savings are redirected to other public spending, especially transfers to the poor (high propensity to consume) and investment (generally high multiplier).
- These demand considerations argue for introducing compensating measures concurrently with subsidy elimination.
- Example: According to a study by Morocco’s State Planning Agency, the increase in energy prices in September 2013 may cut economic growth by [text truncated in source].

*Source: Conclusions, Issues of Special Interest to the Middle East and North Africa, _1403mcd - Conclusions*

### 0.2 percent in 2013 and 0.5 percent in 2014 by slowing domestic demand.

### _1403mcd - 0.2 percent in 2013 and 0.5 percent in 2014 by slowing domestic demand.

### Fiscal and price impacts of energy subsidy reduction
- Reducing subsidies for energy products is expected to improve the budget deficit by 0.2 percent of GDP in 2013 and 0.6 percent in 2014.
- The same measures would hike domestic consumer prices by 0.4 percent in 2013 and 1.1 percent in 2014.
- The estimates assume that no measures would be put in place to counter the rise in costs.

### Impact on the productive sector
- Removal of subsidies—particularly on fuel—represents a negative shock for the productive sector as a whole; a fuel price hike effectively amounts to an increase in indirect taxation on enterprises’ inputs.
- The increase in enterprises’ production costs depends on:
  - the goods and services produced,
  - the production function at the firm level,
  - the economy’s energy intensity and openness to external competition at the aggregate level.
- Examples of energy‑intensive industries: aluminum, metal casting, chemicals, mining, forest products, petroleum refining, glass, and steel.
- Second‑round effects can be significant for less energy‑intensive sectors (for example, agriculture via higher costs of water and fertilizers), with important social implications for small farmers who may not be able to pass higher costs to consumers in the absence of compensating measures.
- In most MENA countries with very large fuel subsidies, the economy is generally much more energy‑intensive, so subsidy reform would have a bigger impact than in economies that have already adapted to high oil prices.

### Export orientation and competitiveness
- Export-oriented industries are likely to be particularly affected: higher input costs translate into smaller profits and potentially bankruptcy or market exit unless firms can pass costs to final consumers.
- Price-taker industries (exporters or those facing import competition) face greater difficulty passing on cost increases; domestically captive sectors can more easily raise product prices.
- Aggregate effect: a shift in the production mix away from energy‑intensive goods.

### Country examples and specific statistics
- Jordan:
  - Electricity tariffs increased for selected service and manufacturing companies in June 2012.
  - Impact stronger for energy‑intensive sectors such as phosphate; limited for less energy‑intensive light industry, which constitutes the bulk of nonprimary exports.
- Bahrain:
  - Industrial gas tariffs increased by 50 percent on January 1, 2012.
  - Annual estimated savings of 1.4 percentage points of GDP.
  - Aluminum industry mostly affected but remains profitable and competitive given still relatively low gas prices.
- Iran:
  - 20 percent of the revenue from the end‑2010 price increases was to be set aside to provide support for enterprise restructuring and efforts to reduce energy intensity.
  - Authorities reviewed more than 12,000 enterprises; 7,000 were selected to receive some form of targeted assistance (including direct assistance and limited sales of fuels at partially subsidized rates).
  - Assistance to enterprises remained very limited during implementation.
- Egypt (Box 5.2):
  - Natural gas and fuel oil were available for Egyptian companies at less than 40 percent of the cost recovery price in 2011.
  - Resulted in bias toward capital‑ and energy‑intensive industries and diversion of resources away from more energy‑efficient or labor‑intensive industries.
  - Even excluding the energy sector, almost 50 percent of the manufacturing sector is composed of high energy‑intensive industries; 15 percent represents low energy‑intensive industries; the rest are medium energy‑intensive industries.
  - Generous subsidies produced shortages and distribution inefficiencies: 60 percent of gas stations and most LPG cylinder deposits and distribution centers are publicly managed; retail prices of LPG cylinders rose to six times the official price in some episodes.
- Yemen:
  - Many industries are highly dependent on subsidized energy products; energy intensity (direct and indirect) is highest in electricity production, oil refining, light manufacturing, and water.

### Policy design to help firms adjust
- First‑best approach to help firms absorb higher input prices:
  - Improve the business climate and competitiveness.
  - Promote corporate restructuring.
  - Support energy efficiency and public transportation.
  - Train workers exiting noncompetitive industrial sectors.
- To encourage enterprise adaptation, governments should:
  - Firmly commit to phasing out subsidies to avoid creating expectations of bailouts.
  - Phase in removal gradually on a credible, preannounced path so firms have time to restructure.
- The removal of subsidies should:
  - Strengthen incentives for research and development in energy‑saving and alternative technologies.
  - Eliminate price distortions and improve allocation of resources toward more profitable investments.
  - Improve corporate governance of state‑owned hydrocarbon enterprises.

### Managing the political economy of subsidy reform
- Common obstacles:
  - Political mobilization bias: beneficiaries of reform (usually poorer households) are often less organized than those who lose out (middle class, vested corporate interests).
  - Lags in timing: costs of eliminating subsidies are immediate while benefits are realized with a lag, increasing risk of early opposition.
  - Weak administrative capacity: removal of price subsidies is relatively easy, but designing and implementing supporting measures (well‑targeted safety nets, communication) requires stronger capacity.
  - Long duration: multi‑step reforms over several years are vulnerable to coordinated resistance and to shocks (economic downturns, elections, commodity price spikes).
- Measures to make reforms more robust:
  - Build an objective case for reform using strengthened measurement systems, poverty surveys, and independent studies.
  - Increase transparency on how public resources are used and on the composition of subsidized prices; consider earmarking sparingly if mistrust exists.
  - Strengthen implementation capacity via appropriate institutional frameworks (independent price‑setting agencies, social agencies for safety nets).
  - Run communication campaigns well in advance, focusing on subsidy costs, benefits of alternatives, and peer comparisons.
  - Create coalitions of stakeholders who benefit from reform (disclose target groups for scaled up social programs).
  - Leverage regional coordination to contain cross‑border arbitrage and smuggling.
  - Embed subsidy reform in a wider reform plan to link savings to popular policies (for example, education or health).

### Conclusions and the way forward
- Key elements for successful subsidy reform in MENA:
  - A well prepared, executed, and followed‑through strategy; policymakers should not underestimate the resources and political capital needed.
  - Strong government ownership and commitment, consensus building, and communication to overcome resistance and mobilize supporters.
  - Establishment of social protection mechanisms prior to reform; remove subsidies gradually and accompany with scaled‑up, well‑targeted social safety nets (preferably targeted cash transfers or vouchers).
- Recommended actions for countries that have started reform:
  - Complete scaling‑up of well‑targeted social safety nets to better protect the vulnerable.
  - Set a clear timeline for gradually raising domestic prices to international levels to ensure predictability for consumers and producers.
  - For energy subsidy reform, introduce or more rigorously implement automatic price‑setting mechanisms (with smoothing features), tackle subsidies that cause losses to state‑owned electricity companies, and combine electricity tariff increases with sector restructuring to ensure greater access and better quality.
- For countries that have not started comprehensive reform:
  - Consider advantages of containing subsidies in both oil‑importing and oil‑exporting countries: reduce fiscal vulnerabilities, remove distortions that stifle labor‑intensive industries and employment creation, contain domestic overconsumption, and reduce environmental damage.
  - Use preparation time to improve transparency on subsidy costs and beneficiaries, and to gather household consumption and poverty data to build or improve social safety nets.
- Political timing and sequencing matter:
  - Manage social impacts carefully, especially in countries undergoing political transition.
  - Prioritize reform types and timing that balance fiscal and efficiency returns against social opposition (for example, postponing socially sensitive food subsidy reforms in favor of fuel price increases with less impact on the poor).
  - Good timing in scaling up social safety nets or introducing mitigating measures is crucial.

*International Monetary Fund.*

### References

### References

### Academic articles and working papers
- Adams, Richard H. Jr., 2002, “Self-Targeted Subsidies: The Political and Distributional Impact of the Egyptian Food Subsidy System,” Economic Development and Cultural Change, Vol. 49, No. 1, pp. 115–136.
- Alderman, Harold, 2002, “Subsidies as a Social Safety Net: Effectiveness and Challenges,” Social Protection Discussion Paper No. 0224 (Washington: World Bank).
- Alderman, Harold, and Kathy Lindert, 1998, “The Potential and Limitations of Self-Targeted Food Subsidies,” World Bank Research Observer, Vol. 13, No. 2, pp. 213–29.
- Arze del Granado, Javier, David Coady, and Robert Gillingham, 2010, “The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries,” IMF Working Paper No. 10/202 (Washington: International Monetary Fund).
- De Gregorio, Jose, 2012, “Commodity Prices, Monetary Policy, and Inflation,” IMF Economic Review, Vol. 60, No. 4, pp. 600–633.
- Gelbach, Jonah B., and Lant Pritchett, 2002, “Is More for the Poor Less for the Poor? The Politics of Means-Tested Targeting,” Topics in Economic Analysis and Policy, Vol. 2, No. 1, pp. 1–26.
- Grindle, Merilee S., and John W. Thomas, 1989, “Policy Makers, Policy Choices, and Policy Outcomes: The Political Economy of Reform in Developing Countries,” Policy Sciences, Vol. 22, No. 3–4, pp. 213–248.
- Manzoor, Davood, Asghar Shahmoradi, and Iman Haqiqi, 2012, “An Analysis of Energy Price Reform: a CGE Approach,” OPEC Energy Review, Vol. 36, Issue 1, pp. 35–54.
- Plante, Michael, 2014, “The Long-Run Macroeconomic Impacts of Fuel Subsidies,” Journal of Development Economics, No. 107, pp. 129–143.
- Spilimbergo, Antonio, Steve Symansky, and Martin Schindler 2009, “Fiscal Multipliers,” IMF Staff Position Note No. 09/11 (Washington: International Monetary Fund).

### IMF, World Bank, and multilateral reports and policy notes
- Baffes, John, Donald Mitchell, Elliot (Mick) Riordan, Shane Streifel, Hans Timmer, and William Shaw, 2009, Global Economic Prospects: Commodities at the Crossroads 2009 (Washington: World Bank).
- Bauer, Andreas, 2011, “Moving from Subsidizing Products to Protecting People: Strengthening Social Protection in MENAP,” World Economic and Financial Surveys: Regional Economic Outlook, pp. 44–49 (Washington: International Monetary Fund).
- Clements, Benedict, David Coady, Stefania Fabrizio, Sanjeev Gupta, Trevor Alleyne, and Carlo Sdralevich, 2013, Energy Subsidy Reform: Lessons and Implications (Washington: International Monetary Fund).
- Coady, David, Javier Arze del Granado, Luc Eyraud, Hui Jin, Vimal Thakoor, Anita Tuladhar, and Lilla Nemeth, 2012, “Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications,” TNM/12/03 (Washington: International Monetary Fund).
- Coady, David, Margaret Grosh, and John Hoddinott, 2004, “Targeting of Transfers in Developing Countries: Review of Lessons and Experiences,” World Bank Regional and Sectoral Studies (Washington: World Bank).
- Coady, David, Robert Gillingham, Rolando Ossowsky, John Piotrowski, Shamsuddin Tareq, and Justin Tyson, 2010, “Petroleum Product Subsidies: Costly, Inequitable and Rising,” IMF Staff Position Note No. 10/05 (Washington: International Monetary Fund).
- De Olivera, Adilson, and Tara Laan, 2010, Lessons Learned from Brazil’s Experience with Fossil-Fuel Subsidies and their Reform (Geneva: Institute for Sustainable Development, June).
- Espinoza, Raphael, and Abdelhak Senhadji, 2011, “How Strong are Fiscal Multipliers in the GCC? An Empirical Investigation,” IMF Working Paper No. 11/61 (Washington: International Monetary Fund).
- Espinoza, Raphael, Ghada Fayad, and Ananthakrishnan Prasad, 2013, The Macroeconomics of the Arab States of the Gulf (Oxford: Oxford University Press and International Monetary Fund).
- Fattouh, Bassam, and Laura El-Katiri, 2012, “Energy Subsidies in the Arab World,” Arab Human Development Report Research Paper Series (London: United Nations Development Programme).
- Guillaume, Dominique, Roman Zytek, and Mohammad Reza Farzin, 2011, “Iran—The Chronicles of the Subsidy Reform,” IMF Working Paper No. 11/167 (Washington: International Monetary Fund).
- Gupta, Sanjeev, 2000, Manual on Best Practices in Price-Subsidy Reform (Washington: International Monetary Fund).
- International Monetary Fund, 2011, Regional Economic Outlook: Middle East and Central Asia (Washington, April).
- International Monetary Fund, 2012, Costly Mideast Subsidies Need Better Targeting, IMF Survey, May 14.
- International Monetary Fund, 2013, Regional Economic Outlook: Middle East and Central Asia (Washington, November).
- International Monetary Fund, 2014, “Algeria: 2013 Article IV Consultation,” IMF Country Report No. 14/32 (Washington: International Monetary Fund).
- Komivies, Kristin, Jon Halpern, Vivien Foster, Quentin Wodon, and Roohi Abdullah, 2007, “Utility Subsidies as Social Transfers: An Empirical Evaluation of Targeting Performance,” Development Policy Review, Vol. 25, No. 6, pp. 659–79.
- Komives, Kristen, Vivien Foster, Jonathan Halpern, and Quentin Wodon, 2005, “Water, Electricity and the Poor: Who Benefits from Utilities Subsidies?” Directions in Development Series (Washington: World Bank).
- Krane, Jim, 2013, Subsidy Reform in the Gulf Monarchies, presentation (Cambridge: University of Cambridge, May).
- Lahn, Glada, Paul Stevens, and Felix Preston, 2013, “Saving Oil and Gas in the Gulf,” Chatham House Report (London: The Royal Institute of International Affairs, Chatham House, August).
- Lang, Kerry, Peter Wooders, and Kati Kulovesi, 2010, “Increasing the Momentum of Fossil-Fuel Subsidy Reform: A Roadmap for International Cooperation,” IISD Trade, Investment and Climate Change Series (Winnipeg: International Institute for Sustainable Development, June).
- Plante, Michael, 2014, “The Long-Run Macroeconomic Impacts of Fuel Subsidies,” Journal of Development Economics, No. 107, pp. 129–143.
- Ruta, Giovanni, 2005, “Deep Wells and Shallow Savings: The Economic Aspect of Groundwater Depletion in MENA Countries,” Background paper to “Making the Most of Scarcity: Accountability for Better Water Management Results in the Middle East and North Africa,” MENA Development Report (Washington: World Bank).
- Silva, Joana, Victoria Levin, and Matteo Morgandi, 2012, “Inclusion and Resilience: The Way Forward for Social Safety Nets in the Middle East and North Africa,” MENA Development Report (Washington: World Bank).
- Spilimbergo, Antonio, Steve Symansky, and Martin Schindler 2009, “Fiscal Multipliers,” IMF Staff Position Note No. 09/11 (Washington: International Monetary Fund).
- Swedish International Development Cooperation Agency, 2010, “Environmental and Climate Change Policy Brief–MENA.” Environmental and Climate Change Analysis by Gunilla Ölund Wingqvist and Olof Drakenberg at the request of Sida (Att: Hazme Akyol) (Gothenburg: Environmental Economics Unit (EEU), University of Gothenburg).
- UN Environment Programme, 2003, Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms (Washington: United Nations Foundation).
- Vagliasindi, Maria, 2013, Implementing Energy Subsidy Reforms: Evidence from Developing Countries (Washington: World Bank).

### Case studies, country analyses, and regional studies
- Beaton, Christopher, Ivetta Gerasimchuk, Tara Laan, Kerryn Lang, Damon Vis-Dunbar, and Peter Wooders, 2013, A Guidebook to Fossil-Fuel Subsidy Reform for Policy-Makers in Southeast Asia (Manitoba: International Institute for Sustainable Development).
- Commander, Simon, 2012, “A Guide to the Political Economy of Reforming Energy Subsidies,” Policy Paper No. 52 (Bonn: Institute for the Study of Labor, IZA).
- De Olivera, Adilson, and Tara Laan, 2010, Lessons Learned from Brazil’s Experience with Fossil-Fuel Subsidies and their Reform (Geneva: Institute for Sustainable Development, June).
- Fattouh, Bassam, and Laura El-Katiri, 2012, “Energy Subsidies in the Arab World,” Arab Human Development Report Research Paper Series (London: United Nations Development Programme).
- Guillaume, Dominique, Roman Zytek, and Mohammad Reza Farzin, 2011, “Iran—The Chronicles of the Subsidy Reform,” IMF Working Paper No. 11/167 (Washington: International Monetary Fund).
- Krane, Jim, 2013, Subsidy Reform in the Gulf Monarchies, presentation (Cambridge: University of Cambridge, May).
- Lahn, Glada, Paul Stevens, and Felix Preston, 2013, “Saving Oil and Gas in the Gulf,” Chatham House Report (London: The Royal Institute of International Affairs, Chatham House, August).
- Manzoor, Davood, Asghar Shahmoradi, and Iman Haqiqi, 2012, “An Analysis of Energy Price Reform: a CGE Approach,” OPEC Energy Review, Vol. 36, Issue 1, pp. 35–54.
- Salehi-Isfahani, Djavad, Bryce Wilson Stucki, and Joshua Deutschmann, 2013, “The Impact of Iran’s Subsidy Reform on Households: Evidence from Survey Data,” September.
- World Bank, 2005, Egypt–Toward a More Effective Social Policy: Subsidies and Social Safety Net (Washington: World Bank).
- World Bank, 2007a, “Arab Republic of Egypt Poverty Assessment Update,” World Bank Other Operational Studies No. 7642 (Washington: World Bank).
- World Bank, 2007b, “Making the Most of Scarcity: Accountability for Better Water Management in the Middle East and North Africa,” MENA Development Report (Washington: World Bank).
- World Bank, 2008, The Political Economy of Policy Reform: Issues and Implications of Policy Dialogue and Development Operations (Washington: World Bank).
- World Bank, 2010a, “Arab Republic of Egypt––Poverty in Egypt 2008–2009: Withstanding the Global Economic Crisis” World Bank Report No. 60249-EG (Washington: World Bank).
- World Bank, 2010b, Egypt’s Food Subsidies: Benefit Incidence and Leakages (Washington: World Bank).
- World Bank, 2010c, Subsidies in the Energy Sector: An Overview—Background Paper for the World Bank Group Energy Sector Strategy (Washington: World Bank, July).
- World Bank/UN Development Program Energy Sector Management Assistance Program, 2005, Household Energy Supply and Use in Yemen, Volumes I and II (Washington: World Bank).

### Technical guidance, evaluations, and other resources
- HelpAge International, 2012, “Electronic Payment for Cash Transfer Programmes.” Available via the Internet: www.pension-watch.net.
- International Institute for Sustainable Development, 2012, “Reforming Fossil-Fuel Subsidies to Reduce Waste and Limit CO2 Emissions while Protecting the Poor,” APEC Project No. EWG11/2010 (Singapore: Asia Pacific Economic Cooperation).
- International Labor Organization, Social Security Inquiry Database. Available via the Internet: http://www.ilo.org/dyn/ilossi/ssimain.home?p_lang=en.
- Koplow, Doug, 2009, “Measuring Energy Subsidies Using the Price-Gap Approach: What Does It Leave Out?” IISD Trade, Investment and Climate Change Series (Winnipeg: International Institute for Sustainable Development).
- McGinley, Shane, 2010, “Dubai Water and Electricity Costs to Rise Around 15% in 2011,” Arabian Business.
- Organization for Economic Cooperation and Development, 2009, The Political Economy of Reform: Lessons from Pensions, Product Markets, and Labour Markets in Ten OECD Countries, by William Tompson in collaboration with Robert Price (Paris: Organization for Economic Cooperation and Development).
- Reuters, 2013, “Morocco Fuel Subsidy Cuts May Trim Growth in 2013, 2014,” September 17.
- Silva, Joana, Victoria Levin, and Matteo Morgandi, 2012, “Inclusion and Resilience: The Way Forward for Social Safety Nets in the Middle East and North Africa,” MENA Development Report (Washington: World Bank).
- U.S. Department of Energy, 2012, Advanced Manufacturing Office. Available via the Internet: http://www1.eere.energy.gov/manufacturing/resources/industries.html.
- UN Environment Programme, 2003, Energy Subsidies: Lessons Learned in Assessing their Impact and Designing Policy Reforms (Washington: United Nations Foundation).

*Source: _1403mcd - References*

### Annex 1.

### Annex 1

### A. Fuel Subsidy Reforms

- Indonesia 2005
  - Reform Triggers: Fiscal pressure and a negative current account balance were the main causes of the 2005 reform as Indonesia became a net oil importer in 2004.
  - Time and Scope of the Reform: The government undertook two large fuel price increases in 2005. As a result, the price of diesel fuel doubled and that of kerosene nearly tripled. In 2008, with international fuel prices at their peak, petroleum product subsidies reached 2.8 percent of GDP. Fuel prices were raised by 29 percent, on average, and were later reduced as international prices started to fall, though remaining above their preincrease levels. The government also ceased paying subsidies to larger industrial electricity consumers.
  - Communication and Mitigating Measures: There had been considerable discussion among domestic stakeholders of subsidy reform during the tenure of the previous government, plus a commitment to eliminate fossil fuel subsidies as a G-20 member. The need for reform was explained and communicated. Mitigating measures were introduced, including unconditional monthly cash transfer payments targeted at poor households, health insurance for the poor, school operational assistance, and expanded rural infrastructure support. Indonesia also initiated a program to phase out the use of kerosene in favor of LPG in 2007.
  - Role of IMF and Other Partners: Technical assistance from other development partners supported the poverty survey needed to prepare the cash transfer program.
  - Outcomes: Protests again took place in opposition to the reform, but with less intensity than in 1998 and 2003. In 2011, fuel subsidies were around 2.2 percent of GDP.

- Iran 2010
  - Reform Triggers: The reform was motivated by the authorities’ broader structural reform agenda to foster growth and job creation.
  - Time and Scope of the Reform: Despite an initial sharp increase, gradual adjustment in prices was a key design feature of the reforms, which planned to increase domestic prices over a five-year period to 90 percent of international prices. In the first phase of the reform, the prices of all major petroleum products and natural gas, as well as electricity, water, and bread, were substantially increased.
  - Communication and Mitigating Measures: The reform was preceded by an extensive public relations campaign to educate the population on the growing costs of low energy prices and on the benefits expected from the reform. About 80 percent of the revenue from price increases was to be redistributed to households as bimonthly cash transfers. The remaining balance of the revenue from price increases was to provide support for enterprise restructuring, with a view to reducing their energy intensity. Multitier tariffs on electricity, natural gas, and water were used to moderate the impact of the price increases on small users, mostly the poor.
  - Role of IMF and Other Partners: The IMF provided advice on macroeconomicpolicies and certain reform design aspects in the context of staff visits.
  - Outcomes: Despite a good start at the end of 2010, the implementation of the second phase of the reform program was postponed in late 2012 due to concerns over its financing and the deteriorating macroeconomicsituation.

- Jordan 2005
  - Reform Triggers: Jordan had been subsidizing petroleum products for many years, but the fuel bill in the budget rose sharply to 5.9 percent of GDP in 2005 following the loss in 2003 of low-cost oil supplies from Iraq.
  - Time and Scope of the Reform: In 2005, the government implemented a series of price increases by up to 68 percent to limit the budgetary impact.
  - Communication and Mitigating Measures: The authorities announced a plan to eliminate fuel subsidies by 2007, to be followed by the introduction of an automatic formula-based fuel price adjustment mechanism. During the reform, the minimum wage was increased and cash transfers were given to low-income households. The government also increased funding to the National Aid Fund, which provides cash transfers to the poor.
  - Role of IMF and Other Partners: The IMF provided technical assistance on the distributional effects of eliminating petroleum subsidies in 2005 and 2011. The National Aid Fund was also supported by the World Bank.
  - Outcomes: By 2008, fuel prices were tracking international prices via a monthly automatic pricing regime with full pass-through of international prices to domestic fuel prices. Following rising international oil prices, regional unrest, and social pressures, pass-through under the fuel pricing mechanism ceased in January 2011. In November 2012, fuel subsidies were eliminated and in January 2013, the monthly fuel price adjustment mechanism was resumed.

- Mauritania 2008
  - Reform Triggers: The reform was motivated by a fiscal expansion after the oil discovery in 2005 and spikes in international fuel and food prices.
  - Time and Scope of the Reform: In late June 2008, the government increased the prices of petroleum products by 17.5–20 percent.
  - Communication and Mitigating Measures: No particular public communication strategy was implemented. No specific mitigating measures were introduced in the context of this fuel subsidy reform episode.
  - Role of IMF and Other Partners: Mauritania had a PRGF arrangement during 2006–09. The program did not have fuel price–related conditionality.
  - Outcomes: The one-off price adjustment triggered protests, which contributed to a climate of political instability that culminated in a military coup in August 2008. The increase was reversed in November 2008.

- Mauritania 2011
  - Reform Triggers: The reform was motivated by the large increases in international fuel and food prices in 2011, which led to further fiscal pressures.
  - Time and Scope of the Reform: The government introduced in May 2012 a new diesel price formula, following a simplified cost structure. Despite substantial increases in international fuel prices, the rigorous application of the new simplified automatic fuel price formula on a biweekly basis helped bring domestic fuel prices up to international levels by June 2012.
  - Communication and Mitigating Measures: No particular public communication strategy was implemented. In 2011, the Mauritanian authorities introduced emergency relief measures to mitigate the impact on the poor of higher international fuel prices and a drought.
  - Role of IMF and Other Partners: Mauritania had an ECF arrangement with the IMF from March 15, 2010–June 25, 2013. Technical assistance was provided to conduct poverty and social impact analysis.
  - Outcomes: By and large, international prices were followed domestically, and the government has consistently been able to maintain prices at international levels.

- Nigeria 2012
  - Reform Triggers: The rationale for subsidy removal was that (1) fixed prices led to a huge, unsustainable subsidy burden, (2) fuel subsidies mostly benefitted the rich, (3) weak subsidy administration led to leakages, (4) subsidy costs diverted resources away from investment in critical infrastructure, (5) subsidies discouraged competition and stifled private investment in downstream petroleum, and (6) the huge price disparity encouraged smuggling to neighboring countries.
  - Time and Scope of the Reform: On January 1, 2012, the price of gasoline was raised to a cost recovery level—a 117 percent increase. The price of kerosene, a cooking fuel used mainly by poorer households, was not changed.
  - Communication and Mitigating Measures: The main plank in the government’s campaign for the subsidy removal was the Subsidy Reinvestment and Empowerment Program. It summarized the government’s case for subsidy removal, spelled out how much the federal government and states and local governments stood to gain from the subsidy removal, and announced how the federal government would spend the money saved. The Subsidy Reinvestment and Empowerment program outlined a variety of social safety net programs to mitigate the impact of the subsidy removal on the poor segment of the population. These included urban mass transit, maternal and child health services, public works, and vocational training.
  - Role of IMF and Other Partners: Nigeria did not have an IMF arrangement at the time of the reform. Fuel subsidy reduction was discussed in the context of the 2011 Article IV Consultations.
  - Outcomes: The price increase came as a surprise and set off widespread protests across the country. On January 15, the price increase was partly reversed but it would still represent a 40 percent increase over its end-2011 level.

- Poland 1996
  - Reform Triggers: Poland sought to harmonize its VAT regime to the European Union ahead of its accession. This required bringing the reduced VAT rate of 7 percent on energy products, introduced at the time of the VAT launch in 1993, to the basic rate of 22 percent. In addition, the reduced VAT rate on energy products implied foregone fiscal revenues.
  - Time and Scope of the Reform: The reform was started in 1996 and involved increasing the VAT rate on energy products in three stages. The VAT rate on energy products was increased to 12 percent in 1996, to 17 percent in 1997, and to 22 percent in 1998. The rate was maintained thereafter.
  - Communication and Mitigating Measures: No particular public communication strategy was implemented. The National Housing Fund provided credit at low interest rates to finance the modernization of heating sources.
  - Role of IMF and Other Partners: Poland had an SBA with the IMF at the time of the reform. While the SBA was formally expiring in March 1996, it was fully repaid in 1995 and the program did not have conditionality on energy prices.
  - Outcomes: The VAT rate increases were implemented as scheduled through 1998.

- Senegal 1998
  - Reform Triggers: The government had introduced LPG subsidies in 1987 to provide incentives to consumers to substitute the use of charcoal with LPG and thus reduce deforestation. But by the mid-1990s, the budgetary costs of the LPG subsidy had increased significantly, reaching 0.5 percent of GDP in 1997.
  - Time and Scope of the Reform: A gradual reform of LPG subsidies was begun in 1998. The reform aimed at phasing out LPG subsidies by 2002 through annual price increases of 20 percent.
  - Communication and Mitigating Measures: No particular public communication strategy was implemented. No specific mitigating measures were introduced in the context of the LPG subsidy reform.
  - Role of IMF and Other Partners: Senegal had a PRGF arrangement with the IMF from 1998–2002. The program did not include fuel price–related conditionality.
  - Outcomes: The reform broadly achieved its objectives. LPG prices were gradually increased by 20 percent annually during 1998–2001. However, plans to completely phase out subsidies were put on hold in 2002, and the last planned 20 percent price increase was not implemented. Overall, the LPG subsidy reform removed about 80 percent of the subsidies.

- Syria 2008
  - Reform Triggers: Subsidy reform was part of a broader push for gradual but wide-ranging economic reforms. These reforms were motivated by the decline in oil production, high world energy prices, and the transition from a centrally controlled to a social market economy.
  - Time and Scope of the Reform: Diesel prices were increased to a level that eliminated about 55 percent of the gap between domestic and international prices in 2008. Historically, diesel accounted for about two-thirds of total energy subsidies. The reform produced savings of about 7 percent of GDP in implicit subsidies in 2008, with compensatory measures amounting to about 4.5 percent of GDP.
  - Communication and Mitigating Measures: The authorities publicly committed to fuel subsidy reform prior to the recent uprising. They announced plans to dismantle Syria’s remaining energy subsidies and allow prices to gradually rise to market levels in the context of the 11th five-year plan (2011–15). Public wages were increased by 25 percent in 2008. The authorities also issued diesel coupons, allowing the purchase of 1,000 liters per household at a subsidized price of SP 9 per liter in 2008. These coupons were replaced in 2009 by targeted cash transfers of SP 10,000.
  - Role of IMF and Other Partners: The IMF provided advice on reforming petroleum price subsidies in a Selected Issues Paper in the context of the 2006 Article IV Consultation. The World Bank provided technical assistance on fuel subsidies in 2007 and an update in 2008. However, the authorities only partially adopted these recommendations.
  - Outcomes: Due to political turmoil and civil unrest, reforms were halted or partially reversed in early 2011; however, according to press reports, after international sanctions were imposed in the spring of 2011 and government revenues faltered, the government dismantled the country’s social safety net and raised fuel (and food) prices to cut back on subsidies.

- Yemen 1995
  - Reform Triggers: After the end of the civil war, the government launched a financial adjustment and structural reform program in early 1995 in the context of an IMF-supported SBA. Yemen’s main goal in subsidy reform has been to improve its fiscal position, while paying due attention to social considerations.
  - Time and Scope of the Reform: In 1995–96, the government implemented more price increases, which affected four products; gasoline increased by 80 percent, diesel by 100 percent, kerosene by 189 percent; and LPG increased in two steps (first by 123 percent and then by 85 percent). However, prices in dollar terms remained well below their 1994 levels. During 2000–04, the government increased the price of diesel again by 30 percent in two consecutive years. Still, in dollar terms it remained below its level of a decade earlier.
  - Communication and Mitigating Measures: No specific communication strategy was implemented. The Social Welfare Fund was established in 1996 and started providing conditional cash transfers to the poor. Other mitigating measures included conversion to less expensive fuels. For example, the government promoted the conversion from kerosene to LPG for residential use starting in the early 2000s.
  - Role of IMF and Other Partners: An SBA arrangement with the IMF was in place and envisaged a ceiling on subsidy spending. The Social Welfare Fund was partly financed with donor resources.
  - Outcomes: Throughout the 1994–2004 period, the depreciation of the currency wiped out all the gains from domestic price increases. Spending on fuel subsidies remained around 5 percent of GDP in 2000 compared to 6.1 percent in 1995, reflecting higher global oil prices.

- Yemen 2005
  - Reform Triggers: Fiscal pressures from subsidies became unsustainable, with spending on fuel subsidies reaching 8.7 percent of GDP in 2005.
  - Time and Scope of the Reform: This reform aimed at gradually adjusting domestic prices over the medium term. In July 2005, domestic prices increased by 130 percent on average. This led to violent protests, and the government had to partially reverse it. However, the net price adjustment remained substantial at 71 percent for gasoline, 106 percent for diesel, 119 percent for kerosene, and 7 percent for LPG. There was no increase in the price of mazot.
  - Communication and Mitigating Measures: The government acknowledged the need for reform in its third development plan for poverty reduction (2005–10) but did not undertake a public information campaign. The Social Welfare Fund continued to be used to provide cash transfers to the poor, but in the 2005 subsidy reform episode, it took three years to approve a social protection law allowing for more streamlined application for benefits and increase monthly transfers.
  - Role of IMF and Other Partners: This reform was based on a World Bank study and IMF policy advice.
  - Outcomes: The initial relative success of the fuel price adjustments was cancelled by the spike in commodity prices in later years. Thus, the subsidy bill remained high, at almost 9 percent of GDP in 2005.

- Yemen 2010
  - Reform Triggers: The objective of this reform episode was to reduce fiscal pressures, following the record-high fiscal deficit of 10 percent of GDP in 2009.
  - Time and Scope of the Reform: In 2010, the prices of gasoline, diesel, and kerosene were gradually increased by about 30 percent on average, and the price of LPG was doubled over a period of nine months. The government also introduced some efficiency-promoting measures, such as replacing diesel-fueled power generators with gas-fueled ones. In late 2010, Yemen started to differentiate diesel prices by charging higher prices to commercial users. In 2011/12, because of fiscal pressures, the government increased the price of gasoline by 66 percent and doubled the prices of diesel and kerosene.
  - Communication and Mitigating Measures: The public information campaign component of the strategy was not adopted. Instead, the government implemented small, surprise increases. The 2010 reform was almost simultaneously mitigated by a 50 percent expansion of the coverage of the cash transfer scheme. Coverage of the Social Welfare Fund was expanded to 500,000 additional families. Other mitigating measures included conversion to less expensive fuels. In 2010, the diesel-fueled electricity plants were converted to natural gas.
  - Role of IMF and Other Partners: The reform strategy was based on technical assistance from the World Bank, which drew lessons from the experience of the previous reforms. This was a part of the reforms supported by an IMF ECF arrangement.
  - Outcomes: Subsidies declined from 8.2 percent of GDP in 2010 to 7.4 percent in 2011.

### B. Food Subsidy Reforms

- Iran 2010
  - Reform Triggers: By 2008, the domestic prices of wheat flour were out of line with international prices (the price was less than 1 cent per kg in Iran).
  - Time and Scope of the Reform: In 2010, Iran moved the wheat flour price closer to international levels, which required an increase from less than 1 cent per kg to 28 cents, as part of a comprehensive package of energy and food subsidy reform.
  - Communication and Mitigating Measures: The government launched a comprehensive consensus-buildingprocess involving all key stakeholders (government, parliament, academia, business, etc.). The president, parliament, and government interacted extensively with the public for nearly 18 months from the start of the reform. Generalized cash transfers were put in place in the context of the reform of fuel and food prices. These transfers were eventually received by 95 percent of the population.
  - Role of IMF and Other Partners: The IMF provided advice on macroeconomicpolicies and certain reform design aspects, during staff visits.
  - Outcomes: Domestic prices are moving toward international prices. Flour consumption declined by 10 percent from 2009 to 2011, and smuggling to neighboring countries stopped.

- Jordan 1990–96
  - Reform Triggers: Fiscal pressures had become unsustainable, with spending on food subsidies (wheat, rice, milk, sugar, and barley) reaching 3 percent of GDP by 1990.
  - Time and Scope of the Reform: In the first phase in 1990, rationing of sugar, rice, and powdered milk was introduced. In the second phase, subsidies were gradually reduced through a number of upward adjustments in administered prices and eliminated by 1997.
  - Communication and Mitigating Measures: In the first phase of the reform (1990), not much outreach with the public took place. In a second phase (1996), parliament approved a budget that put a cap on food subsidy costs. The government compensated the poor with cash transfers through the National Aid Fund established in 1993.
  - Role of IMF and Other Partners: The IMF provided advice in the context of SBA (1990) and EFF (1996) arrangements, which included conditionality on subsidy reform.
  - Outcomes: By 1997, Jordan had implemented all aspects of the wide-ranging subsidy reform program resulting in net gains of 3 percent of GDP. However, food subsidies were reintroduced in 2005 to mitigate the impact of fuel subsidy reforms implemented over the same period.

- Mexico 1990–1999
  - Reform Triggers: In the mid-1980s, Mexico embarked on a broad set of market-oriented reforms. These included replacing guaranteed prices for certain crops (corn, beans, rice, wheat, barley, sorghum, soybean, cotton seed, sunflower, copra, and sesame) and establishing a more targeted food subsidy
  - Time and Scope of the Reform: Mexico controlled the price of a number of basic food products, while subsidizing some of the fundamental inputs used in their production. The most important of these general food subsidies was the one for tortillas (the focus of this analysis), which entailed subsidizing maize prices to mills while controlling the retail price for the processed
  - Communication and Mitigating Measures: The authorities showed strong commitment by taking ownership of policy measures outlined in a World Bank program. However, no information is available on whether there was a specific public communication campaign. In parallel with the reduction of general food
  - Role of IMF and Other Partners: This reform was undertaken in the context of two World Bank agricultural adjustment loans (1988–90 and 1991–93).
  - Outcomes: After a sharp increase in tortilla prices following the lifting of price controls, the Commerce Ministry and tortilla producers reached an agreement at the beginning of 1999 to discourage price gouging by setting a ceiling for

*Annex 1.*

### Annex 1

### Annex 1

### Overview of Food Subsidy Reform Episodes
- The annex documents episodes of food subsidy reform across multiple countries, highlighting reform triggers, time and scope of the reform, communication and mitigating measures, the role of the IMF and other partners, and outcomes.

### Mexico (selected measures across 1990s–2007)
- 1990: Guaranteed prices eliminated for all crops (except corn and beans).
- 1990: Vouchers distributed to urban consumers to buy tortillas at below-market prices (tortibonos); replaced in 1991 by a targeted subsidy on tortillas.
- Targeted subsidy later phased out and integrated into the conditional cash transfer program Progresa.
- January 1, 1999: Subsidies on tortillas were eliminated and price controls were lifted.
- Late 2006–early 2007: Rapid spike in tortilla prices prompted a voluntary “price pact” where retailers agreed to cap tortilla and corn flour prices; pact renewed at least twice.
- Communication/mitigation: targeted subsidies and integration into Progresa; voluntary retailer agreements used during price spikes.
- IMF/partners: Not detailed for Mexico in the supplied text.
- Outcome: Transition from generalized guaranteed prices to targeted measures and integration into a conditional cash transfer program.

### Morocco (1999 reform)
- Trigger: Cost of food subsidies reached 1.6 percent of GDP in 1999.
- Measures implemented in 1999:
  - Eliminated sugar subsidies for processing industries (mainly food and beverage industries).
  - Began liberalizing cooking oil prices.
  - Significantly reduced import tariffs on these products.
- Mitigating measures:
  - Set up a social development agency in 1999.
  - Introduced a targeted compensatory scheme for poor households.
  - Provided assistance to small farmers affected by removal of customs protections.
- IMF/partners:
  - The World Bank provided technical assistance in assessing effects and helped with design.
- Outcome:
  - Budget cost of food subsidies reduced from 1.8 percent of GDP in the early 1990s to 0.8 percent in early 2000.

### Tunisia (1983 episode)
- Trigger: Budgetary costs of generalized food subsidy program about 3 percent of GDP in 1983; significant leakages to the nonpoor.
- Measures at end-December 1983:
  - Government doubled prices of cereals and cereal products, including bread, semolina, pasta, and couscous.
  - Price hikes announced only 24 hours in advance; consumers surprised.
  - Minimum wages increased by 1.5 dinars (US$2.20) per month per person.
- Communication/mitigation: No involvement (no mitigating communication).
- Outcome: Reform abandoned after only a month in January 1984 following widespread riots and protests.

### Tunisia (1991–93 gradual reform)
- Trigger: Budgetary cost of generalized food subsidies reached about 4 percent of GDP in 1990; subsidies found regressive.
- Measures (1991–93):
  - Gradual move from generalized to self-targeted system.
  - Subsidies shifted to products consumed mostly by the poor (per the 1990 Household Expenditure Survey): lower-quality bread, generic edible oil, powdered milk.
  - Subsidies on food products mostly consumed by the rich were eliminated.
- Communication/mitigation:
  - Built general consensus via awareness campaign and well-timed announcements of food price adjustments.
  - Press coverage emphasized the fiscal weight of food subsidies.
  - Construction workers’ salaries and the minimum wage were increased.
  - Social safety nets strengthened: increased cash transfers to needy families and expanded school feeding programs.
- IMF/partners:
  - Reform undertaken in context of an EFF arrangement (program did not include food price conditionality).
  - World Bank provided technical support for design and implementation.
- Outcome: Improved targeting of the food subsidy program and declined fiscal costs.

### Yemen (1996)
- Trigger: Post–civil war financial adjustment and structural reform program launched early 1995 in context of IMF-supported SBA.
- Measures (January 1996 onward):
  - Base prices for wheat and wheat flour increased by 150 percent in January 1996.
  - Medium-term strategy to phase out food subsidies over five years.
- Communication/mitigation:
  - No specific public communication strategy implemented.
  - Social Welfare Fund established in 1996, providing cash transfers to the poor, partly donor-financed.
- IMF/partners:
  - SBA arrangement in place with a ceiling on subsidy spending.
  - IMF provided technical assistance focusing on wheat subsidy incidence in 1996.
- Outcome: Gradual price adjustments; as of May 1999, no remaining subsidies on wheat or flour.

### Cross-cutting observations from Annex 1 episodes
- Common reform triggers:
  - High fiscal cost of generalized subsidies (examples: 1.6 percent of GDP in Morocco 1999; 3 percent of GDP in Tunisia 1983; 4 percent of GDP in Tunisia 1990).
  - Regressivity and large leakages to nonpoor households.
- Typical reform instruments:
  - Elimination or reduction of universal price supports.
  - Shift to targeted subsidies or cash transfers.
  - Price liberalization and tariff reductions for certain processed food inputs.
- Typical mitigating measures:
  - Targeted compensatory schemes for poor households.
  - Establishment or strengthening of social safety nets and cash transfer programs.
  - Wage adjustments and expansion of school feeding programs in some cases.
- Role of partners:
  - World Bank provided technical assistance in multiple cases (design, assessment).
  - IMF involvement ranged from technical assistance to conditionality within programs (SBA, EFF), though specifics vary by episode.
- Outcomes:
  - Successful reforms combined gradual implementation, targeted mitigation, and communication/consensus-building.
  - Sudden, poorly communicated large price increases faced strong social backlash (Tunisia 1983).
- Implementation lessons evident in episodes:
  - Gradualism, targeting, communication, and social protection expansion are central to sustaining subsidy reform.
  - Fiscal savings from subsidy reduction were often substantial and measurable (e.g., Morocco reduced food subsidy cost from 1.8 percent of GDP to 0.8 percent of GDP in early 2000).

*International Monetary Fund. Annex 1 (selected episodes of food subsidy reform).*

### Annex 2

### Annex 2

### Mauritania
- Initial conditions
  - Fiscal pressures were the main driver of the energy subsidy reform starting in 2008.
  - Spending increased unsustainably after the discovery of oil reserves in 2005—which later proved very minor—and spikes in international fuel and food prices in 2008 and 2011.
  - Before 2011, prices of petroleum products were controlled by the government and set according to a price structure and formula intended to be adjusted monthly whenever changes in international prices or the exchange rate exceeded ±5 percent; in practice adjustments were discretionary and ad hoc.
  - The fiscal cost of the food subsidies under the EMEL (the government’s emergency response plan) was about 1.1 percent of GDP in 2012.
  - Residential and commercial electricity tariffs were among the lowest in the region and estimated at more than 30 percent below cost recovery prices.
  - According to a 2008 household survey, almost 80 percent of all energy subsidies were captured by the richest 40 percent of households.

- Recent reforms
  - Post-coup, subsidy reform and wage bill containment were central to the government’s fiscal adjustment under the 2010 Extended Credit Facility (ECF).
  - In May 2012, the government introduced a new diesel price formula, agreed with petroleum distribution companies, following a simplified cost structure; domestic fuel prices were brought in line with international prices in 2012.
  - Electricity sector measures: recapitalized SOMELEC; clarified financial relationship by (1) paying its electricity bills on time, (2) providing SOMELEC with required subsidies at regular intervals, and (3) drawing up a plan for settlement of arrears accumulated through end-2010.
  - Low electricity rates for the services sector were aligned with medium-voltage electricity rates starting at the beginning of 2012.
  - A new credit line from the Islamic Development Bank helped limit SOMELEC’s recourse to bank borrowing at high interest rates.

- Reform plans
  - The government intends to introduce a cap of 3 percent on any one adjustment to the diesel pricing formula to smooth domestic retail price volatility.
  - Based on an electricity tariff study completed in 2013, tariffs should increase on average by 30 percent to recover costs.
  - Authorities have engaged a consulting firm to establish a performance contract between SOMELEC and the government.
  - A comprehensive strategy to diversify energy generation away from fuel is planned to result in improved electricity supply from 2014 onwards.
  - Authorities plan to restructure national electricity and gas companies to improve management and efficiency.

- Mitigating measures
  - Emergency response: In 2011, authorities introduced emergency relief measures totaling about UM 40 billion (3.4 percent of GDP), mostly reversible; expansion of subsidized food shops from 1,000 to 1,223, mostly in rural areas.
  - Cash transfers: In 2012, a cash transfer program targeted 10,000 vulnerable households in Nouakchott; each household receives UM 15,000 monthly, or $51 (equivalent to half of the legal minimum wage) via bank transfer. A nationwide cash transfer program with the World Bank was being developed to be deployed after the results of the 2014 household survey.
  - Broader social protection: A social protection strategy developed with UNICEF was adopted by the Council of Ministers in early June 2013; plans to strengthen free school cafeterias, food-for-work, and support for pregnant women; developing a national food security strategy for 2015 to 2030 and an associated national investment program.
  - Emergency food subsidies used during the 2011–12 drought were generally ill-targeted and costly; authorities are transforming the emergency food program into a permanent well-targeted program.

- Communication and ownership
  - Technical assistance on subsidy reform from the IMF in 2011 fed into policy dialogue.
  - There was an ECF from March 15, 2010, to June 30, 2013.
  - There was no real public communication strategy during earlier reform efforts.

- Macroeconomic impact
  - Inflation fell to 3.4 percent in December 2012, significantly lower than projected, as regular increases in retail fuel prices were more than offset by the decline in food prices (food makes up 49 percent of the consumption basket).

- Challenges
  - It may be difficult to increase electricity tariffs before the upcoming presidential elections planned for June 2014, which will take place in a difficult political environment.

### Morocco
- Initial conditions
  - The subsidy bill reached 6 percent of GDP in 2011 and 6.5 percent in 2012, with fuel subsidies representing the bulk of subsidy expenditure.
  - Increases in the wage and subsidy bills led to a widening of the fiscal deficit to 7.4 percent of GDP in 2012, compared to 6.7 percent in 2011.
  - The current account deficit widened from 8.1 percent of GDP in 2011 to 9.7 percent of GDP in 2012, due to higher fuel and food imports, lower tourism receipts, and lower remittances from Europe.
  - Studies indicate about 43 percent of total food and fuel subsidies go to the top quintile of the population, while the poorest quintile receives only 9 percent.

- Recent reforms
  - On June 2, 2012, administered prices were increased: diesel from 7.15 dirham/liter to 8.15 dirham/liter; gasoline from 10.18 dirham/liter to 12.18 dirham/liter; fuel oil from 3,678 dirham/ton to 4,666.04 dirham/liter.
  - In July 2013, a mechanism was adopted to index domestic prices of fuel, gasoline, and diesel to world prices with a hedging operation for diesel; the indexation uses a rolling moving average of the last two months and triggers automatic adjustment when the difference between implied world prices and actual domestic prices exceeds 2.5 percent.
  - On September 15, 2013, partial indexation began, resulting in diesel prices increasing by 8.5 percent, gasoline by 4.8 percent, and fuel by 14.2 percent.
  - Starting in January 2014, subsidies on gasoline and industrial fuel were eliminated; their prices are reviewed twice a month.
  - In February 2014, the per-unit subsidy of diesel was reduced, with additional quarterly reductions announced for the remainder of 2014.
  - The 2014 budget includes a reduction by 0.2 percent of GDP of food subsidies.
  - The quota of subsidized wheat was reduced by 6 percent.

- Reform plans
  - Objective of reducing untargeted subsidies to 3 percent of GDP by 2016.
  - The 2014 budget seeks to reduce the subsidy envelope to 3.7 percent of GDP through full-year impact of price indexation and new measures.

- Mitigating measures
  - Gradual strengthening of the social safety net and targeting to vulnerable groups.
  - Expansion under the 2014 finance law of the coverage of the TAYSSIR education program and of the RAMED health insurance program; increased resources for the social cohesion fund to finance assistance for widows in precarious situations and for the disabled.
  - Measures in support of public transport to ease the impact of fuel price hikes.
  - National Initiative for Human Development (established in 2005): dual geographic and social targeting; in phase 1 (2005–10), 22,000 projects initiated to benefit 5 million citizens (approximately 15 percent of the population).
  - TAYSSIR: conditional cash transfers to prevent school dropout in five targeted geographical areas; student beneficiaries increased from 88,000 in 2009 to 450,000 in 2011.
  - RAMED: pilot introduced in 2008 expected to generalize to 8.5 million people, including 4 million poor inhabitants and 4.5 million vulnerable people, in addition to 160,000 prisoners, homeless persons, and orphans.

- Communication and ownership
  - A Precautionary Liquidity Line was agreed for August 3, 2012, to August 2, 2014.
  - Large information campaign, discussions with parties and parliament, and extensive press coverage.
  - World Bank supported technical assistance on subsidy reform in 2008.

- Impact on productive sector and macroeconomy
  - Development of alternative energy sources, notably solar energy.
  - Inflation remained low but increased to 2.8 percent at end-May 2013, in part due to the June 2012 fuel price increases.
  - Monetary policy aims to remain vigilant against potential second-round inflation effects from domestic energy price increases.
  - Current account improved in 2013 partly because energy imports fell due to volume and price effects, weaker nonprimary growth, higher domestic alternative energy production in early 2013, and lower international prices.

- Challenges
  - Continued regional tensions and domestic social pressures make forging consensus on difficult reforms challenging.

### Sudan
- Initial conditions
  - July 2011 secession of South Sudan caused Sudan to lose three-quarters of its oil output, almost 60 percent of its fiscal revenues, and about two-thirds of its current account payment capacity.
  - Subsidies cover mostly petroleum products and, to a limited extent, food items and electricity.
  - Petroleum product subsidies were a heavy budgetary burden; they accounted for about three-quarters of tax revenues in 2011 and rose following the secession.
  - Fuel subsidies disproportionately benefit the rich: the poorest 20 percent receive about 3 percent of the subsidy, whereas the richest 20 percent receive more than 50 percent.

- Recent reforms
  - June 2012 package increased pump prices: gasoline +47 percent, diesel +23 percent, LPG +15 percent; and fully liberalized jet fuel. These adjustments are estimated to have reduced fuel subsidies by about 25 percent.
  - At end-2012, overall subsidies were estimated at 2.8 percent of GDP with the following breakdown: (1) fuel subsidies equivalent to 2.1 percent of GDP, (2) food subsidies representing 0.4 percent of GDP, and (3) electricity subsidy equivalent to 0.3 percent of GDP.
  - Despite the June 2012 increases, subsidies remained high, mainly due to a 66 percent devaluation of the exchange rate, which made the cost of crude oil in local currency more expensive.
  - In June 2012, the authorities also liberalized the price of sugar.
  - On September 22, 2013, corrective measures increased domestic petroleum prices at the pump as follows: diesel: 74.7 percent; gasoline: 68 percent; LPG: [text cut off in source].

- Macroeconomic context and impacts
  - The secession shock prompted authorities to put together a medium-term emergency strategy.

*Italic: Source: _1403mcd - Annex 2*

### 66.7 percent. This represents a weighted increase of  68 percent.

### _1403mcd - 66.7 percent. This represents a weighted increase of  68 percent.

### Sudan — Reform plans and implementation
- Reform objective: eliminate subsidies by 2017 to coincide with the expiration of the oil flows triggered by the transitional financial arrangements signed between Sudan and South Sudan.
- Policy stance: revised subsidy policy based on a gradual approach.
- Complementary measures: strengthen the social safety net through higher social spending and a more coherent and better-targeted social safety net.
- IMF support: policy advice and technical assistance in reviewing the structure of fuel subsidies, recommending steps to better target price increases, and implementing social safety nets; further technical assistance planned for upcoming phases.

### Sudan — Mitigating measures
- Salary adjustment: an average of about SDG 100 (or $17.5) for all civil servants.
- Monthly grant: SDG 150 for about 500,000 urban poor families.
- Health insurance: reduction in the premium for about 500,000 poor families.
- Education/transportation: exemption of school and transportation fees for disabled people.
- Risk: the wage increase in the civil service could be inflationary because of contagion effects on the rest of the economy.

### Sudan — Communication, ownership, and challenges
- Program approved: comprehensive reform program approved in late June 2012 building on the Three-Year Emergency Program.
- Program elements: exchange rate devaluation of about 66 percent, increase in key taxes, sharp reduction in fuel subsidies, cuts in nonpriority spending, and strengthening of social safety nets.
- Challenges: high and rising inflation and unstable political conditions have hampered swift implementation of subsidy reform.

### Tunisia — Background and recent reforms
- Initial conditions: moderate recovery in 2012 after sharp economic decline following the revolution; fiscal space reduced though public debt at sustainable levels.
- Subsidy magnitude: price subsidies on basic food, oil products, electricity, and transport approximate 5 percent of GDP.
- Energy subsidy trend: cost of energy subsidies tripled from an average of 0.9 percent of GDP before 2010 to 2.8 percent in 2012.
- Distributional issue: highest-income households benefit almost 40 times more from energy subsidies than the lowest-income ones.
- Recent measures:
  - March 2013: increased prices of gasoline and diesel products, and electricity tariffs, by an average of 7–8 percent.
  - September 2012: prior 7 percent increase on same products.
  - January 1, 2014: energy subsidies to cement companies reduced by half by increasing electricity tariff by 47 percent and natural gas prices by 35 percent, with view to eliminating them by June 2014.
  - January 1, 2014 and May 2014: tariffs and natural gas prices for medium- and low-voltage consumers increased in a two-step process (10 percent as of January 1, 2014; further 10 percent in May 2014).
  - January 2014: new automatic price formula for gasoline to allow convergence to international prices over time, but without a smoothing mechanism.

### Tunisia — Reform plans, mitigating measures, and macro impact
- Reform plan: authorities committed to increasing fuel prices by a further 6 percent on average in July 2014.
- Mitigating measures:
  - New lifeline electricity tariff to protect households consuming less than 100 kwh per month.
  - New social housing program for needy families.
  - Increased income tax deduction for the poorest households.
  - Targeted household strategy to be launched by July 2014 expanding PNAFN beneficiaries from 220,000 to 250,000 and broadening the definition of vulnerable households.
  - Creation of a unified registry and improved targeting system for PNAFN (under preparation).
- Macroeconomic impact:
  - Headline inflation increased from 5.1 percent in January 2012 to 6.4 percent in April 2013, mainly due to higher food and energy prices.
  - Core inflation remained stable at about 5 percent even after increases in electricity prices.

### Tunisia — Communication and implementation support
- Program engagement: Tunisia signed an SBA for June 07, 2013–June 06, 2015.
- Technical assistance: World Bank and IMF assisted in analyzing welfare and social impact of reforms and in designing the automatic fuel price formula for gasoline.
- Planned actions: additional programs and a new communication campaign to explain subsidy reform will be carried out prior to any new price increases.

### Yemen — Initial conditions and background
- Fiscal position: budget deficit widened to 6.4 percent of GDP in 2012.
- Subsidy levels: subsidy bill at more than 9 percent of GDP in 2012 (peak was 14 percent of GDP in 2008).
- Composition: this amount constitutes two-thirds of hydrocarbon revenue and exceeds total infrastructure and social expenditures.
- Distributional incidence: about 40 percent of fuel subsidies go to the richest 20 percent of households, while only 25 percent go to households in the bottom 40 percent (based on updates of the 2005 Household Budget Survey data).
  - For gasoline specifically, households in the bottom 40 percent receive only 10 percent of the direct value of the subsidy.
- Sectoral distortions: electricity production benefits from high subsidies; electricity tariffs are on average 50 percent below cost recovery.

### Yemen — Recent reforms and mitigation
- 2010 reforms (with IMF ECF arrangement and World Bank technical assistance):
  - Prices of gasoline, diesel, and kerosene gradually increased by about 30 percent on average.
  - Price of LPG doubled over nine months.
  - Efficiency measures: replacing diesel-fueled power generators with gas-fueled ones; differentiating diesel prices by charging higher prices to commercial users (late 2010).
- 2011–12 adjustments:
  - Price of gasoline increased by 66 percent; diesel and kerosene prices doubled.
  - In 2013, diesel prices were unified across users, including the electricity sector.
- Mitigating measures implemented:
  - Conditional cash transfers via the Social Welfare Fund (established 1996); coverage expanded and transfers increased in steps.
  - Public Works Project providing short-term employment and support for small-scale contractors.
  - Social Fund for Development promoting community and small and microenterprise development.
  - Fuel conversion: promoted conversion from kerosene to LPG for residential use; 2010 conversions of diesel-fueled electricity plants to natural gas.

### Yemen — Communication, impact, and challenges
- Communication: during the 2010 reform, public information campaign was not adopted; small, surprise increases were implemented instead.
- IMF role: technical assistance mission in 2012 assessed impact of energy subsidies and scenarios for reform ensuring social protection.
- Macroeconomic impact: inflation (eop) reached nearly 23 percent in 2011 from 12.5 percent in 2010, mainly reflecting supply constraints from fuel and goods shortages.
- Risks and challenges:
  - Possible popular unrest in a highly unstable political situation.
  - Strong macroeconomic impact given the large adjustments still needed.
  - Need to differentiate increases of fuel products to alleviate immediate impact on the poor.
  - Need to implement mitigating measures to soften the impact on productive sectors dependent on low energy prices.

*Source: IMF, Subsidy Reform in the Middle East and North Africa (Annex material).*

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