## _1403mcdsum

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---

### Overview
- Subsidies—especially on energy products—are widely used across the Middle East and North Africa (MENA) and their cost has been rising in response to recent commodity price increases and greater social demands.
- Reform momentum has increased mainly in oil-importing countries but also in some oil exporters.
- To ensure sustained progress, countries that have started reform need to: complete scaling-up of social safety nets, implement automatic price-setting mechanisms, and restructure the energy sector.
- Countries that have not yet undertaken reform should raise transparency about subsidy costs and prepare social safety net infrastructure.

### Scale and Fiscal Cost
- Social safety nets (excluding subsidies) represent on average less than 0.7 percent of GDP in public spending.
- Pre-tax energy subsidies in 2011 cost $236.5 billion, equivalent to 48 percent of world subsidies (8.6 percent of regional GDP).
- In 2011, pre-tax energy subsidies amounted to $204 billion (8.4 percent of GDP) in oil exporters and $33 billion (6.3 percent of GDP) in oil importers.
- For 2012, available estimates for diesel and gasoline show pre-tax subsidies on these products were 3.8 percent of regional GDP.
- Food subsidies in 2011 were about $22 billion or 0.7 percent of GDP.

### Distributional Effects and Economic Costs
- Generalized price subsidies are commonly used as substitutes for cash transfers because social safety nets are underdeveloped.
- Generalized subsidies are neither well targeted nor cost-effective as a social protection tool:
  - In 2008 in Egypt, the poorest 40 percent of the population received only 3 percent of gasoline subsidies.
- Economic and welfare costs of energy subsidies:
  - Distort relative prices, fostering overconsumption and resource misallocation.
  - Reduce exportable resources in energy-exporting countries and weaken current accounts in energy-importing countries.
  - Adverse impacts on traffic congestion, health, environment, and inefficient specialization toward less labor-intensive, high energy-intensive industries.
  - Discourage investment in the energy sector and encourage smuggling and black market activity.
  - Hurt long-term growth potential via price distortions, under-investment in labor-intensive and energy-efficient sectors, crowding out of productive spending on human and physical capital, and higher inequality.

### Recent Reform Experience in MENA
- Since 2011, most progress has been made in Egypt, Jordan, Mauritania, Morocco, Sudan, Tunisia, and Yemen.
- Common features of recent reforms:
  - Based on well-prepared plans as part of wider fiscal consolidation; sometimes supported by public communication campaigns.
  - Some countries saw gains from price increases eroded by high international oil prices and exchange rate depreciations.
  - Jordan, Mauritania, Morocco, and Tunisia adopted price-adjustment mechanisms to align domestic fuel prices with international levels.
  - Reforms were accompanied by compensation measures—either targeted cash transfers or less effective measures such as public sector wage increases.
  - IMF supported reforms through policy advice and technical assistance.
- Progress in oil exporters has been more limited but growing:
  - Iran (2010) launched comprehensive reform still under way.
  - Saudi Arabia (2010) raised average electricity price for non-household users.
  - Bahrain, Dubai, Qatar have started raising fuel and electricity prices.
  - Kuwait is planning to eliminate diesel subsidies.
- Major obstacles to reform:
  - Short-term inflationary effects and adverse impacts on competitiveness of industries that rely on subsidized inputs.
  - Sheer size of subsidy programs in many oil exporters.
  - Political stability concerns and perceptions of reforms as potential sources of unrest.
  - Political economy resistance from organized groups of potential losers and lack of trust in state capacity to manage social safety nets.

### Elements of Successful Subsidy Reform
- Factors that have often accompanied successful episodes:
  - Thorough preparation, including careful planning of pace and breadth of reform, with technical assistance.
  - Strong government commitment achieved by building pro-reform consensus through communication and coalition building.
  - Introduction or scaling-up of effective social safety nets to mitigate impacts on the vulnerable.
  - Favorable economic conditions, particularly relatively high economic growth.
  - A multiparty government that builds consensus for reform among different parties.

### Policy Recommendations and Next Steps
- For countries that have started reform:
  - Complete the scaling-up of well-targeted social safety nets.
  - Set a clear timeline for raising domestic prices gradually to international levels.
  - Depoliticize pricing by introducing or rigorously implementing automatic price-setting mechanisms—possibly with smoothing features.
  - Tackle subsidies in the energy sector, which may require restructuring of state-owned electricity companies.
- For countries that have not started reform:
  - Improve transparency on subsidy costs and beneficiaries.
  - Gather household consumption and poverty data to establish or improve social safety nets.
  - Start preparation, consensus building, and implementation planning now because well-designed reforms can take several years.
- For all countries:
  - Address the social impact of reform carefully, especially where political transitions are underway (notably Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen).
  - Consider sequencing that balances fiscal and efficiency returns with mitigating measures—for example, starting with price increases that have less impact on the poor and postponing phasing out socially sensitive food subsidies until mitigating measures are in place.
  - Time scaling-up of existing social safety nets or introduction of targeted mitigating measures to minimize social disruption.

### Selected Country Measures and Mitigating Actions
- Egypt:
  - 2012–13: 95 octane gasoline prices increased by 112 percent for high-end vehicles; fuel oil for non-energy-intensive industries by 33 percent and for energy-intensive industries by 50 percent.
  - January 2013: electricity prices to households increased by 16 percent on average; natural gas and fuel oil prices for electricity generation rose by one-third.
  - July 2014: fuel and natural gas prices increased by 40-80 percent; electricity tariffs increased by 10-50 percent.
  - Mitigating: electricity tariffs unchanged for the lowest consumption bracket; additional social expenditure envisaged in the 2014/15 budget to cover more social security pension beneficiaries.
  - Next steps: introduce further price increases aiming to eliminate subsidies in five years; finalize smartcard distribution; expand priority social programs and targeted cash transfers.
- Jordan:
  - June 2012: electricity tariffs increased for selected sectors and households.
  - November 2012: elimination of fuel subsidies.
  - January 2013: monthly fuel price adjustment mechanism resumed.
  - August 2013 and January 2014: electricity tariffs increased by 7.5–15 percent for selected consumers; January 2015: electricity tariffs increased by up to 15 percent for selected consumers; February 2015: authorities repealed half of the 2015 electricity tariff increase.
  - Mitigating: cash transfers to families below a certain income threshold (70 percent of the population) if oil prices are above $100.
  - Next steps: gradually increase electricity tariffs, diversify energy import mix, develop new energy sources with lower generation costs.
- Mauritania:
  - May 2012: new automatic diesel price formula introduced to bring domestic fuel prices to international levels.
  - January 2012: electricity tariffs increased for the service sector.
  - August 2014: gas prices increased ranging from 15 to 50 percent; another price hike expected end-2014 to remove the gas subsidy.
  - Mitigating: gradual reorientation of social safety nets toward well-targeted cash transfer schemes (progress slow).
  - Next steps: ensure diesel pricing formula is applied automatically; eliminate electricity subsidy; develop a nationwide cash transfer program and strengthen public sector governance in emergency response.
- Morocco:
  - June 2012: diesel prices increased by 14 percent, gasoline by 20 percent, industrial fuel by 27 percent.
  - September 2013: partial indexation mechanism implemented; diesel increased by 8.5 percent, gasoline by 4.8 percent, and fuel by 14.2 percent.
  - February 2014: gasoline and industrial fuel (excluding fuel used for electricity generation) subsidies eliminated; prices reviewed twice a month.
  - June 2014: removal of subsidies on industrial fuel used for electricity generation.
  - February, April, and July 2014: per-unit subsidy of diesel reduced.
  - January 2015: diesel subsidy completely eliminated.

### Section 2 — Overview: subsidy reform, social safety nets, and complementary measures
- Gradual strengthening of the existing social safety nets and their targeting to vulnerable groups through improvements in education, health, and assistance to poor widows and the disabled.
- Supporting public transport.
- Direct transfers to electricity company to last four years while measures are taken to ensure the financial viability of the company.
- Continue implementing the comprehensive subsidy reform (remaining products are butane gas as well as sugar and flour) combined with cash transfers and other social assistance programs.
- Gradually phase out the remaining subsidies on petroleum products and other staples while strengthening the social safety net through higher social spending and a more coherent and better targeted social net.
- Gradually phase out energy subsidies by increasing electricity tariffs and fuel prices. Continue expanding and improving the targeted household support strategy. Operationalize the unified registry system for vulnerable households.
- Adopt a fuel pricing mechanism that would allow domestic prices to move in response to increases in international prices. This will help reduce further energy subsidies. Strengthen support through an expansion of the SWF. Increase in infrastructure investment.

### Sudan — recent price adjustments and social measures
- June 2012: gasoline, diesel, and liquefied petroleum gas prices increased by 47 percent, 23 percent, and 15 percent, respectively; jet fuel liberalized.
- September 2013: diesel prices increased by 74.7 percent, gasoline by 68.0 percent, and liquefied petroleum gas by 66.7 percent.
- Public sector wage increase of about SDG100.
- A monthly grant allocation of SDG150 for about 500,000 urban poor families (end-2014 target).
- Lower health insurance premium for about 500,000 poor families.
- An exemption of school and transportation fees for disabled people.
- Next steps: Gradually phase out the remaining subsidies on petroleum products and other staples while strengthening the social safety net through higher social spending and a more coherent and better targeted social net.

### Tunisia — phased energy price increases and social protections
- September 2012: gasoline and diesel prices and electricity tariffs increased by 7 percent, on average.
- March 2013: further 7–8 percent price increase, on average for the same products.
- January 2014: energy subsidies to cement companies were reduced by half and then eliminated in June 2014.
- Electricity tariff and natural gas prices increased for medium and low-voltage consumers with a 10 percent rate hike in January 2014 and May 2014.
- July 2014: gasoline prices increased by 6.4 percent and diesel prices by about 7 percent.
- Mitigating measures:
  - 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 households.
  - Increase and expansion of the cash transfers program for poor families.
- Next steps: Gradually phase out energy subsidies by increasing electricity tariffs and fuel prices. Continue expanding and improving the targeted household support strategy. Operationalize the unified registry system for vulnerable households.

### Yemen — large fuel price adjustments and social fund expansion
- 2011–12: gasoline prices increased by 66 percent and diesel and kerosene prices doubled.
- 2013: diesel price unified across users, including the electricity sector.
- June 2014: private sector companies allowed to directly import diesel for their own use at international prices.
- July-September 2014: The prices of diesel and gasoline increased by 50 percent and 20 percent, respectively. These are net increases after the partial reversal of a larger adjustment introduced in July.
- Increase in the Social Welfare Fund transfers to the poor by 50 percent in December 2014.
- Coverage of the Social Welfare Fund (SWF) was expanded to 500,000 additional families.
- Next steps: Adopt a fuel pricing mechanism that would allow domestic prices to move in response to increases in international prices. Strengthen support through an expansion of the SWF. Increase in infrastructure investment.

### Oil Exporters — recent measures
- Kuwait:
  - In Jan-15, government raised diesel and kerosene prices (+50%) and instituted monthly price review mechanism.
  - n/a (Main Mitigating Measures)
  - n/a (Next Steps)
- Qatar:
  - Diesel prices up in May-14 by 50%.
  - Starting to improve desalination technologies and awareness of sustainable energy use.
  - n/a (Next Steps)
- United Arab Emirates (UAE):
  - Gasoline price highest in GCC (still below international levels). Abu Dhabi increased water (+170%) and electricity (+40%) tariffs in Jan-15.
  - n/a (Main Mitigating Measures)
  - n/a (Next Steps)

*International Monetary Fund — Middle East and Central Asia Department, October 2014*

### Section 1

### _1403mcdsum - Section 1

### Overview
- Subsidies—especially on energy products—are widely used across the Middle East and North Africa (MENA) and their cost has been rising in response to recent commodity price increases and greater social demands.
- Reform momentum has increased mainly in oil-importing countries but also in some oil exporters.
- To ensure sustained progress, countries that have started reform need to: complete scaling-up of social safety nets, implement automatic price-setting mechanisms, and restructure the energy sector. Countries that have not yet undertaken reform should raise transparency about subsidy costs and prepare social safety net infrastructure.

### Scale and Fiscal Cost
- Social safety nets (excluding subsidies) represent on average less than 0.7 percent of GDP in public spending.
- Pre-tax energy subsidies in 2011 cost $236.5 billion, equivalent to 48 percent of world subsidies (8.6 percent of regional GDP).
- In 2011, pre-tax energy subsidies amounted to $204 billion (8.4 percent of GDP) in oil exporters and $33 billion (6.3 percent of GDP) in oil importers.
- For 2012, available estimates for diesel and gasoline show pre-tax subsidies on these products were 3.8 percent of regional GDP.
- Food subsidies in 2011 were about $22 billion or 0.7 percent of GDP.

### Distributional Effects and Economic Costs
- Generalized price subsidies are commonly used as substitutes for cash transfers because social safety nets are underdeveloped.
- Generalized subsidies are neither well targeted nor cost-effective as a social protection tool:
  - In 2008 in Egypt, the poorest 40 percent of the population received only 3 percent of gasoline subsidies.
- Economic and welfare costs of energy subsidies:
  - Distort relative prices, fostering overconsumption and resource misallocation.
  - Reduce exportable resources in energy-exporting countries and weaken current accounts in energy-importing countries.
  - Adverse impacts on traffic congestion, health, environment, and inefficient specialization toward less labor-intensive, high energy-intensive industries.
  - Discourage investment in the energy sector and encourage smuggling and black market activity.
  - Hurt long-term growth potential via price distortions, under-investment in labor-intensive and energy-efficient sectors, crowding out of productive spending on human and physical capital, and higher inequality.

### Recent Reform Experience in MENA
- Since 2011, most progress has been made in Egypt, Jordan, Mauritania, Morocco, Sudan, Tunisia, and Yemen.
- Common features of recent reforms:
  - Based on well-prepared plans as part of wider fiscal consolidation; sometimes supported by public communication campaigns.
  - Some countries saw gains from price increases eroded by high international oil prices and exchange rate depreciations.
  - Jordan, Mauritania, Morocco, and Tunisia adopted price-adjustment mechanisms to align domestic fuel prices with international levels.
  - Reforms were accompanied by compensation measures—either targeted cash transfers or less effective measures such as public sector wage increases.
  - IMF supported reforms through policy advice and technical assistance.
- Progress in oil exporters has been more limited but growing: Iran (2010) launched comprehensive reform still under way; Saudi Arabia (2010) raised average electricity price for non-household users; Bahrain, Dubai, Qatar have started raising fuel and electricity prices; Kuwait is planning to eliminate diesel subsidies.
- Major obstacles to reform:
  - Short-term inflationary effects and adverse impacts on competitiveness of industries that rely on subsidized inputs.
  - Sheer size of subsidy programs in many oil exporters.
  - Political stability concerns and perceptions of reforms as potential sources of unrest.
  - Political economy resistance from organized groups of potential losers and lack of trust in state capacity to manage social safety nets.

### Elements of Successful Subsidy Reform
- Factors that have often accompanied successful episodes:
  - Thorough preparation, including careful planning of pace and breadth of reform, with technical assistance.
  - Strong government commitment achieved by building pro-reform consensus through communication and coalition building.
  - Introduction or scaling-up of effective social safety nets to mitigate impacts on the vulnerable.
  - Favorable economic conditions, particularly relatively high economic growth.
  - A multiparty government that builds consensus for reform among different parties.

### Policy Recommendations and Next Steps
- For countries that have started reform:
  - Complete the scaling-up of well-targeted social safety nets.
  - Set a clear timeline for raising domestic prices gradually to international levels.
  - Depoliticize pricing by introducing or rigorously implementing automatic price-setting mechanisms—possibly with smoothing features.
  - Tackle subsidies in the energy sector, which may require restructuring of state-owned electricity companies.
- For countries that have not started reform:
  - Improve transparency on subsidy costs and beneficiaries.
  - Gather household consumption and poverty data to establish or improve social safety nets.
  - Start preparation, consensus building, and implementation planning now because well-designed reforms can take several years.
- For all countries:
  - Address the social impact of reform carefully, especially where political transitions are underway (notably Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen).
  - Consider sequencing that balances fiscal and efficiency returns with mitigating measures—for example, starting with price increases that have less impact on the poor and postponing phasing out socially sensitive food subsidies until mitigating measures are in place.
  - Time scaling-up of existing social safety nets or introduction of targeted mitigating measures to minimize social disruption.

### Selected Country Measures and Mitigating Actions
- Egypt:
  - 2012–13: 95 octane gasoline prices increased by 112 percent for high-end vehicles; fuel oil for non-energy-intensive industries by 33 percent and for energy-intensive industries by 50 percent.
  - January 2013: electricity prices to households increased by 16 percent on average; natural gas and fuel oil prices for electricity generation rose by one-third.
  - July 2014: fuel and natural gas prices increased by 40-80 percent; electricity tariffs increased by 10-50 percent.
  - Mitigating: electricity tariffs unchanged for the lowest consumption bracket; additional social expenditure envisaged in the 2014/15 budget to cover more social security pension beneficiaries.
  - Next steps: introduce further price increases aiming to eliminate subsidies in five years; finalize smartcard distribution; expand priority social programs and targeted cash transfers.
- Jordan:
  - June 2012: electricity tariffs increased for selected sectors and households.
  - November 2012: elimination of fuel subsidies.
  - January 2013: monthly fuel price adjustment mechanism resumed.
  - August 2013 and January 2014: electricity tariffs increased by 7.5–15 percent for selected consumers; January 2015: electricity tariffs increased by up to 15 percent for selected consumers; February 2015: authorities repealed half of the 2015 electricity tariff increase.
  - Mitigating: cash transfers to families below a certain income threshold (70 percent of the population) if oil prices are above $100.
  - Next steps: gradually increase electricity tariffs, diversify energy import mix, develop new energy sources with lower generation costs.
- Mauritania:
  - May 2012: new automatic diesel price formula introduced to bring domestic fuel prices to international levels.
  - January 2012: electricity tariffs increased for the service sector.
  - August 2014: gas prices increased ranging from 15 to 50 percent; another price hike expected end-2014 to remove the gas subsidy.
  - Mitigating: gradual reorientation of social safety nets toward well-targeted cash transfer schemes (progress slow).
  - Next steps: ensure diesel pricing formula is applied automatically; eliminate electricity subsidy; develop a nationwide cash transfer program and strengthen public sector governance in emergency response.
- Morocco:
  - June 2012: diesel prices increased by 14 percent, gasoline by 20 percent, industrial fuel by 27 percent.
  - September 2013: partial indexation mechanism implemented; diesel increased by 8.5 percent, gasoline by 4.8 percent, and fuel by 14.2 percent.
  - February 2014: gasoline and industrial fuel (excluding fuel used for electricity generation) subsidies eliminated; prices reviewed twice a month.
  - June 2014: removal of subsidies on industrial fuel used for electricity generation.
  - February, April, and July 2014: per-unit subsidy of diesel reduced.
  - January 2015: diesel subsidy completely eliminated.

*International Monetary Fund — Middle East and Central Asia Department, October 2014*

### Section 2

### _1403mcdsum - Section 2

### Overview: subsidy reform, social safety nets, and complementary measures
- Gradual strengthening of the existing social safety nets and their targeting to vulnerable groups through improvements in education, health, and assistance to poor widows and the disabled.
- Supporting public transport.
- Direct transfers to electricity company to last four years while measures are taken to ensure the financial viability of the company.
- Continue implementing the comprehensive subsidy reform (remaining products are butane gas as well as sugar and flour) combined with cash transfers and other social assistance programs.
- Gradually phase out the remaining subsidies on petroleum products and other staples while strengthening the social safety net through higher social spending and a more coherent and better targeted social net.
- Gradually phase out energy subsidies by increasing electricity tariffs and fuel prices. Continue expanding and improving the targeted household support strategy. Operationalize the unified registry system for vulnerable households.
- Adopt a fuel pricing mechanism that would allow domestic prices to move in response to increases in international prices. This will help reduce further energy subsidies. Strengthen support through an expansion of the SWF. Increase in infrastructure investment.

### Sudan — recent price adjustments and social measures
- June 2012: gasoline, diesel, and liquefied petroleum gas prices increased by 47 percent, 23 percent, and 15 percent, respectively; jet fuel liberalized.
- September 2013: diesel prices increased by 74.7 percent, gasoline by 68.0 percent, and liquefied petroleum gas by 66.7 percent.
- Public sector wage increase of about SDG100.
- A monthly grant allocation of SDG150 for about 500,000 urban poor families (end-2014 target).
- Lower health insurance premium for about 500,000 poor families.
- An exemption of school and transportation fees for disabled people.
- Next steps: Gradually phase out the remaining subsidies on petroleum products and other staples while strengthening the social safety net through higher social spending and a more coherent and better targeted social net.

### Tunisia — phased energy price increases and social protections
- September 2012: gasoline and diesel prices and electricity tariffs increased by 7 percent, on average.
- March 2013: further 7–8 percent price increase, on average for the same products.
- January 2014: energy subsidies to cement companies were reduced by half and then eliminated in June 2014.
- Electricity tariff and natural gas prices increased for medium and low-voltage consumers with a 10 percent rate hike in January 2014 and May 2014.
- July 2014: gasoline prices increased by 6.4 percent and diesel prices by about 7 percent.
- Mitigating measures:
  - 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 households.
  - Increase and expansion of the cash transfers program for poor families.
- Next steps: Gradually phase out energy subsidies by increasing electricity tariffs and fuel prices. Continue expanding and improving the targeted household support strategy. Operationalize the unified registry system for vulnerable households.

### Yemen — large fuel price adjustments and social fund expansion
- 2011–12: gasoline prices increased by 66 percent and diesel and kerosene prices doubled.
- 2013: diesel price unified across users, including the electricity sector.
- June 2014: private sector companies allowed to directly import diesel for their own use at international prices.
- July-September 2014: The prices of diesel and gasoline increased by 50 percent and 20 percent, respectively. These are net increases after the partial reversal of a larger adjustment introduced in July.
- Increase in the Social Welfare Fund transfers to the poor by 50 percent in December 2014.
- Coverage of the Social Welfare Fund (SWF) was expanded to 500,000 additional families.
- Next steps: Adopt a fuel pricing mechanism that would allow domestic prices to move in response to increases in international prices. Strengthen support through an expansion of the SWF. Increase in infrastructure investment.

### Oil Exporters — recent measures (Table 2)
- Kuwait:
  - In Jan-15, government raised diesel and kerosene prices (+50%) and instituted monthly price review mechanism.
  - n/a (Main Mitigating Measures)
  - n/a (Next Steps)
- Qatar:
  - Diesel prices up in May-14 by 50%.
  - Starting to improve desalination technologies and awareness of sustainable energy use.
  - n/a (Next Steps)
- United Arab Emirates (UAE):
  - Gasoline price highest in GCC (still below international levels). Abu Dhabi increased water (+170%) and electricity (+40%) tariffs in Jan-15.
  - n/a (Main Mitigating Measures)
  - n/a (Next Steps)

*Source: _1403mcdsum - Section 2*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/pubs/ft/dp/2014/_1403mcdsum.pdf_