Middle class key to MENA energy subsidy reforms, speakers say

Countries in the Middle East and North Africa (MENA) are talking more openly about energy subsidy reforms, but governments need to pay closer attention to middle-class consumers’ concerns if they expect to make more progress, speakers said during a July 10 forum at the Atlantic Council.

“The middle class stands to lose more from not having subsidies than poor people,” said Daniela Gressani, Deputy Director of the International Monetary Fund’s Middle East and Central Asia Department. “They have invested in educating their children, and should support real job and economic growth.

“Subsidy reform is only part of a bigger economic picture that must include investment in infrastructure to make supplies more reliable,” Gressani said, adding, “A vibrant and happy middle class in the region is going to be necessary for real success.”

MENA countries’ energy subsidies are widespread and account for about half of the worldwide total, a March IMF report said. It estimated that pretax energy subsidies in the region—measured as the difference between world and domestic prices—cost about $237 billion in 2011. That equaled about 8% of regional gross domestic product, or 22% of government revenue, and accounted for 48% of total global energy subsidies, it said.

Countries in the region are either entering the second phase of energy subsidy reform “or at least thinking about it,” Gressani said. “We have seen a wave of gradual price increases in petroleum products, a more deliberate effort to discuss the costs of subsidies and the need to reform them, and a strong interest by energy exporting countries in tackling energy subsidies.”

‘Significant burdens’

Conceding that the idea might be provocative, Justin Dargin, the Saudi Aramco fellow and a Middle East and Energy Scholar at the University of Oxford, nevertheless said, “I believe the era of energy subsidization in the MENA region is dead. That does not mean the beast will stop kicking for some time. But there is increasing recognition that energy subsidies have imposed significant burdens on their economies.”

Deficits in the region’s energy exporting countries have grown significant the past few years because investments in mature natural gas fields to sustain production have declined as a result of subsidization, he maintained. Price subsidies also lead to overconsumption, which makes resource-rich countries less able to export oil and gas, promote industries that are more carbon-intensive, and ignore budgetary strains aggravated by the social welfare expansion in several states undergoing the Arab Spring, Dargin said.

“If you go back a few years, the average break-even price for MENA countries which export crude oil was $30-40/bbl,” compared with $100/bbl now, he said.

Gressani said, “While there’s been more interest in addressing the price subsidy problem, many which are only starting in the process are exporting countries. They also need to identify the costs of subsidies and benefits of reforms. They’ll also need to look at social safety nets for the most vulnerable segments of their populations, and focus their efforts in these political economy factors.”

‘Very heavy burden’

A third panelist, Malek Kabariti, a former Energy and Mineral Resources Minister in Jordan who participated via Skype, maintained, “I believe subsidies don’t help a country in any way.” He said the kingdom went through three energy price honeymoons, first when it got its crude supplies from Persian Gulf producers, then from Iraq, and most recently when it bought gas from Egypt.

“In Jordan, the main beneficiaries are the rich,” Kabariti said. “The government should take a courageous position and say this is not how it should be done. Unfortunately, it has not done that for the past few years. In the current gulf war and increase in prices of gas from Egypt, Jordan was under a very heavy burden.”

Jordan’s measures to remove product subsidies from products and award them directly to residents three times a year based on individual incomes were partly successful, he said. “Last year, we tried to move more aggressively, but we still should remove subsidies and increase the transition to renewable energy, especially since it now costs less than fossil fuels, particularly diesel fuel, from places like Iraq,” Kabariti said.

Dargin said, “The upper and professional classes may have more influence in the halls of government, but there’s greater fear of street protests against removing subsidies. Large-scale industrial users which grew fat on low gas prices don’t want to have to become more competitive because it would require significant capital outlays. Still, many of them are ready to pay higher prices if supplies were guaranteed. Some sort of framework of tax or financial grants for these industrial users to buy the necessary equipment that is more efficient possibly could work.”

Gressani said, “I believe the need for adequate social protection goes beyond specific population segments. So how do we address concerns of the portions which are not poor? A number of surveys about the middle class’s stake in subsidy reform identified the need for steady and predictable supplies, the importance for the government to be trusted to use savings from not having subsidies for important purposes, and the use of cash transfers to middle-class users to facilitate the transfer.”

There hasn’t been that much action so far, Gressani conceded. “We have seen increasing debate on how removing subsidies can be implemented,” she said, adding, “Is the beast dead? No. But I think the general atmosphere in the region has shifted from how and why this needs to be done to doing it in the best possible way that ensures the poor and middle-classes are protected and industries can benefit.”

Contact Nick Snow at nicks@pennwell.com.

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