An inflated energy subsidies bill is not only Egypt's problem. Governments' spending on making energy products more affordable for their populations represents 2.25 per cent of world GDP and eight per cent of governments' revenues, according to a recently released IMF report. Entitled “Energy Subsidy Reform — Lessons and Implications”, the report estimates that energy subsidies amount to a staggering $1.9 trillion annually worldwide. Speaking on the release of the report, IMF First Deputy Managing Director David Lipton said that 20 countries maintained pre-tax energy subsidies that exceeded five per cent of their GDP, while in other emerging and developing countries the share of scarce government resources spent on subsidies remained “a stumbling block” to higher growth. Energy subsidies, according to the report, also reinforce inequality because they mostly benefit upper-income groups, which are the biggest consumers of energy. “On average, the richest 20 per cent of households in low- and middle-income countries capture 43 per cent of fuel subsidies,” Lipton said. The report is based on studying 28 cases of energy subsidy reforms in different countries. Some countries have more than one case, as in Indonesia where four cases are covered by the study. In 14 of the cases reported on there was an IMF-supported reform programme in place, and subsidies reform was conditional in 12 of those cases. Some of the programmes showed a decline in the percentage of subsidies relative to GDP in countries applying reforms or turning state-owned energy enterprises to profit. Out of the 28 reform episodes looked at, 12 were classified as successes, 11 as partial successes, often because of reversals or incomplete implementation, and five as unsuccessful. Through analysing the 28 cases covered, the report indicates those policies that made the success of the reform programmes achievable. In Iran, successful fuel subsidy reform took place in 2010 as a result of a comprehensive reform programme that incorporated clear objectives, compensating measures, and a timetable for reform, preceded by an extensive public-relations campaign. Moreover, bank accounts were opened for most citizens prior to the reform and compensating cash transfers deposited into these accounts preceding the implementation of price increases. The successful cases also included a clear assessment of the impact of the reforms. In Ghana in 2005, the government commissioned an independent poverty and social impact analysis to assess winners and losers from fuel subsidies and subsidy removal. A far-reaching communications campaign can also help to generate broad political and public support for subsidy reform, the report found. Experiences showed that the likelihood of success almost tripled with strong public support and proactive public communications. The case of Uganda is proof of this, since in this country the government focused on explaining the cost of the electricity subsidy and its incidence to the public. As a consequence, a large proportion of the country's media considered the raising of tariffs to be a pro-poor measure, guaranteeing public approval. Phasing-in price increases and sequencing them are also prerequisites for a successful reform programme, as is shown in cases presented in the report. The success of reforms depends on the magnitude of the price increases required to eliminate subsidies, the political and social context in which reforms are being undertaken, and the availability of social safety nets. In the cases looked at, successful and partially successful subsidy reforms required about five years on average. In Namibia, subsidies were removed steadily according to a three-year reform plan. In Brazil, the government pursued a step-by-step approach to reforming petroleum subsidies during the 1990s in order to minimise opposition from key interest groups. According to the report, price increases can also be sequenced differently across energy products. For example, petroleum price increases can initially be larger for products that are consumed more by higher-income groups and by industry, such as gasoline and jet kerosene. In Brazil, petroleum product reforms started by liberalising prices for petroleum products used primarily by industry, followed by a more extensive liberalisation of gasoline prices and finally diesel prices. Improving the efficiency of state-owned enterprises can reduce the fiscal burden of the energy sector. Energy producers often receive substantial budgetary resources, both in terms of current and capital transfers, to compensate for inefficiencies in production and revenue collection. Improvements in efficiency can strengthen the financial position of these enterprises and reduce the need for transfers. Another means to sell the reform programmes is to adopt measures to mitigate the impact of energy price increases on the poor. Out of the 28 reform episodes looked at in the report, 18 relied on targeted mitigating measures including the expansion of public works, education, and health programmes in poor areas. Cash transfers targeting the poorest can also be used. When cash transfers are not feasible, other programmes can be expanded, including school meals, public works and reductions in education and health-user fees. Kenya subsidised connection costs in place of electricity price subsidies, which helped expand coverage to poor households and those in remote and rural areas. While ballooning subsidies are a burden on the international economy, reducing them has to be done carefully in order to limit effects on the poor. “Subsidy reform is needed, but it is better to do it the right way, than to do it right away,” Lipton said. The report also highlights a number of problems that hinder the success of subsidy reform programmes. The lack of data about the magnitude and shortcomings of subsidies top the list, such as when populations are unaware of how domestic energy prices compare with international market prices and the consequences of low energy prices for both the budget and economic efficiency. In these cases, it can be hard for them to accept reforms that could increase their cost of living. Lack of government credibility is another problem, as populations in countries with a history of corruption, lack of transparency in the conduct of public policy, and perceived inefficiencies in public spending, have little confidence that governments will use savings from subsidy reforms wisely. Concerns about the effects of reforms on the poor are one of the main impediments to subsidy reforms. Such reforms can negatively affect the real incomes of the poor, both through higher energy costs of cooking, heating, lighting, and personal transport, as well as in terms of higher prices for other goods and services, including food. Things worsen in countries where there is no well-functioning social safety net. Other problems include fears of impacts on inflation, international competitiveness, and the volatility of domestic energy prices. There can also be opposition from specific interest groups benefiting from the status quo, and weak macroeconomic conditions make reforms harder to swallow, the report said.
