Subsidies not a sustainable way of helping the poor - IMF

Published March 27th, 2013 - 08:34 GMT
The IMF's Middle East and North Africa director has said subsidies are not the best way to help the poor
The IMF's Middle East and North Africa director has said subsidies are not the best way to help the poor

Masood Ahmed, director of the International Monetary Fund's (IMF) Middle East and Central Asia Department, advocates cutting energy subsidies in the region, arguing that it is costly and inefficient in helping the poor.

He claims energy subsidies eat up a large part of governments’ budgets and leads to higher deficit and debt levels. "Does this well-intended social protection policy represent the most efficient way to channel aid to the most vulnerable? The answer is no!" Ahmed said in a paper issued by the IMF on Tuesday.

Ahmed advices governments in the region to form a comprehensive energy sector reform plan that includes clear long-term objectives, an assessment of the impact and a consultation with those affected.

He also suggests implementing measures that compensate the poor who could be negatively affected. "There are many ways to subsidise the poor, either by subsidising the goods they consume, targeting regions where they live, or by providing them lifeline tariffs and cash transfers," Ahmed proposed.

According to the IMF, energy subsidies in the region amounted to about $240 billion, more than 8.5 percent of regional GDP in 2011.

Egypt’s government is working on a program to cut the country's energy subsidy bill by 50 percent over the coming five years. The government has already raised prices of electricity and natural gas for households as well as for industry and commerce.

It has also revealed its intentions to cut gasoline and diesel subsidies. Public opinion and many economists link the government decision with a $4.8 billion finance agreement the government is seeking to conclude with the IMF.

Egypt’s energy subsidy bill for the current fiscal year 2012/13 is expected to amount LE110 billion ($16.3 billion).

Ahmed's opinion was published along with a paper entitled “Energy Subsidy Reform” in which IMF mainly focused on the fiscal imbalances that such subsidies can aggravate.

© Copyright Al-Ahram Publishing House

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