In Morocco, Tunisia, Egypt, Jordan, and Syria—the Middle East and North Africa’s (MENA) oil importing countries (OIC)—budget deficits are on the rise, as are demands for employment, health, education, and social protection. Nonetheless, OIC governments continue to allocate a high share of government expenditure to consumption subsidies, crowding out investment in other crucial public services. Fuel subsidies, which account for the majority of consumption subsidies in Egypt, Morocco, and Syria, benefit the rich more than the poor. With oil prices rising and the OIC’s fiscal space having narrowed since the last price hike, the burden of these fuel subsidies on government budgets is growing more acute. Jordan, Syria, and, to some extent, Tunisia have cut down on them, but Egypt and Morocco continue to avoid reforms. Reforming the fuel subsidy system is inevitable, however, as fiscal room for them is no longer sufficient. By postponing action, policy makers are wasting valuable fiscal resources, engaging in regressive policies, and worsening their economic prospects.
The Heavy Burden of Consumption Subsidies
Though the OIC economies managed to expand amidst the global crisis—GDP growth ranged from 2.8 percent in Jordan to 5.2 percent in Morocco in 2009—their budget deficits increased as well, due to rescue packages and growing social demands. In 2009, the budget deficit averaged 4.1 percent of GDP across the five countries, reaching 7 percent of GDP in Egypt. Morocco and Tunisia, which had government balances close to zero in 2008, saw the balances deteriorate to an average of close to -3 percent of GDP in 2009.
Even with recent events in Greece underscoring the necessity of fiscal prudence, the pressure on government spending is rising. Nonetheless, consumption subsidies continue to absorb a sizeable amount of OIC government resources, crowding out expenditures in other key areas like health, education, and basic infrastructure. In Egypt, subsidies amounted to a remarkable 8 percent of GDP, on average, over the last four years—three times the government’s investment spending. Tunisia, Morocco, and Syria allocated an average of 3.2 percent of GDP to subsidies in 2009; the share in Jordan was also more than 3 percent of GDP between 2006 and 2009, though it is on a clear downward trend.
Fuel subsidies account for the majority of consumption subsidies in Egypt, Morocco, and Syria. Their share ranges from 60 to 95 percent, depending on the world oil price. Though politically popular, these subsidies pose three issues:
- Effect on the Poor: Existing studies show that the benefits of universal (that is, not targeted) fuel subsidies accrue to the rich more than the poor.
- Oil Consumption: By artificially lowering oil prices, subsidies promote fuel-intensive technologies and lead to over-consumption.
- Budget Volatility: Because they depend on international energy prices, the burden of fuel subsidies on the state budget is highly volatile. Amid the sharp oil price deterioration of 2009, for instance, subsidy expenditures fell to $9 billion, down from $16 billion in 2008, when prices were sky-high. As global growth resumes and the crude oil price rebounds, the burden is rising again. The average price over the first five months of 2010 was around $80 a barrel, compared with an average price of $62 in 2009.
Reforms in Jordan and Syria
Jordan, Syria, and, to some extent, Tunisia are ahead in their efforts to reform fuel subsidies:
- Jordan: An IMF study in 2005, which found that the poorest 20 percent of the country’s population received less than 10 percent of total fuel subsidies, while the richest 20 percent received more than 40 percent, helped the country make the case for phasing out fuel subsidies by 2008. Since then, Jordan has implemented an automatic price adjustment mechanism to pass world oil prices on to consumers.
- Syria: In 2008, the country increased the domestic market prices of most petroleum products, saving 7 percent of GDP in implicit subsidies. In parallel, the government issued coupons to each household for up to 1,000 liters of diesel at one-third of the market price. In 2009, targeted cash transfers, for which approximately half of Syrian households are eligible, replaced the coupons.
- Tunisia: In January of 2009, the country launched a new fuel pricing mechanism that partially reflects the movement of international oil prices in the domestic market.
In both Jordan and Syria, policy makers also adopted measures to mitigate the impact of higher fuel prices on low income households. Jordan increased the minimum wage and salaries for low-paid state employees. Government employees and pensioners earning less than $560 per month received a one-time bonus. In Syria, the government raised public sector wages.
Egypt and Morocco Need to Catch Up
Policy makers in Egypt and Morocco need to shift scarce fiscal resources from fuel subsidies to public investment and sectors with high social payoffs, such as health and education. While they agree on the need to replace universal fuel subsidies with cost-effective, targeted approaches, they fear the associated social distress and possibility of unrest. However, policy makers should learn from the successful removal of fuel subsidies in other countries, like Jordan and Syria, and plan the phase-out around three pillars:
- Building Public Support: First, policy makers need to highlight the shortcomings of fuel subsidies, their excessive budgetary cost, and their skewed distribution, which hurts the poor.
- Gradual Implementation: Second, they need to gradually, but steadily reduce the fuel subsidies. This is particularly critical in Egypt, where the gap between the subsidized and market price is substantial.
- Mitigate the Impact on the Poor: Finally, policy makers have to set credible commitments to ease the impact on the poor. Egypt can commit to increasing the minimum wage in both the government and the private sector. Over five million Egyptians work for the government and 1.3 million work in the public sector, yet the minimum monthly salary for public sector workers is only around $53. Paradoxically, Egypt spends as much money on consumption subsidies as on remunerations of civil servants. Extending health insurance to the poor is another relevant policy alternative. Less than 20 percent of the poor in Morocco and Egypt are insured. As a result, poor families are forced to sell productive assets or borrow money at high interest rates in order to pay for costly medical treatments.
Lahcen Achy is a resident scholar at the Carnegie Middle East Center in Beirut.