On Subsidy Reform in Arab Countries: Reflection on IMF Recommendations

1. On Subsidy Reform in Arab Countries: Reflection on IMF Recommendations Picture adapted from: http://news.nationalgeographic.com/news/energy/2012/06/pictures/120618-large-fossil-fuel-subsidies/#/energy-fuel-subsidies-quiz_54907_600x450.jpg Prepared by the Arab NGO Network for Development (ANND), the New America Foundation (NAF) and the Egyptian Center for Economic and Social Rights (ECESR)

2. Abstract Subsidy reform is not viable for Arab countries in transition in the near-term due to political and economic challenges. Photo source: http://middleeastvoices.voanews.com/2012/11/insight-can-social-expenditures-be-reformed-in-arab-states-69017/

3. MENA Region: Highest Spending on Energy Subsidies Worldwide Adapted from: http://www.imf.org/external/np/fad/subsidies/pdf/menanote.pdf

4. IMF Recommendations on food and fuel subsidies toTunisia and Morocco Available at: http://www.kalima-tunisie.info/kr/media/images/tunisie_maroc.jpg

5. Tunisian Response • Authorities’ response to recommendations: • In 2009 and 2010: Loosened fiscal policy (including on subsidies) • In September, 2012: Lifted the price of lead-free petrol by 7.3%. • In March 2013, the government increased energy and electricity prices by 7%; a move accompanied by a rise in cash transfers to lower-income households. • June 2013: IMF Executive Board approved a $1.75 billion loan for Tunisia • Popular response to subsidy cuts: • Unstable street protests, last of which was in March 2013. http://www.imf.org/external/pubs/ft/scr/2010/cr10282.pdf http://www.imf.org/external/pubs/ft/scr/2010/cr10282.pdf

6. Moroccan Response • Authority’s Response to recommendations: • In 2009, the volume of subsidized wheat in Morocco was reduced as part of a pilot program that the Moroccan government has launched to distribute targeted cash assistance. • In response to Morocco's budget deficit (7.6% of its annual GDP in 2012) partly due to the rising cost of subsidies, which have reached $6.3 billion in 2012 • In August 2012, the IMF approved a $6.2 billion loan for Morocco over two years. • In September 2012, Morocco's Islamist government raised energy prices in accordance with IMF requirements (Diesel increased by 0.69 MAD/litre, gasoline by 0.59 MAD/litre, and fuel oil by 662.88 MAD/ton. • Popular Response to subsidy cuts: • Street protests, last of which took place in September 2013 http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11125634 http://www.reuters.com/article/2013/09/09/us-morocco-opposition-subsidies-idUSBRE9880O320130909

7. Challenges • Political Developments • Weak Institutional Capacity • Weak Social Safety Nets • Inefficiency in cash transfers(Corruption) • Reflections from CSOs in Tunisia and Morocco

8. Challenges • The efficacy of social safety nets • Coverage and availability of data • Inadequacy of cash transfers • Consistency of distribution

9. Challenges • Feasibility and effectiveness of subsidy reforms • Political development • Institutional capacity • Budget issues

10. Recommendations for the IMF • Rethink subsidy policy proposals in the SR. IMF recs should address the potentially negative socio-economic effects of subsidy removal on low and middle-income households and individuals. This necessitates the consideration of broader economic indicators, such as wages, purchasing power, participation in domestic markets, and poverty levels. • Adjust recs on social safety nets according to country-specific political and institutional conditions. • Most importantly, The IMF should adopt a rights-based approach in policy recs for governments in the region. • IMF’s engagement and negotiations with Arab governments should be transparent. • Encourage local governments to consult with stakeholders, including civil society organizations, on major economic reforms such as subsidy reforms.