Energy subsidy reform: The way forward

The Sierra Leone Telegraph: 28 March,  2013

David Lipton – First Deputy Managing Director, International Monetary Fund

david liptonThank you for giving me an opportunity to present the key findings of a new IMF study on energy subsidies. That study will be published today on the IMF’s website, including in Arabic and French.

Over the decades, the subject of energy subsidies has evoked the image of oil producing countries that offer cheap gasoline and fuel to their people.

In recent years, we have been hearing about countries that are finding that the fiscal weight of energy subsidies is growing too large to bear.

In some countries budget deficits are becoming unmanageable and threatening the stability of the economy.

Where political systems have generated large and growing subsidy burdens, in part to placate restive populations, countries now find they suffer both fiscal paralysis and energy shortages.

Headlines from countries like Egypt and Pakistan have focused on the need to address this burden that could jeopardize fiscal sustainability and balance of payments viability.

In many others, subsidies remain a stumbling block to higher growth by squeezing out much needed health, education and infrastructure spending. Twenty countries now maintain energy subsidies that exceed 5 percent of GDP.

Nigerians queue for petrolBut as I will explain, energy subsidies are a wider and more pervasive problem, with major consequences for many individual countries, but also for the global economy and the environment.

The G20 acknowledged this point at the Pittsburgh Leaders Summit in 2009, and pledged to eliminate all inefficient fossil fuel subsidies over the medium term.

I do not know exactly what constitutes the medium term, but it is surely time to get on with fulfilling this very important commitment.

Subsidies are an issue in practically every country in the world. Pre-tax subsidies, which arise when energy consumers pay less than the supply cost of energy, are high in many emerging and developing economies, and have risen in recent years due to limited pass- through of increases in international energy prices to domestic consumers.

Although pre-tax subsidies are not a large enough problem in advanced economies to cause fiscal difficulties, these countries have tax subsidies, where the taxes imposed on energy are not high enough to account for all of the adverse effects of excessive energy consumption, including on the environment, in other words, where externalities are not addressed.

petrol queuing in saloneThe issue of energy subsidy reform is not new. Indeed, in several cases, the IMF and country authorities have been discussing potential reforms for several decades.

Despite widespread recognition of their adverse consequences, energy subsidies have proven difficult to reform.

The surge in international energy prices in recent years has drawn further attention to this issue, including as I mentioned from the G-20.

And the link between subsidies, consumption of energy, and climate change has added a new dimension to the debate on energy subsidies.

My presentation, which can be accessed through the IMF website, will cover three broad topics: first, the consequences of energy subsidies; second, the magnitude of these subsidies; and third, the ingredients for successful subsidy reform.


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