Energy Subsidies andmena Fiscal Stability

As has become evident throughout the first decade of the twenty-first century, energy subsidies constitute a significant fiscal burden. With rising world market prices for oil and natural gas since the turn of the new millennium, the mena region’s parallel surge in domestic demand has translated into a rapid growth in fiscal expenditure on energy subsidies in importing countries such as Morocco, Egypt, Jordan, Syria, and Lebanon. Egypt’s expenditure on energy subsidies reached a staggering usd 21 billion (egp 143.7 billion) in the financial year 2013/14—a figure equivalent to 19.5 per cent of total government spending, or almost the entire value of aid received by Egypt from Middle Eastern donors since mid-2012.[1] Yemen’s energy subsidy bill for 2013/14 was most recently estimated to be around usd 3.5 billion, a third of government expenditure and in excess of the country’s budgeted deficit of usd 3.2 billion in that fiscal year (mees, 2014h; Ghobari and El Gamal, 2014). The recent fall in the oil price comes as a welcome relief to these oil importers, but such relief could prove temporary, given that the future trajectory of oil prices remains highly uncertain.

A parallel problem related to current energy pricing in oil and gas producing countries—and in countries, such as Egypt, that are net importers of some fuels—is the medium- and long-term effect that current pricing policies have on these countries’ own domestic production, and hence on their future revenue streams. Low domestic energy prices in many oil and gas producing countries provide a poor incentive for independent oil and gas companies to invest in new exploration and upstream development projects. Natural gas is the energy source most affected by domestic pricing policies—reflected in the poor fiscal terms offered to oil and gas companies considering investment opportunities. This will become increasingly important as a larger proportion of Middle East oil and gas becomes more expensive to produce. The development of gas reserves has hence lagged decades behind the Middle East’s massive gas resource endowment undermining the long-term supply potential of the region.

The mena economies’ exceptionally high reliance on oil and natural gas— tradable fossil fuels whose world market prices fluctuate significantly—has also made the region highly vulnerable to international commodity price cycles. Energy subsidies have also been shown to be strong, procyclical ‘destabilisers’ in oil- and gas-importing countries across mena, as government spending on subsidies increases during economic boom times along with rising demand, and declines as economic activity falls (Sdralevich et al., 2014, 21-22; IMF, 2013, 37-40). Several studies have demonstrated the negative consequences of procyclical spending in developing economies (Lane, 2003; Abdih et al., 2010; Kaminsky et al. 2004; Erbil, 2011), including the effect of commodity cycles on political stability over the medium and long term.[2]

  • [1] mees (2014a); authors’ estimates of Gulf and Turkish aid paid to Egypt since the Morsi regime assumed power until February 2014 (around usd 24.5 billion). It is important to notethat in measuring energy subsidies, Egypt only considers the actual expenditure on subsidiesand not the opportunity cost. Based on the opportunity cost, the size of the subsidy would bemuch higher.
  • [2] E.g. Collier and Hoeffler (1998).
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