Baseline Prices and Subsidies

As a reference period for the analysis, we use the very early part of 2014 when oil prices and subsidies peaked at their highest levels. A major wave of subsidies reforms occurred in the MENA Region in 2014 but this chapter focuses on the extraordinary situation faced by MENA countries before the reforms. We are interested in the prices and subsidies existing in the MENA countries just before the reforms.

Table 2.2 shows the baseline prices and unit subsidies for energy products. For LPG, prices are the lowest for Libya and the Islamic Republic of Iran in that

Table 2.2 Energy unit prices and subsidies, in US$ at PPP (2014)

Source World Bank estimations from Household Budget Surveys Note PPP = purchasing power parity order and the highest for Djibouti. The highest shares of subsidies as a percentage of the free market price are in Libya and the Islamic Republic of Iran, the two oil-producing countries, with Libya’s LPG subsidies reaching 90.4% of the full price. The percentage price increases that would be necessary to eliminate subsidies on LPG are remarkable. In Libya the price would have to be increased by 947% to eliminate subsidies and in the Islamic Republic of Iran by 500%.

It is interesting to see that in Djibouti, the poorest of the countries considered, the price of LPG is 15 times the price in the Islamic Republic of Iran, the richest country considered. This divergence is also striking because LPG is a product that is typically consumed by the poor and it is the most important among the poor. The claim that consumers’ subsidies are a form of social protection schemes does not really hold if we observe data for LPG across countries.

Prices for electricity appear less diverse, but that can be explained by the way the prices are listed—in kilowatt hours (average across tariffs blocks). As a percentage of the free market price, electricity subsidies are the highest in Tunisia. The lowest subsidies are for Libya (30.6%) and Morocco (42.3%) but still high. To reach the market price, Libya would have to increase prices by 44%, an increase that would not go unnoticed by the population, and Tunisia would have to increase prices by 583%, a staggering figure.

Prices for gasoline and diesel are closer to the free market price for most countries except the Islamic Republic of Iran and Libya. The Islamic Republic of Iran and Libya in particular would have to raise prices of gasoline fivefold and more than sevenfold, respectively, to reach the free market price. For the Islamic Republic of Iran in 2014 this finding is remarkable given that this country went through a comprehensive reform of the subsidies system in 2010 that supposedly eliminated most subsidies and was costly in terms of cash transfers administered to the population in compensation of the subsidies removal.

For food (Table 2.3), the items considered are few, but we can see that subsidies can also be quite high. For flour, subsidies represent 91.3% of the free market price in Libya and almost 60% in the Islamic Republic of Iran. Libya has also the highest subsidies for bread, sugar, and vegetable oil, and the Islamic Republic of Iran has large subsidies on bread. Therefore, the oil-producing countries seem to be those that maintained the highest food subsidies. However, subsidies are also high in Morocco for flour and sugar, and in this country these products are universally subsidized and not subject to quotas.