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Five takeaways from a decade of energy subsidy reforms in MENA

EXPERT COMMENT

Experiences from the MENA region show that successful energy subsidy reforms must focus strongly on mitigating social impacts.

The phasing out of inefficient fossil fuel subsidies is a key part of the global climate change agenda as well as the Sustainable Development Goals (SDGs). Their negative environmental impacts and associated costs are well known. They lead to overconsumption, divert business to rent-seeking energy-intensive activities and drain government expenditure at the expense of public goods such as infrastructure, healthcare and education. Low energy prices also mainly benefit the wealthiest populations.

The MENA region is responsible for almost half of global energy consumption subsidies. Increases in energy prices put significant pressure on MENA social contracts as the benefits are generally not immediately tangible for the wider population. The price elasticity of social discontent is brought under the microscope with the implementation of energy pricing reforms and the (often) associated weakening of purchasing power at citizen level.  Stronger social safety nets, for example via cash transfer mechanisms, are needed to protect livelihoods while simultaneously continuing efforts to rationalize consumption.

Without innovation in the design and implementation of social safety nets, reforms can be short-lived or can lead to serious political instability. Yemen is a case in point. While political turmoil was already creating political chaos, fuel subsidy reforms in 2014 were the straw that broke the camel’s back and led to protests that eventually made way for the Houthi takeover of Sana’a. But protests do not need to reach the level of civil war to ignite political instability. During the 2013-14 fuel subsidy reforms in Tunisia, protests put significant pressure on successive governments that tried to rebuild the economy. In 2018, Jordanian Prime Minister Hani Mulki resigned because of anti-austerity protests, which also focused on energy subsidy reforms.

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Original article link: https://www.chathamhouse.org/2022/02/five-takeaways-decade-energy-subsidy-reforms-mena

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