September 12, 2012 1:49 pm

Middle East leaders cornered by subsidies

An Egyptian family drives on a motorbike loaded with gas canisters©AP

An Egyptian family drives on a motorbike loaded with gas canisters, but the perk may soon end

Popular revolts sweeping the Arab world are throwing up a financial dilemma for struggling governments who want to scrap expensive energy subsidies but fear they will provoke riots if they do.

Regimes under pressure from tough economic conditions and high oil prices have pulled back from existing subsidy cut plans or shied away from new ones for fear of angering their newly emboldened populations.

Analysts say the trend could badly damage the region’s economic prospects and pull precious oil away from the global crude market because of high demand in Arab states where prices of fuel for cooking and heating are kept cheap.

“After the Arab Spring [began], the efforts in some countries to reform some subsidies and to bring energy prices close to market values slowed down,” said Fatih Birol, chief economist at the International Energy Agency in Paris. “Global oil markets will get less oil because a significant proportion of that oil will be used at home, driven by artificially low prices.”

Countries in the Middle East and north Africa spent $212bn last year on food and energy subsidies, equivalent to more than 7 per cent of the region’s gross domestic product, according to International Monetary Fund estimates.

Fuel subsidies accounted for a striking four-fifths of the total cost. Rapidly rising domestic consumption, exacerbated by the availability of the cheapest fuel in the world, has transformed the region’s energy market, with big crude exporters such as Saudi Arabia consuming more of their oil at home.

Citigroup, the bank, said Saudi Arabia – the world’s biggest crude exporter – could become a net oil importer in the next 20 years. A quarter of the country’s fuel production is used domestically, more per capita than industrialised nations, because the cost is subsidised, Citi said.

But it is the much less wealthy Arab oil importing countries, such as Egypt and Jordan, that face the biggest subsidy problems. Egypt’s budget deficit is 11 per cent of gross domestic product and Jordan’s is 10 per cent, creating big pressures to scale back injections of government cash into fuel markets.

Both countries have announced fuel price rises and large cuts in subsidies, but there is little sign of the changes being pushed through. Jordan has to import most of its fuel and it suffered this year after a gas pipeline from Egypt, which it depends on to fuel electricity production, had to be shut for security reasons. Amman was forced to compensate by buying more expensive liquid diesel oil. Jordan expects that replacing the Egyptian fuel alone will cost the government $2bn this year, double last year’s outlay.

“The lack of Egyptian gas hit us hard in the budget,” says Alaa Batayneh, Jordan's energy minister. “It has forced us to substitute that gas with more expensive diesel”. Jordan’s efforts to balance these budgetary strains by cutting subsidies have spluttered. King Abdullah this month blocked a proposed 10 per cent rise in the price of low-grade fuel used by the poor, after protests against the move. “It's never a right time to raise prices and no government likes to raise prices but it’s our duty, as unpopular as it is, to make these choices,” Mr Batayneh said, speaking before the king’s intervention.

Officials in Egypt, where 20 per cent of the state budget is eaten up by keeping fuel prices low, promised the total cancellation of subsidies in energy intensive industries in early 2012 and the enforcement of a nationwide coupon distribution system to help limit the impact on the poorest people. So far, there has been scant evidence of this policy taking place.

It is a reminder of the difficulty Arab world governments face in convincing their populations that removing subsidies will ultimately help them, as energy subsidies are not only a drag on the economy but can also disproportionately benefit wealthy high consumers of energy.

After years during which Arab regimes have ruled by diktat and enriched elites, populations are understandably resentful at the prospect of one of the few perks given to them by governments being scrapped.

Nemat Shafik, the IMF’s deputy managing director, says the Arab world is now an “anomaly” internationally for its reliance on subsidies, after programmes to cut them in countries such as Mexico and Brazil.

Despite some good efforts in the Middle East and north Africa to phase out subsidies, “unless governments can persuade populations they can credibly provide support for the vulnerable, the people won’t believe and won’t support” change, Ms Shafik said.

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