A worker loads Liquefied Petroleum Gas (LPG) cylinders onto his cycle-rickshaw in Kolkata January 17, 2013. Indian Oil Minister Veerappa Moily says LPG cooking gas subsidy changes will increase subsidy burden by 93 billion rupees. REUTERS/Rupak De Chowdhuri (INDIA - Tags: BUSINESS ENERGY) - RTR3CK2F
A worker loads liquid gas cylinders on to his cycle-rickshaw in Kolkata, India

Morocco’s leaders held their breath as the moment approached. Would riots erupt? Would inflation jump?

But the day came and went. The last of the country’s diesel fuel subsidies came to an end on January 1, and hardly anyone seemed to notice. Through a combination of two years of careful planning and a public outreach programme — not to mention a gigantic stroke of good fortune because of rapidly falling energy prices — Rabat managed to end a 40-year burden on its economy.

“The subsidies system was useful in the time when Morocco started out just after independence,” said Mohamed Bousaid, Morocco’s minister of finance. “There were a lot of people in need, and it was the role of the state to stabilise prices. But the subsidies became unsustainable. The idea now is to target those in need of help and support while trying to get at the market price. But the approach needs to be progressive, not aggressive.”

For decades, expensive and unsustainable subsidies on fuel and food have curtailed growth in developing countries. Middle East and north African nations typically spend between 5 and 10 per cent of gross domestic product on subsidising petroleum and food products. In Egypt’s case, it is 14 per cent.

Yet for all the expense, they do little to alleviate the suffering of the poor. According to “Corrosive Subsidies,” a World Bank study published in October, between 60 and 80 per cent of energy subsidies in the Middle East and north Africa benefit the richest 20 per cent of the people, with the poor receiving perhaps 10 per cent of the outlays.

Fuel subsidies also contribute to unemployment by strengthening capital-intensive industries such as petrochemicals or steel that require fewer employees; increase air pollution and cardiovascular illnesses by discouraging public transportation; and hasten the depletion of water resources in countries such as Yemen and Jordan by encouraging machine-powered drilling, the report says.

But rising budget deficits and international pressure have forced some governments to slash fuel subsidies that have underpinned economies for generations, while falling oil prices have created a golden opportunity to cushion the blow.

In Egypt, authorities have cut the fuel subsidy and plan to phase it out over five years. They have also reconfigured the food subsidy, cutting billions in losses to the black market, and introduced a points system that allows recipients to spend unused portions of their allotments on other staples. Malaysia has significantly cut fuel and sugar subsidies, while increasing cash transfers to the poor. Indonesia, which spent 15 per cent of its state budget on fuel subsidies in 2014, reduced them all on January 1.

New Delhi’s opportunity

Perhaps the greatest opportunity for change is in India, where recently elected prime minister Narendra Modi has pushed forward aggressively to end diesel controls and increase natural gas prices, part of wider attempts to wean Asia’s third-largest economy away from its use of heavy subsidies.

But experts also caution that dangers lurk in subsidy reforms. A 2013 IMF study examining 28 reform efforts said 12 cases were seen as successes, 11 as partial successes and five as failures. “One thing that came out with the failures was not having a good public information campaign and not taking the time to meet stakeholders when designing the reforms,” said Benedict Clements, an energy specialist at the IMF.

Poor planning can result in disasters, as Iran experienced after December 2010 when its then-president Mahmoud Ahmadi-Nejad embarked on a plan to cut $100bn in subsidies on energy and other basic commodities. But the plan went awry and wound up costing the government money, with cash transfers to consumers exceeding any savings from subsidies reductions.

“I don’t have a formula for success,” says Shanta Devarajan, the Middle East and north Africa chief economist at the World Bank. “I have certain principles. One of my principles is that you have to accompany subsidies reform with some sort of transfer for the poor, and the reason is not necessarily because the poor are going to be hurt, but that it gives the government some kind of cushion so that the people who will protest cannot say this is hurting the poor.”

Although some controls had been lifted before Mr Modi’s election last May, his government took advantage of falling oil prices to scrap all diesel supports, managing to do so without widespread protests from poorer citizens that marred previous attempts to lessen fuel import bills.

The decision helped to improve Delhi’s fiscal situation, too, given that diesel consumed a hefty $10.1bn out of a total fuel subsidy bill of $23bn during 2014, according to Mumbai-based brokerage Kotak. Some analysts hope subsidy reforms in areas such as food distribution and fertilisers may be announced in India’s budget later this month, but the country’s leader seems to judge that while these systems are inefficient, they are also often popular.

Incremental steps

Egypt’s subsidy reform effort has also been measured. Standard-octane fuel at the pump still only costs about E£1.67 ($0.22) per litre despite a price hike last July. Like India, Egypt’s leaders are treading cautiously, for fear of a political backlash. They have good reason.

“There are numerous examples of subsidy reforms that have gone badly,” says Damon Vis-Dunbar, former programme manager at the International Institute for Sustainable Development, a think-tank. “In recent years we have seen significant social unrest in countries like Sudan, Nigeria and Yemen in response to steep increases in fuel prices. That unrest has forced governments to backtrack on reforms.”

Political considerations — and a sense of history — drove the decision by Venezuela’s socialist president Nicolás Maduro to be careful in even mentioning a rollback of his country’s generous fuel subsidies. Thanks to subsidies and enormous oil reserves, Venezuela has the cheapest petrol in the world; people generally tip the pump attendant more than they pay for a full tank. At black market exchange rates, $1 will buy more than 1,000 litres of gasoline.

But with Venezuela’s economy in recession, hit by lower oil prices, galloping inflation and widespread shortages of goods, the embattled Mr Maduro hinted last month he would remove petrol subsidies that cost $12bn a year. Many Venezuelans still remember the rise in gasoline prices 25 years ago that sparked deadly riots and opened the door for Mr Maduro’s predecessor, the late Hugo Chávez.

“I could consider more expensive gasoline because it is a gift here,” says Daniel Torres, a taxi driver in Caracas. “But we are already tired, suffering with barren shelves and food prices rocketing, and everyone knows officials will steal every penny from higher petrol prices.”

Ending the gasoline subsidy would help narrow a fiscal deficit estimated at some 20 per cent of GDP that is financed by printing money, which only drives further inflation. Amid declining crude production, higher prices could allow exports of some of the roughly 600,000 barrels a day of oil Venezuelans consume as petrol, helping to rev up the country’s strained finances.

International policy makers are working to dispel the idea that subsidies in oil-producing countries such as Venezuela, Libya, Indonesia and the Gulf states make more sense than in oil-importing countries. “It’s just a mythical notion that ‘we are just subsidising our own oil therefore it’s not that bad,’” says the World Bank’s Mr Devarajan.

Political change

Morocco took steps over several years to make its subsidies reform effort a relative success. The Arab spring uprisings in 2011 spurred its centuries-old monarchy to increase wages and subsidies to keep social peace, but also to open up the political system to allow a moderate Islamist government led by prime minister Abdelilah Benkirane to take power in 2012. With a relatively broad base of support and a desire to prove his novice government’s management skills, it became Mr Benkirane’s mission to sell Moroccans on subsidies reform.

“It has to be communicated very clearly what this means and what damage the subsidies are doing,” says Mr Devarajan. While Mr Maduro launched slick television commercials with the aim of convincing Venezuelans they pay too little for petrol, the populist Mr Benkirane embarked on a plain-spoken drive to sell ordinary Moroccans on the importance of removing subsidies, even though it meant that prices for taxi rides have increased by 25 per cent and that household spending among the lower-middle class has dropped.

“The prime minister explained it to the people, continuously,” says Nizar Baraka, Morocco’s minister of general affairs, who oversaw parts of the reform.

The government implemented an index system where subsidies for various fuel products were slowly removed on a set schedule and subsidies for cooking fuel, used almost exclusively by the poor, remain untouched for now. Half of the savings from reduced subsidies were partly allocated to programmes that benefit poor schoolchildren and widows as well as education and healthcare infrastructure, officials say.

“Moroccans are convinced that all politicians are thieves,” says Karim Tazi, a Moroccan industrialist and one-time backer of the prime minister who is now a critic. “But they still believe that Benkirane is not a thief, that he’s doing things because he had to do them.”

Still, officials in Morocco and other countries that embarked on subsidies reform last year concede that they were blessed with low energy prices. “We got very lucky,” says Mr Baraka.

Low prices may not last. And in Morocco, many say it remains too early to judge the success or failure of the subsidies reform experiment. Meanwhile, civil servants have begun to grumble that their salaries have not grown with inflation. “We are in the most difficult part of subsidies reform,” says Mr Tazi. “What we feel now is the deep plunge in household buying power. The flow of VAT into Moroccan state coffers is going down. Households have been hard hit.”

Nevertheless, low oil prices offer a great opportunity for governments to show they can provide alternatives to subsidies. “The point of fuel subsidy reform should be improved economic, social and environmental conditions,” says Mr Vis-Dunbar. “In the absence of these improvements, the pressure to subsidise fuel prices will persist.”

Additional reporting by James Crabtree, Heba Saleh, Andres Schipani and Najmeh Bozorgmehr

***

Electronic payment: Cutting queues and beating the black market

It is early morning but there are no queues in front of the bakeries in the narrow backstreets of Imbaba, a teeming slum west of the Nile in Cairo, writes Heba Saleh. Instead of a long line of disgruntled customers waiting, sometimes for hours, to receive a stack of misshapen loaves of government-subsidised bread, people walk into Mostapha Abdel Wahhab’s bakery and present a card, which he swipes through a reader before handing over their allocation.

“There are no crowds now,” says Mr Abdel Wahhab. “This has been the huge difference since the new bread system was introduced here on August 19.”

A worker arranges freshly baked bread in a bakery in Cairo, Egypt, on Sunday, May 19, 2013. Egypt will curb wheat imports by 31 percent to 8 million metric tons in 2012-13, still enough to make it the world's biggest buyer, the U.S. Department of Agriculture estimates. Photographer: Shawn Baldwin/Bloomberg
A Cairo bakery

Egypt’s experiment in subsidies reform is among several attempts worldwide to roll back or increase controls over subsidies. India is also considering a revamp of its $41bn food subsidy programme using direct cash transfers through smart cards.

Not only has Egypt’s overhaul of the bread system succeeded in eliminating queues, but it has also saved money for the state, cut wasteful consumption and ended the black market trade in subsidised flour. It has even helped to improve the notorious quality of the bread. Instead of selling flour to bakers at a massively subsidised price, the government now provides it at the market price, removing an incentive for bakers to siphon it off to the black market.

Cairo’s supply ministry tracks the number of loaves sold by each baker through the smart card system. Every time a sale is made, a deposit is made in the baker’s bank account equivalent to an agreed cost price plus a profit margin. The real cost of the bread including the baker’s profit is around six times more than the price to the customer.

Khaled Hanafi, minister of supply, said up to 60 per cent of the subsidised flour worth up $1.7bn used to end up on the black market. “There is no longer an illegal trade,” he says.

To encourage people to consume less bread — and cut waste and the practice of feeding it to farm animals — another system allows those who do not use up their full allocation to accumulate points that they can exchange for free groceries.

“I want citizens to rationalise their consumption of bread,” said Mr Hanafi. “This is not obligatory, but those who want to can take against their points free groceries which are actually cheaper for the government to provide [than the subsidised bread].”

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