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IMF blueprint for subsidy reform fosters instability in Middle East and North Africa region

With the outbreak of the “Arab Springs” the IMF rushed to Middle East and North Africa’s transitional governments to provide loans conditional upon the implementation of a fiscal consolidation approach to economic crisis.

These programs were accompanied by austerity measures contrary to the aspirations of the Arab populations for social justice, causing political instability. The Egyptian Center for Economic and Social Rights (ECESR), The Arab NGO Network for Development (ANND) and New America Foundation (NAF) Middle East Task Force, recently conducted a study of IMF recommendations to Arab governments.

In Tunisia, although cutting subsidies could alleviate Tunisia’s budgetary difficulties, such measures would impose an added burden on the poor—the group that is notoriously difficult to target and most in need of social protection.

In Morocco, rights activists asserted that well-targeted social safety nets could potentially offset the impact of rising commodity prices on the purchasing power of society’s poorest strata, but the impact of removing subsidies on the middle class as well as on local consumption would remain negative.

In Jordan, attempting to reduce the fiscal deficit through subsidy reform alone could at best produce temporary, short-term results, and fiscal dilemmas will be reproduced unless subsidy reforms are combined with significant changes in macroeconomic policy choices. Furthermore, following subsidy cuts, social protection schemes and social safety nets do not necessarily guarantee the economic and social rights of the poor. This is particularly the case for those working in the large informal sector in Jordan, who typically lack access to public services and welfare benefits.

In Yemen – one of the poorest countries of the Arab region – the volatile political situation is unable to sustain further economic shocks as a result of near-term subsidy reduction. Yemeni activists have asserted that the budget deficit is a result of corruption within the public sector, especially the sectors that generate government revenue. In light of the exacerbated corruption in Yemen, cash transfers that aim at alleviating pressure on the poor might instead line the pockets of corrupt officials or local elites.

In Egypt, since 2007-2008 the IMF called for dismantling the subsidies system, something the Mubarak government refused to implement for having dangerous socio-political implications, according to the Fund. In April 2013, the Middle East and North Africa (MENA) Transition Fund with the World Bank carried out a “Social Safety Net / Energy Reform Program” aimed at restructuring the energy subsidy system in Egypt. The agreement lacked any transparency.

In addition to the absence of transparency, the efficacy of the Bank’s plan is doubtful, for it aims at creating a data-network to target the poor based on consolidating the already existing data systems, criticized for corruption and bureaucratic inefficiency; a main reason for considering subsidy reform to start with. In addition, in Egypt, conditional cash transfer programs represent a threat to the middle class, which has managed to remain above the poverty line while benefiting from the universal welfare system already in place. Additionally, while the agricultural subsidies suffered highest cuts in 2012 (75 per cent), dismantling the food subsidies will result in an increase of overall poverty from the official figure of 25 per cent to 35 per cent of the total population, according to the World Food Program, notwithstanding the effects of such policy on the informal sector, which accounts for 40 per cent of economic activity, according to some predictions.

Therefore, the study recommends to refrain from dismantling the subsidies system, before working on developing the statistical and research capacity of the state’s bureaucracy to enable it to create real and effective welfare programs that would be tested well in advance so as not to lead into counterproductive results.

The Fund should shift policy advice to Arab governments away from near-term fiscal consolidation toward strengthening productive economic sectors and social protection schemes. It should urge national governments to consult with civil society organizations, including labor unions, NGOs, and municipal authorities to safeguard social and economic rights of the poor and the middle class in reform agendas. It should also work with national governments to develop short-term alternatives to subsidy reform, such as debt relief and progressive taxation systems, measures that would create the fiscal space necessary for comprehensive reforms and sustainable social protection policies.

Mahinour El-Badrawi is a Programs Officer at the Egyptian Center for Economic and Social Rights.

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March 2017
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