Studies

UNDP Reviews the State of Fossil Fuel Subsidization in the Arab World

The United Nations Development Program (UNDP) has released a report Energy Subsidies in the Arab World, reviewing the current state of fossil-fuel subsidies and efforts to reform them in seventeen Arab countries. The report provides a useful summary of the existing research and discussion on the subject undertaken by the International Energy Agency (IEA), World Bank, International Monetary Fund (IMF) and a number of regional research organizations and media.

According to the IEA estimates, six of the world’s ten largest energy subsidizers in 2010 were found in the Arab world, namely Saudi Arabia (US$ 43.5 billion), Egypt (US$ 20.3 billion), UAE (US$ 18.2 billion), Iraq (US$ 11.3 billion), Algeria (US$ 10.6 billion) and Kuwait (US$ 7.6 billion). In many cases, the share of government expenditure on fuel subsidies exceeds social spending on pro-poor sectors such as health and education (see figure).

SHARE OF GOVERNMENTAL EXPENDITURE ON FUEL SUBSIDIES (BLUE), EDUCATION (RED), AND HEALTH (GREEN) IN EGYPT, YEMEN AND SYRIA IN 2008
Source: UNDP (2012). Energy Subsidies in the Arab World, p. 49.

The level of subsidization varies across the region, with Kuwait, Saudi Arabia and Qatar charging their populations less than a third of international prices for fuel and electricity.

Energy subsidies constitute an important social safety net for the poor in many parts of the Arab world, but they are often a costly and inefficient way of achieving the stated policy objectives. Energy subsidies also tend to be regressive, with high-income households and industries proportionately benefiting most from low-energy prices. In Egypt, the top 20% of wage earners get 33% of the energy subsidies, against 3.8% for the poorest families. For gasoline, 93% of the subsidies go to the rich.

The subsidies also distort the economy by encouraging waste and holding up investment in renewable energy. Energy consumption in the Arab world tripled between 1980 and 2008.

The authors of the report emphasize that the reform of energy pricing mechanisms in the Arab world may be seen as beneficial from more than one perspective. However, in the wake of the Arab spring, they also recognize that reform will be difficult in practice. A critical factor for successful reform will be the ability of governments to compensate their populations for the reduction or removal of subsidies through carefully designed mitigation measures that protect the poorest and assist the economy in its long-term adaptation. The report highlights the recent policies in the region that have been mostly successful at eliminating fossil-fuel subsidies: Jordan, Syria, and, especially, Iran.

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