IMF/World Bank Annual Meetings, Civil Society Forum
Saturday 12th October
Host: Leila Hilal, New America Foundation
Kinda Mohamediah: Arab NGO Network for Development (ANND)
Hassan Sherry: Arab NGO Network for Development (ANND)
Abdullah Zaid: New America Foundation, Fellow
Carlo Sdralevich: IMF, Deputy Division Chief in Middle East and Central Asia (Mission Chief, Iraq, and works on fiscal issues)
Dr Mohamed Said Saadi: Graduate Institute, Morocco
Findings: subsidy reform is not viable for Arab countries in transition, especially in short-term, due to political and economic challenges.
MENA region (based on IMF 2011 data) spends 8.6% of GDP, $236 billion
Authorities recommendations that level of subsidies are unsustainable
- Loosened fiscal policy,
- Sep 2012 lifted price of lead-free petrol by 7.3%
- March 2013 government increased energy and electricity prices by 7%
- June 2013 – IMF approved $1.75 billion for Tunisia
Popular response disputed subsidy cuts, as recently as March 2013
The IMF indicated that the money was to plug the current account deficit, attributed to spending on subsidies, as wages, as well as decreased EU support as a consequence of the financial crisis.
In 2009 the volume of subsidized wheat reduced as pilot of distributed targeted cash assistance
- Political Developments
- Weak institutional capacity
- Weak social safety nets
- Inefficiency in cash transfers – corruption
Reflections – much of the motivation for social unrest was to challenge policies derived from undemocratic governments, which were often related to IMF-derived recommendations
The findings suggest that in short-term subsidy cuts represent ‘political suicide’.
Sudan case provides brief picture in terms of what region wants in terms of subsidy recommendations.
As for challenges related to social safety nets and cash transfers, which the IMF clearly recommends, it is important to acknowledge that relying on social protection schemes in the region given weak institutional structures and state institutions’ limited capacity, especially in Tunisia and Morocco.
In the Arab region inclusive and comprehensive social protection schemes are absent, and amongst officials corruption is endemic, inhibiting the ability to realise cash transfers, and renders such solutions a non-viable solution to this challenge.
Regional civil society responses
Tunisia – testimony suggest such social protection schemes cannot play a role that is inclusive.
Cutting subsidies would increase the burden on the poor – despite cash transfers – due to inaccessibility of a significant strata of the population.
Morocco – social safety nets do not represent the ideal substitute for social subsidies. If they were comprehensive, funded, and better targeted at the poor they could alleviate poverty, but due to the technical difficulties this is not realistic.
Most interviewed CSOs pointed to officials’ corruption as key barrier
Governments and subsidy reforms are natural challenges in cases of deficits or budget imbalances, and when governments’ face these problems citizens carry the burden of those government mistakes.
The social safety net has become the simply strategy to address the complex problem.
For social safety nets’ coverage, inadequacy of cash transfers and the consistency of distribution.
Key is availability of data, especially in order to know how to locate groups of people
Jordan’s 2008 removal of subsidies, those who mostly benefitted were principally working in the public sector, but private and informal sector employment represents about 44% of the labour force. The informal sector is 26% of the economy, and need to be addressed.
A key question is – are cash transfers sufficient to help the poor to address the rising prices that result in subsidy reform?
The case of Yemen based on Oxfam evidence suggests that 98% of poor households’ income goes on food. Would subsidy reform – and the subsequent inflation – may not allow people to live.
Would the safety net address those concerns?
IMF recommendations have consistently focused on fiscal consolidation and deficit reduction, despite the complexity and heterogeneity of the countries in the region and the underlying political instability of the transition process.
Hence the reform of subsidies is fraught, as there is a long history of social unrest associated with attempted subsidy reform over the last 2/3 decades.
Corruption remains a crucial hole in the budget that needs to be addressed.
Recommends that the IMF better include subsidy organisations and empower them to contribute to improved options and policy alternatives. Based on a Jordanian economist’s view of an alternative to subsidy reform, in the near term subsidies either go to those who doesn’t deserve or need it, but instead of looking for the people who don’t deserve money, and examine how to charge those at the top of the income scale.
Hassan Sherry – Recommendations
To the IMF – we do acknowledge in the long-run subsidies are unsustainable, and civil society organisations have come to realize that energy subsidies are associated with a regressive outcome
In the short-run, however, and given the region’s critical social circumstances, we request that the IMF rethink its recommendations in the interim and short-run address the potentially negative effects of subsidy removal on low and middle-income households and individuals. This necessitates the consideration of broader economic indicators including wages, purchasing power, participation in domestic markets, and poverty levels.
Including non-tangible social indicators, e.g. dignity.
The IMF should engage various stakeholders in the region, including civil society organisations, including in negotiations around major economic reforms in the region including subsidy reforms. This should include lobbying governments to include local civil society organisations, as well as adopting.
Carlo Sdralevich, IMF
This topic is extremely important, and it is great to have a debate, and from a personal perspective it’s extremely useful to hear what the views are from the ground and from a different policy perspective. It is useful to feed back into internal discussion of our recommendations. The proposals remain objective and fair, and almost everything that was said was something we could agree with.
2) What to replace safety nets with
The question of urgency is perhaps the main point of disagreement.
Firstly, the political transition have changed the economic and social environment, including across the board increases in spending, whether governments have remained in power or been replaced, via subsidies and wages. This is also due to other effects, such as the movement of oil prices, as well as food prices.
Fiscal pressures also come from the general slowdown, which has effected many MENA sectors, such as tourism and export industries to Europe, which have made the economic situation more challenging.
We also have social demands, which also raise the question of how to address them.
Our work in the region seeks to consider all the aspects, fiscal aspect, social fairness, distortions; do subsidies when they are really so pervasive. The last on is environment – the book on energy subsidies we produced reveals this, including the latter question, which perhaps is not the most urgent.
The most urgent is fiscal questions, secondly is social order.
If you look at the fiscal deficits in the region they’ve all been increasing, debt has been increasing, and financing is drying up. External financing from the last few years. Political developments haven’t always helped, as revenues decrease and deficits grow.
What could you do? Cut current spending? Cut wages? Or cut investment – normally the first thing that is sacrificed, but that reduces future economic potential.
When subsidy spending is significant component of GDP and of the budget, which are huge in many MENA states, this is the area one has to go to address the ‘emergency room’ problem of the fiscal crunch.
2) Fairness & Social Safety Nets
Many studies show the completely disproportionate and regressive nature of subsidies, such as in Egypt in petrol and bread subsidies. This is not to minimize how subsidies help the poor.
Hence the subsidies are necessarily progressive, when considered according to proportion of income spent, hence reducing wasteful regressive subsidies can itself be a regressive reform.
In oil importer states, the idea is to use subsidies as a very simple & easy to administer tool to help the population to decrease the cost of living for poor households and smooth the impact of commodity price fluctuation, but it is a very ineffective social tool . It may be ineffective but it is also part of the social contract, hence taking away subsidies the question is ‘what am I going to get in return?’.
Given experience of bad governance and incapacity to administer the tools, hence the case of Sudan where people fear that they have lost something and will gain nothing in return.
We all agree that reform is unavoidable – though perhaps not on the urgency of reform.
3) Corruption & institutional development
What we can do to support reform is to support countries on a technical level, and be less rigid in our subsidy reform. Many options are very low cost, and can have a significant impact on the poor. The case of Djibouti where food and fuel subsidies were present, the food subsidy was maintained, while in the fuel question the use of kerosene was a low-cost subsidy which nevertheless supported cost of food preparation, and that was maintained.
Can we do better targeting than transfers?
I am fairly positive that this can be done. Frankly much of the responsibility is of governments.
Corruption remains a critical aspect of the question, and a significant disappointment that the transition has not yet produced a more open economy, whereby the population can participate where they did not before.
Transparency is where the IMF can help, in fiscal accounts and how it works. Examining subsidies, price subsidies are relatively ‘clean’ as they are visible. In Iraq there is a huge public distribution system, essentially a basket of goods to basically everybody. TI is inefficient and corrupted, and wasteful, though taking it away would be problematic.
The question is how to introduce other tools in a way that doesn’t increase corruption or to increase the power of the government over the population. One way is to use indexation mechanisms. Jordan had one, and are now re-introducing it, as s Morocco. This can be an automatic adjustment mechanism to price movements, it is objective and public.
What is the IMF doing in the region?
This discussion is crucial, and the more this comes out in the open and difficult choices are made easier, while we continue to work with countries to address technical problems.
Perhaps a disagreement remains the question of not jeopardizing the gains of the social transition, which may be deemed a key short-term fiscal question, but is inherent to the demands of civil society.
Institutionally there remains incapacity and shortcomings in the region, but the Fund’s answer (and the World Bank is also trying to do so) is to not stop given the urgency that we perceive.
The question becomes how can the IMF think with governments, including for example the parallel concerns of not just subsidy costs, but debt servicing, and military spending, for example. Though there is common ground, we see that there is a burden of this transformation shifted to be more fairly balanced, and it is not only the poorer population just because it is the easier answer and thing to implement.
Firstly, there is a significant and fundamental problem in the targeting approach, e.g. medical care support programme in Morocco, this was a government-implemented survey to understand the population, which had millions of responses; meaning that a significant budget allocation will be required for this targeting system which is not yet implemented or allocated.
His main question is whether the middle class in the region, given depressed wages is able to handle the removal of subsidies, which may lead to destabilization at the social front. How much of the middle class is under pressure and on the verge of entering poverty.
His final point was that the IFIs including IMF considers the problematic policies of the 80s and90s, often designed by IFIs, was a problem of implementation rather than choices and policy design.
There is a problem in what is considered needed reforms in the region; he referenced the Deauville partnership and the policy advice from the IMF through this partnership which prioritises the budget deficit reduction and to emphasises the private sector and prioritizing the business climate which tends to mean a neoliberal growth model and an emphasis on deregulation.
The fundamental difference is the schools of though at the heart of policy design, hence the approach on which the IMF bases the obligations of countries in terms of human rights, including under international law – hence the IMF focus is on individualism and profit, rather than rights and other social considerations. The priority is given to the rights of investors, foreign and private. There is a severe contradiction in what the governments are negotiation and agreeing to under the UN and human rights framework, which are agreed there by consensus, and also what they are taking under the IMF umbrella.
Austerity policies – presented as a way out in Europe and growth – have actually led to increased public debt while growth and employment has not been successfully addressed, as the control of the debt to GDP ratio has been lost, mainly because the ability to revive growth has been a failure. His fundamental point is there is a need for a paradigm shift and this should be the core of the discussion.