Lurking behind plummeting oil prices: Advancing structural adjustment

7 October 2015 | Minutes

7 October 2015, 11:00AM-12:30PM

Civil Society Policy Forum: Annual Meetings of the IMF and World Bank, Lima; Peru

Under the title, “Lurking Behind Plummeting Oil Prices: Advancing Structural Adjustment”, ANND will be hosting a session at the Civil Society Forum at the IMF annual meeting in Lima-Peru, focusing on the IMF recommendations in the aftermath of the slumped oil prices. As soon as the price of oil slumped over the past few months, the IMF has called on countries of the Arab region to step up their structural reform efforts, notably eliminating subsidies on energy. While in its recent Regional Economic Outlook “Learning to Live With Cheaper Oil Amid Weaker Demand” the Fund promotes diversification of economies away from oil as well as encourages growth and job creation, it nevertheless overlooks that such long-term endeavor can hardly mitigate the adverse effects of short to medium-term fiscal consolidation on the realization of economic and social rights of the poor and middle class citizens.

  • Dr. Samir Aita, President of the Cercle des Economistes Arabes
  • Dr. Reem Abdel Haliem, Economic consultant at Takween, ANND and affiliated to EIPR
  • Mr. Ahmad Awad, Director of Phoenix Centre
  • Ms. Daniela Gressani, Deputy Director IMF Middle East and Central Asia Department.

Moderator: Mr. Ziad Abdel Samad, Executive Director of ANND

Dr. Samir Aita

  • MENA subsidies are two-fold; pre-tax and post-tax – as per IMF definition
    • Pre-tax are difference between value of energy consumption at world and domestic prices, while post-tax allow for subsidies
  • Additional problem is energy consumption
  • IMF contend that MENA represents 48% of global pre-tax subsidies ($237bn)
  • MENA post-tax in region of $400bn
  • Problem in Arab countries is consumption – MENA has globally highest of energy intensity as ratio of GDP-produced (3 times the world average)
    • g. Saudi is the 6th largest world energy consumer
  • Many Arab states transitioning from energy-exporters to importers – most evidently Tunisia (since 2011)
    • Region as source of energy is likely to fall from half to a third of world supply according to BP
    • Region is massive producer of carbon, despite massive solar renewables potential
  • Energy supply and efficiency are major issues, so not only is insufficient supply of electricity provided, it’s also unreliable, and dirty

MENA energy challenges

  • Securing electiricty generation capacities to cope with increase of demand
  • Increase signififcantly the share of renewable energies
  • Reduce strong inefficiencies
  • Remove subsidies and better taxation

Financing instruments – who is financing what?

  • Ver low FDIs in energy (while high in resoruces)
  • Loans, EIB, EBRD, WB, Kfw AFD
    • Egypt 08-13, only one of five years of needs of production capacity increase, with no reenwabels, and 1/3 on grids
    • Only Morcco support focues on renewables.
    • In Egypty and Tunisis the focus ins on grids and networsk – simply providing basic needs
  • EBRD – a development institution – is financing exploration

Post-tax subsidy issues

  • Taxation massively constrained, including subsidization due to 80% informal employment share outside public sector
  • Strong need for taxation analyses & capacity building
  • Taxation and redistribution in informal context
  • What is the proper role of the state?

Dr. Reem Abdel Haliem – the growth-inequality nexus in Egypt

What happens after oil subsidies decrease? A rights-based assessment of the IMF outlook – using hundreds of case studies in rural Egypt, since 2005

  1. Growth and poverty did not trade off, but rather it was a poverty- or vulnerability- driven growth
  2. Labour was deprived of basic organizational rights
  3. An inequality path developed with no sufficient social contract or public/social welfare
  4. The economy could not create jobs, driving an informal economy which suited government needs

Post-crisis Egyptian stimulus plan – too little, too late

  1. Short-lived, and led to austerity
  2. Major budget deficit, so Government cooperated closely with the IMF, and very quickly lifted the subsidies.
  3. VAT increased, and restricted wage increases
  4. Inflationary pressures still grew
  5. No notable increase in expenditure on health and education

Need to identify a new social contract after the failure of austerity measures, both in terms of fiscal sustainability or poverty alleviation

Mr. Ahmad Awad

  • Examining Jordan’s relationship to IMF and Wrold Bank, which begain in 1989, and restarted in 2011
  • Energy subsidy issue is the primary economy policy issue, given the country imports over 90% of its energy requirements
  •  These are being proposed to be ended by 2017 under the terms of the IMF lending agreement with Jordan
  •  The policy failed to have the desired effect, and instead weakened the already-fragile Jordanian economy with a deep regression of living standards of the majority of Jordanians since 2011
  •  Data reflects this, with the drop in the growth rate since 2010, the growth of the budget deficit from 2009, though recent peak in 2011
  • Public debt has grown steadily in absolute terms, but stayed around 80% of GDP
    • Though unemployment has fallen, it has accompanied a significant deterioaration in job security and conditions
    • Similar reflections could emerge from discussion of the industrial sector, based on the high domestic prices, with many roganisations relcoating to northern Saudi Arabia, with a similar fall in the proportion of unemployment – especially youth unemployment – accounted for by industry

Ms. Daniela Gressani, Deputy Director IMF Middle East and Central Asia Department.

  • We see the challenges of inclusive growth, as also including dimesnnions of investment, governance and investment
    • This also includes the importance of social safety nets, plus investment in training and skill-building amongst the young
    • I see these messages echoed in the presentations
  • A clear concern is the focus on inequality – even when growth has been high, it hasn’t necessarily stopped poverty even worsening
  • IMF has sought for this reason to publish work on fair taxation in the MENA region, with an event tomorrow on this issue
    • We examined the opportunities for governments to revise the tax system in ways that challenge inequality
  • Subsidies remain a big problem, reflecting a lot of challenges for public revenue and even opportunities for corruption, smuggling and so on.
    • IMF has sought to address this in different ways: when oil prices were high the subsidies took up a huge proportion of resources such that they took away opportunities for investment in growth-supporting areas, while creating distorting effects such as wasteful consumption and investment
  • Now oil prices are lower the problems are different, and for importers life is easier – and our economic outlook for the region to be published in a few weeks will show improving headline growth rates around 3% for this year and the next: good news – but we are still not out of the woods
    • These savings – irrespective of the cause – will not automatically translate into a more growth- or environmentally- friendly policy, so we must not sit on our hands
  • We must seize the opportunity, while oil prices are low, to challenge and reform the way that subsidies are dysfunctional, including state enterprises that have been wasteful and inefficient
    • this will allow a stronger position the next time that oil prices increase
    • this could include automatic price-setting formulas to de-politicise the setting of oil and energy prices