North Africa Burns Billions on Energy Subsidies

In total, the governments of Egypt, Algeria, Libya, Morocco and Tunisia spend more than $45bn on energy subsidies each year – a figure that dwarfs spending on healthcare and education, according to the latest available data. Yet as the cost of fuel continues to grow, governments are trapped between the unsavory options of cutting subsidies and facing popular unrest, or going broke trying to continue paying for them.

Governments in energy producing countries, including those in North Africa, have traditionally supported domestic demand for energy by fixing prices at levels deemed affordable so their citizens are not priced out of the market by global energy demand.

The subsidies not only help with the cost of goods like petrol or cooking gas, they also indirectly reduce the costs of goods and services which use energy in production, lowering overall living costs.

However the cost of subsidies has ballooned in recent years. In Egypt, for instance, the government now spends around 20 percent of its annual budget fixing the price of energy.

“The extent of a government’s ability to cut subsidies is dependent on the amount of confidence and support it has from the population. In North Africa, there is clearly little of that at the moment,” Glada Lahn, senior research fellow for Energy, Environment and Resources at Chatham House, tells This is Africa.

However, Ms Lahn says, “the question is whether this is economically sustainable, and the answer in North Africa is definitely not. Governments have seen disasters in other countries where reforms have been tried and are naturally concerned, but long term the problem will have to be addressed.”

Taking the plunge

On 1 February, Morocco broke rank and announced that it had become the first country in the region to stop subsidising gasoline and fuel oil, and that it would be substantially reducing subsidies for diesel over the next few months.

Morocco spent more than $5bn on energy subsidies in 2013. Diesel subsidies were one of the most substantial state bills, but 80 percent of the fuel was consumed by the richest 60 percent of Moroccans.

Plans to reduce subsidies have been in the works for some time. With support from the IMF, the government developed a plan which linked the hikes to an agreement extending a $6.2bn loan to the Moroccan state in 2012. In addition, a new deal with the World Bank will see the state receive an extra $400m per year between 2014 and 2017.

When the plans were first announced last October, five ministers from the ruling coalition party, Istiqlal, resigned. They accused the leading Islamist Justice and Development party of hurting the poor.

In Tunisia, the Islamist Ennahda government – which was replaced by an independent cabinet in December – had also planned to heavily reduce the amount of money it spends on energy subsidies. The state energy subsidy bill in Tunisia is the smallest in the region, but is still estimated to be worth around $2bn, or more than 10 percent of the national budget.

However, plans had to be suspended in the face of popular pressure. Protests and demonstrations in the capital made policy makers – already burdened with managing a political transition and bringing in a new constitution – cancel the price hikes. Tunisia’s unemployment rate is the highest in the region at 15.9 percent, and youth unemployment has been estimated at around 30 percent.

The IMF ‘s crusade

According to the IMF, which has been strongly lobbying for the removal of the subsidies, while poorer consumers are the main target of subsidy benefits, but in fact disproportionately end up going to the rich and middle classes.

In one example, the IMF shows that in Sudan only around 3 percent of fuel subsidies go to the poorest 20 percent of people, while the richest 20 percent receive over 50 percent of the subsidies.

The IMF now says it is time for action, and has particularly targeted North African countries, where national finances have been severely affected by both the global financial crisis and the wave of popular uprisings that began in 2011.

“Everyone, the rich and the poor, benefit from these subsidies by paying lower prices, but governments in North Africa would get more ‘bang for the buck’ if they removed or reduced subsidies and targeted the money directly at helping only the poor,” a spokesperson for the IMF told This is Africa.

In high level meetings with Finance Ministries and Executives across the region, the IMF is pushing for cuts that would allow funds to be reallocated to more productive public spending, including promoting energy saving technology and reducing pollution.

A World Bank official in Cairo told This is Africa that the Bank is supporting the IMF in this drive, particularly by holding roundtable meetings with government officials, and arranging for international economists to make presentations to leaders promoting subsidy reductions.

But cutting subsidies is often easier planned than done. Sudan is a case in point: last September, the government made a shock announcement that it was removing fuel subsidies, doubling the price of fuel overnight. In response, widespread protests turned into riots. In the end, more than 200 were killed in a brutal crackdown by security forces.

Egypt fears for stability

In Egypt, energy subsidies have become all but unaffordable. Constituting around one fifth of the annual budget, the spend is equal to three times the bill for education and seven times what is spent on healthcare.

Oil minister Sherif Ismail has said that petroleum product subsidies alone are expected to increase by 10 percent in 2014, which would see the cost to the government rise to almost $20bn.

The benefits are also particularly badly distributed. Only around 3 percent of diesel and gasoline subsidies benefit the poorest 40 percent of the population.

The Islamist government of Mohamed Morsi attempted to cut subsidies, but due to popular opposition to the plans – and recollections of riots in Cairo when President Anwar Sadat attempted to cut state subsidies in the 1970s – the administration back-pedalled.

However, the Finance Ministry announced on 15 April that it will again attempt to make Egypt swallow its medicine. The head of the ministry, Hani Qadri, said in a public statement that plans to cut subsidies will be announced after the May Presidential elections, which are expected to bring Field Marshal Abdel Fattah el-Sisi to power.

The smuggling problem

In Algeria, energy subsidies have created additional problems beyond balancing the state’s books. The country spends more than $14bn per year (7 percent of GDP) subsidising energy. Not only do the benefits often miss the poor, many of them are going abroad.

Smuggling across Algeria’s almost 4,000 miles of land border is booming. The black market in fuel along the border with Morocco, which has been officially closed since 1994, is particularly active. As a result, in addition to rising domestic demand for energy damaging export revenues, criminal gangs are profiting from the handouts. The World Bank reports that roughly 25 per cent of all the fuel consumed in Tunisia in fact comes from Algeria through smuggling.

The losses that the Algerian state sustains due to smuggling have been estimated at $1.3bn per year. According to oil minister and temporary prime minister Youcef Yousfi, “smuggling of fuel is a gangrene on the national economy”.

In Libya, the subsidy problem has largely been lost amid drastic security concerns, according to a Libyan banker working for an international bank based in Britain. The aftermath of the country’s 2011 revolution that overthrew long-time dictator Colonel Muammar Gaddafi has been turbulent, with militant groups still roaming the country.

“The two key policy issues we should be talking about are subsidy reductions and the privatisation of state companies, but in the country’s current state important reforms are very difficult,” the individual told This is Africa.

Libya’s subsidy bill is equal to around 9 percent of GDP, or $7bn, taking up almost 16 percent of a national budget already strained by ever rising salaries in a system where almost the entire working population is employed by the government.

 Popular backlash

Critics of IMF policy largely accept that energy subsidies are unsustainable in the long term, but say the IMF is disconnected from the political reality of actually removing them, and that mitigating social projects often will not be enough to support the poor.

“In North Africa, where a significant fraction of the populations suffers from poverty, unemployment, and depressed wages, any near-term subsidy elimination could carry severe socio-economic repercussions for the region’s most vulnerable citizens,” says Hassan Sherry of the Arab NGO Network for Development.

The IMF does note that cutting subsidies poses a risk to the poor. “Price increases can still have a substantial adverse impact on the real incomes of the poor through higher energy costs of cooking, heating, lighting, and personal transport,” the IMF explained in a briefing.

But Mr Sherry says that however much North Africa is spending on subsidies, the wider consequences of cuts have not been fully thought through.

“Given the heightened regional instability and the deteriorating social and economic conditions in North African countries, subsidy reform in the near-term is likely to provoke significant popular backlash,” he says, “which might entail using force by the authorities.”

This article was originally published with Financial Times: This is Africa on May 2.