Energy Subsidies in the Arab World
This paper, authored by Bassam Fattouh and Laura El-Katiri and published by the United Nations Development Programme, explores the issue of energy subsidies in the Arab World. The authors argue that while energy subsidies may be seen as achieving social objectives (such as expanding energy access and protecting poor households’ incomes); economic objectives (such as fostering industrial growth and smoothing domestic consumption); and political objectives (such as distributing the oil and natural gas rents to the population), they are a costly and inefficient way of doing so. Energy subsidies distort price signals, with serious implications on efficiency and the optimal allocation of resources. Energy subsidies also tend to be regressive, with high-income households and industries benefiting proportionately most from low energy prices. However, despite such adverse effects, energy subsidies constitute an important social safety net for the poor in many parts of the Arab world, and any attempts to reduce or eliminate them in the absence of compensatory programmes would lead to a decline in households’ welfare and erode the competitiveness of certain industries. Therefore, a critical factor for successful reforms will be the ability of governments to compensate their populations for the reduction or removal of subsidies through carefully designed mitigation measures. It is argued that reform of energy pricing mechanisms in the Arab world may be seen as beneficial from more than one perspective. Nevertheless, this paper recognises that the current political climate in the region will render the reform of domestic energy prices difficult in practice, such that reform may indeed be a medium- to long-term endeavour.
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