The IMF’s Wasteful Energy Whimper

After consecutive G-20 summit calls to phase out fossil fuel subsidies, the IMF in preparation for its spring gathering completed a study on economic costs and reform experience to serve as a catalyst, especially with increased developing country fiscal and power constraints. It finds that cheap energy stimulates overconsumption, hurts investment and job creation and extends carbon-based reliance, but that price adjustments from support removal often result in popular backlash with poorly-designed exit steps. Transfers come both from tax relief and budget outlays and may not be captured in national accounts. State-owned oil companies are frequently loss-making and do not face private competition, and the subsidy array can comprise gasoline, diesel and kerosene. Electricity and natural gas are also protected but coal less so, as the global pre-tax toll amounted to half a trillion dollars or 2 percent of government revenue in 2011. The oil-exporting MENA region accounted for half the pre-tax total, while Asia and Europe-CIS took 35 percent. Latin America and Africa’s combined portion was 10 percent, but the top three countries in absolute terms underpricing through taxes are the US, China and Russia with spending over $900 billion. Although Sub-Sahara Africa’s burden is smaller on a worldwide basis, its power production costs across a 30 country sample are much steeper, reflecting broader infrastructure and industry disadvantages. Budget and efficiency gains are clear from overhaul along with environmental and health benefits, according to the paper, which also notes that current policies favor upper-income groups. Gasoline coverage is the most regressive and is rarely targeted and can encourage cross-border smuggling as in Nigeria. Social spending from savings could go to education, sanitation and employment training, and in many cases expatriate workers receive access eroding domestic economic impact.

Based on twenty reform efforts across the emerging world, the authors draw common conclusions to guide the next round expected again to be endorsed as a priority by participants at the upcoming Bretton Woods institutions’ meeting. Lack of information and administrative capacity are typical obstacles, and success is aided by good growth and inflation performance before changes. Interest groups from the urban middle class and business community can be powerful opponents and should be directly engaged as part of an extensive stakeholder consultation process. They must fashion a comprehensive long-term plan setting a timetable and quantifying likely effects and safety-net measures, and avoid the temptation to focus on early easy “wins” that soon encounter wider roadblocks. The Philippines and Turkey were two examples where advance communication and planning facilitated lasting consensus, the Fund believes. Improving state enterprise governance and moving to automated cash or voucher channels are also important parallel initiatives. The availability of alternative energy sources can promote a switch as with Indonesia’s kerosene conversion to liquid gas. An independent body should handle technical pricing decisions and full liberalization should be the eventual aim even if existing motion is idle, the document urges.