Energy subsidies reform can boost growth: IMF

The International Monitory Fund (IMF) has urged global nations to reform energy subsidies saying that the changes could remove impediments to economic growth.

A paper presented by the IMF's fiscal affairs experts said that global subsidies in 2011 amounted to $1.9 trillion which is equivalent to about 2.5 per cent of world gross domestic product (GDP) or 8 per cent of all global revenues. The IMF survey is based on data from 176 countries.

Three top subsidisers account for almost half of the global energy subsidies. The US is the world's largest subsidiser whose government grants in the sector are at $502 billion followed by China with $279 billion and Russia with 116 billion.

The IMF cautioned that any subsidy reform has to consider possible adverse effects on the poor and mitigating measures to protect the poor have to be built into the reform plan.

According to the IMF analysis, subsidies are a very inefficient way of supporting the poor, as the rich consume more energy than the poor and therefore receive most of the benefits of the subsidies.

On average, the richest 20 per cent of households in low and middle income countries capture six time more in fuel subsidies than the poorest 20 per cent.

The global lender urges governments to make better use of fiscal programmes that more directly help the poor.

Subsidies also impede growth, as increased public spending can boost growth in sectors such as infrastructure, education and health care. Cheap energy can also lead to overconsumption of energy and aggravating environmental problems, the IMF said.

Removal of energy subsidies needs be accompanied by targeted measures that compensate those most in need from the resulting higher prices. A conditional cash transfer to the needy is the best way to go, as Mozambique and Gabon have done, the paper highlighted.

Other programmes could include an increase in public-transport system, food distribution programmes or the creation of youth and women's employment programmes.

Alternatively, subsidies can be maintained for those items heavily used by the poor, like kerosene or consumption of electricity below a specified threshold.

A successful subsidy reform plan should involve establishing clear long-term objectives such as full price decontrol, a communications strategy and consultation with stakeholders, phased price increases to allow households and governments to adjust to the situation, improving the efficiency of public enterprises and finally depoliticising the setting of energy prices, the IMF said.