Implications of Subsidy Reform for Kuwait and the Arab World
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The IMF’s Middle East Center for Economics and Finance (CEF) and the
Arab Fund for Economic and Social Development (AFESD) jointly
organized a panel discussion on the economic and social implications
of the subsidy reform on September 14, 2015. CEF Director Oussama
Kanaan moderated the panel which featured three keynote speakers:
Ananthakrishnan Prasad, IMF mission chief to Kuwait, Firas Raad, World
Bank Country Manager in Kuwait, and Imed Limam, Advisor at the Arab
Fund for Economic and Social Development (AFESD).
In his opening
remarks, Kanaan indicated that the drop in global oil prices has
brought to the fore the need for fiscal adjustment. Energy price
reform, which has started in the region, can be an important element
of fiscal consolidation and inclusive growth strategies.
Prasad
highlighted that energy prices in Kuwait, as well as in other GCC
countries, are considerably below international prices and heavily
subsidized by the government. He identified three adverse implications
of such situation. First, energy subsidies absorb substantial
resources that could otherwise be invested in human and physical
capital, or saved for future generations. Second, cheap energy
contributes to high energy consumption, which holds back the growth of
skill-intensive sectors as well as impedes long-term economic
diversification. Moreover, it leads to significant environmental
distortions. Third, energy subsidies do not always reach the most
vulnerable segments of the population as they are mainly captured by
rich households and are not effective at redistributing income.
Raad provided the key lessons learned from international experience in
energy subsidy reform. “The reform strategy should be formulated in
consultation with stakeholders and establish clear long-term
objectives including a sustainable approach to energy pricing and a
proper assessment of the likely impact of the reform on various
stakeholders” Raad said. He also drew attention to the role of
well-targeted measures to mitigate the impact of energy price
increases on the poor and build support for reforms.
In his
presentation, Limam pointed out that energy price reforms impact
inflation and the productive sector, particularly in the short term.
“The increase in energy prices would increase production costs;
particularly in energy-intensive sectors such as chemicals, petroleum
products, as well as transport”. He pointed out that firms in
export-oriented sectors, which are price-takers in global markets, are
likely to be affected, and suggested that the importance of
energy-intensive industries in the region favors adopting a gradual
approach for raising energy prices. The subsidy reform symposium
attracted more than a hundred attendees including government
officials, private sector executive staff, academics as well as
delegates from different embassies. The event has benefited from wide
media coverage and offered an opportunity for a very lively discussion.
Press coverage:
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