IMFCEF

Implications of Subsidy Reform for Kuwait and the Arab World

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:

• http://www.kuna.net.kw/ArticlePrintPage.aspx?id=2460579&language=en

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