IMF sees big gains from energy subsidies reform

WASHINGTON - The International Monetary Fund (IMF) Wednesday urged policymakers of both developed and developing countries to reform energy subsidies, arguing that this could alleviate budgetary pressures and generate big gains both for economic growth and the environment.

In a policy paper "Energy Subsidy Reform: Lessons and Implications", the IMF said energy subsidies, while aimed at protecting consumers by keeping prices low, aggravate fiscal imbalances, crowd-out priority public spending, depress private investing, encourage excessive energy consumption, artificially promote capital-intensive industries and accelerate natural resources depletion.

In 2011, energy subsidies reached $480 billion, accounting for 0.7 percent of global GDP, or 2 percent of total government revenues, the IMF estimated. If the negative externalities from energy consumption are factored in, the figures would be even higher.

"The paper shows that for some countries the fiscal weight of energy subsidies is growing so large that budget deficits are becoming unmanageable and threaten the stability of the economy," IMF First Deputy Managing Director David Lipton said in a speech on Wednesday.

For some emerging and developing countries, he said, the share of the scarce government resources spent on subsidies remains "a stumbling block" to higher growth and fundamentally impairs their future.

According to the IMF research, the advanced economies account for about 40 percent of the global post-tax energy subsidies, which include the subsidies reflected in the budget and those off the budget. Oil exporters account for about one-third.

"Clearly, when a country embarks on subsidy reform, there is a need to be mindful of possible adverse effects on the poor, and mitigating measures to protect the poor have to be built into the reform plan," said Carlo Cottarelli, director of IMF's Fiscal Affairs Department.

While keeping energy prices down has been considered as a way to protect the poor, the IMF argued that on average, the richest 20 percent of households in low and middle-income countries capture six times more in fuel subsidies than the poorest 20 percent.

The paper also drew on lessons from international reform experiences from 22 country case studies, both successful and unsuccessful reform episodes over the past two decades. It noted energy subsidy reform needs a comprehensive energy sector reform plan which entails clear long-term objectives, analysis of the impact of reforms, and consultation with stakeholders.

"Energy subsidization is a major problem, but one that can be solved," said Lipton. "It is better to do it the right way, than to do it right away," he added.