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article imageOp-Ed: IMF chief Lagarde presses Arab countries to phase out subsidies

By Ken Hanly     May 13, 2014 in Politics
Amman - International Monetary Fund(IMF) head, Christine Lagarde, pressed Arab countries to cut subsidies. She was speaking at a conference sponsored by the IMF in Amman the capital of Jordan.
Lagarde said that Arab countries pursuing democracy must keep up structural reforms and phase out their subsidy systems. The IMF estimates subsidies across the region cost about $237 billion a year. Lagarde also maintained that average growth rates of about 3 per cent in Arab countries were not high enough to meet the needs of growing workforce and to improve the plight of the rural poor:"The growth that we are seeing on average in the region at about 3 percent would have to significantly increase in order to respond to the demands of the young population that is waiting to join the job market.. So my message is please pursue the discipline and continue this momentum of structural reform in order to capitalize on the stabilization you have obtained in order to .. generate the growth that is needed to create the jobs needed".
While finance ministers from the area agreed with Lagarde that cutting back on subsidies was important because they were a big portion of budgets, they worried about the social costs of doing so. There are also political costs as subsidies are often enormously popular. The IMF is concerned only to create a system that is in line with free market ideology insofar as that fits in with the needs of global capital. Recently, the IMF and World Bank have also been insisting that at least some of the costs of reducing climate change should be factored into prices or collected as taxes.
Austerity policies and liberal reforms implemented as a result of IMF lending policies often lead to protests and social divisions. Arab countries that are aid dependent such as Yemen, Jordan and Tunisia need to reform to gain approval for western support to help fund deficits and pay back loans.
The blowback from IMF policies has led to easing of requirements in some instances. In the case of Jordan the IMF relaxed fiscal targets for a $2 billion agreement that was reached in 2012 to short up its economy. Jordan has been faced with enormous costs due to the massive number of refugees from Syria.
The conference, titled "Building The Future" is the first of this kind since the Arab Spring revolts. As well as finance ministers, there were also civic groups at the conference and even critics of IMF policies. Lagarde said that there were signs that some Arab economies such as that of Morocco, Tunisia, Jordan, and Egypt were stabilizing after years of turmoil. In Egypt's case the "stability" is the result of a massive crackdown on any opposition and unrest continues. Lagarde said: "This stabilization is fragile and needs to be consolidated by continued discipline and that momentum of reform that has already been underway without receding,"
An IMF study of Egypt called for energy subsidy funds to be put to better use. While it is true that fuel subsidies benefit the rich who own vehicles, at the same time any rise in fuel costs will ultimately result in higher food costs because of the increase in the cost of transport. Higher food costs hurt the poor most.
The IMF urged the end of government subsidies of energy sources globally and even suggested taxes on energy use to battle climate change and pay for social programs. The pricing of energy should reflect the cost of externalities involved such as pollution and global warming. However, such policies could themselves produce disastrous effects on the poor as the costs of food and their energy consumption soars beyond their ability to pay. IMF First Deputy Managing Director David Lipton said: “It is time for subsidies to end and carbon taxation to be put in place. You don’t want overconsumption based on getting something for less than it costs and forcing someone else to pay.” The IMF has a point that some subsidy funds could be better used for other purposes. However, will the IMF force countries to use the funds saved to pay for needed social programs? Will we see the IMF refuse to loan money to a country because that country is not spending enough on health care, education, or welfare? Quite often the IMF demands cuts in government spending that result in spending cuts in all these areas to service debt repayments.
The IMF study significantly excluded subsidies involved in giving tax breaks for drilling or exploration. Nor did the study consider the subsidies that governments provide for development of alternative energy industry. Whatever the benefits of such subsidies they increase costs which has negative effects on those with limited funds to pay for their energy needs.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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