TOKYO – International Monetary Fund (IMF) Middle East and Central Asia Department Director Masood Ahmed has called on countries in the Middle East and Northern Africa (Mena) region to slash subsidies, noting that the region, aggregately spends $200 billion on general subsidies. Answering a question from TradeArabia, he said these subsidies are not an efficient way of helping the poor, because the bulk of the spending are going to people who consume more energy, who are generally better off. “In our view, it's important to protect the poor. But the better way to do that is more targeted form of subsidy rather than subsiding energy for all – rich and poor," he said. On the volatility of oil price and its impact on budgets, he said oil-exporting states have built up record levels of surpluses. “However, we must remember that only in the recent past the price had been at much lower levels," he warned. Although the price of oil has fallen from its April peak, thanks in part to recovering supply from Libya and record volumes of oil production in Saudi Arabia and Kuwait, it is expected to stay close to its 2011 levels in 2012–13. As a result, the oil exporters' combined current account surplus is anticipated to remain at its historic high of around $400 billion in 2012, an IMF report said. However, these record surpluses are sensitive to a change in the oil price: a 10 percent drop in oil prices would bring down that surplus by about $150 billion, it said. “In the budget planning, it's always useful to introduce an element of margin to be able to have a buffer to sustain the programs in the time of lower oil price," he said. Though a number of these countries have built up huge reserves, there others who have fixed their breakeven levels at a high oil price. These will face problems in adjusting their spending quickly when the oil prices are down, he said. In the context of booming oil prices and growing social demands, government expenditure on wages and salaries has been rising dramatically in most oil exporters in recent years. This stepped-up spending has contributed to a faster increase in fiscal breakeven prices (the oil price at which an oil exporter's fiscal balance is zero for a given level of spending and revenues) relative to increases in the actual oil price, he said. Uncertainty over the euro zone debt crisis is now showing signs of restraining business and household spending in the Middle East, a top IMF official said Sunday after weekend meetings of the International Monetary Fund and World Bank. Ahmed told Reuters the uncertainty was adding to already existing concerns over political transitions in Arab Spring nations, and a heavy election and legislative calendar in 2013 in the region. He said the message from the region's finance leaders during the IMF meetings in Tokyo was that Europe's debt crisis was seeping into businesses and household spending plans. “It's not simply a question of the direct impact in terms of the rest of the world buying less of their products or sending less investment, but they feel the uncertainty (over Europe's debt crisis) is also spilling over into their economies," Ahmed said in an interview. Ahmed said the region was mostly immune to the effects of European banks reducing their debt because of limited financial ties with eurozone markets. “Even where there are subsidiaries of European banks in the region, these subsidiaries are generally funded from local sources, so the deleveraging of European banks hasn't had the same impact," Ahmed added. Ahmed said some companies in the region were finding it more expensive to refinance debt. In some cases, refinancing of syndicated loans was being converted into refinancing through bonds because banks were less keen to lend. Ahmed said the transition to democracy underway in Morocco, Tunisia, Jordan, Egypt, Yemen and Libya was still not complete. Over the next 12 months, many of these countries will hold elections or plan constitutional revisions. “For many investors and decision-makers, they are holding back waiting for this process to define the future policy directions," said Ahmed. A sharp drop in tourism revenues and business activity after the Arab Spring forced many countries to increase government spending to avoid further protests. Higher food and fuel prices have also meant that government subsidies have risen. Ahmed said increased spending had drawn down reserves and it was time for governments to reduce spending and make investments more effective. “We're saying you have to consolidate now because financing pressures and the reserve buffers have been used up, and if you don't consolidate there is a risk of increasing your vulnerabilities. The last thing you want is to have a crisis in the middle of a political transition," he added. Some 60 percent of benefits on subsidies are going to the top 30 to 40 percent of the population who do not need it, Ahmed said, urging government to target subsidies to the poorest. – Agencies
