International Monetary Fund (IMF) Managing Director Christine Lagarde said that there was no reason to continue pursuing the energy subsidy policies in Arab countries, as subsidies cost, on average, around 4.5% of GDP in the Arab oil-exporting countries, and around 3% of GDP in oil importing countries, despite the drop in global oil prices.
She added that energy subsidies lack transparency, and are often implicit, not included in the budget, highly unequal, and favouring the rich who consume the most energy. Lagarde’s remarks came during her opening speech to the third Annual Arab Fiscal Forum in Dubai on Saturday.
Fiscal policy has to be on a sustainable path, otherwise, the increase in debt will burden young people and there will be insufficient funds to finance the spending needed for inclusive growth, Lagarde explained, noting that the spending policy specifically plays a vital role in supporting and promoting the sustainable and inclusive growth needed in the Arab region.
“The level of spending in Arab countries is much higher than the average in emerging economies, and is close to 55% of GDP in some countries of the region,” she added.
With regards to public spending trends, Lagarde pointed out that although public investments are a priority for inclusive and sustainable growth, yet other priority areas, such as health, education, and social protection, are marginalised by low spending, while spending in other areas such as energy subsidies and public-sector wages are rising.
Lagarde expressed her understanding that public sector and government jobs are a “social safety valve,” but when the public sector provides one out of every five jobs, it will bear enormous costs that affect the sustainability of public finances, the ability to create a dynamic private sector, and attaining good governance.
Such challenges are not limited to the Middle East; reforming the large and rapidly growing public-sector wage bill was a necessity faced by various countries, she added, where the careful design of reforms allowed countries such as Ireland to reduce this bill by 4% of GDP.
Lagarde concluded her speech by saying that all these factors lead to below average social results, as life expectancy in Arab countries is about 10 years lower than the average among members of the Organisation for Economic Co-operation and Development (OECD), while enrollment in education is still below universal levels, with a large number of girls being forced to stay at home and the performance of students in standardised tests among the lowest in the world, in addition to the fact that the poverty rate in the region is relatively high while inequality remains a concern.