Holding the IMF and Governments Accountable for Subsidy Reform

News Program UpdatesHolding the IMF and Governments Accountable for Subsidy Reform

IMF Findings for Subsidy Reform in Middle East and North Africa (MENA)

The International Monetary Fund (IMF) conducted a study that identified factors for successful subsidy reform in MENA. These factor should be considered the minimum Governments and the IMF should be held accountable to these minimum standards when developing subsidy reforms.

The IMF focused on aspects particularly relevant for MENA – namely political economy factors (type of government), macroeconomic environment and fiscal pressures, and social safety nets and mitigating measures. The IMF gathered 22 country case studies with 28 reform periods.

The IMF defines a reform as successful if it leads to a durable increase in prices of subsidized goods, thus reducing fiscal costs and freeing resources to better support the poor, even if it does not fully bring up prices to international levels. The IMF recommends developing well-targeted measures to mitigate the impact of price increases on the poor, a crucial component for building public support for subsidy reforms. The IMF does not discuss how to design effective mitigation measures, but this should be done in close consultation with civil society and impacted communities.

How the IMF judges the success of a reform:

o Unsuccessful (Score=0): reform attempts were short-lived (the initial price increase was reversed or reduced)

o Partially Successful (Score=1): initial price adjustments at time of implementation of the reform were sustained and/or when there were significant adjustments of domestic prices but not enough to reduce the price gap

o Successful (Score=2): the initial price adjustment was followed by additional adjustments leading to a significant reduction of the subsidy burden and the price gap

Key Factors for Successful Subsidy Reform

Factors essential to successful subsidy reform
*associated with a successful outcome in 100% of cases

1. Cash and in-kind transfers were granted

2. Other mitigation measures (e.g. social safety nets) were implemented

3. Subsidies targeted specific groups

4. Government ownership and commitment is strong

5. Government tried to build consensus

6. Government developed communication strategy and undertook a public information campaign

Other factors that the IMF highlights as having very high rates of success:

§ Sufficient analysis of subsidy incidence is associated with a successful outcome in 86% of cases

§ Gradual price increases are associated with a successful outcome in 75% of cases

§ Technical assistance by international partners is associated with a successful outcome in 88% of cases

6 Factors in Successful Subsidy Reform

Factor for Success	Components	Case Studies & Indicators
Good reform preparation, gradual pace of adjustment, and breadth of reform	Well prepared reforms which draw on accurate diagnostics and allow for gradual pacing	1983 reform of subsidies on cereals in Tunisia, where a 100 percent price increase led to riots and forced the cancellation of the price increases
Sufficient analysis of subsidy incidence, which contributes to good policy discussion and targeting of mitigating measures	86% of the cases where the authorities conducted an incidence analysis were associated with a successful outcome
Gradual pace of reform (versus a shock approach) · subsidy is phased out slowly (5 years or more) · Price increases are modest (less than 50%)	Case studies indicated that gradual price increases (defined as less than 50% at the start of the reform) are more likely to be successful. 75% of the cases where price increases were gradual were associated with a successful outcome
Breadth of reform: more comprehensive of a scope, targeting a wide range of fuel or food products. In the case of fuel products, the development of substitute forms of energy is often effective when the new product offers a lower-cost alternative that also has economic benefits. When countries are not ready to implement a comprehensive subsidy reform, phasing in price increases and sequencing them differently across energy products may be appropriate	Examples include reforms that improve service delivery or product availability in exchange for tariff and price increases, such as electricity tariff adjustment and power sector restructuring in Mauritania
Strong government leadership and consensus building	Effective communication strategy that underlines the costs of the subsidy, who benefits from it, what are the reform benefits, and why other options for assisting the poor (other than subsidies) are better. Comparison with peer countries more advanced in the reform process can be useful	A well-planned communications strategy is essential to help generate broad political and public support. For example, a government awareness campaign preceded price adjustments in Tunisia’s 1991 successful food subsidy reform. Newspapers also focused on the weight of food subsidies on the budget and compared food prices in Tunisia with those in neighboring countries
Stakeholder consultation and consensus building: parliament outreach plays a positive role in reform. Outreach to influential beneficiaries, who are directly affected by subsidy reform, is also necessary to manage vested interests	For example, fuel subsidies may be intended to lower transportation, heating, and cooking costs for the poor but may actually have benefits that accrue to only a limited segment of society (and not necessarily the intended target group) – policymakers must consult with these key stakeholders
Transparency: communication is more credible when accompanied by a systematic effort at improving transparency overall. Transparency helps avoid conflicts of interest, reduces the power of vested interest groups, and allows for identification of political and economic relationships	In the case of fuel, it is useful to explain the composition of the prices at the pump and corresponding tax, the size of subsidies, and the functioning of automatic pricing mechanisms
Introduction of mitigating measures to soften the impact of the reform on the poor	Reforms were more successful when governments introduced measures to mitigate the impact of the price increase on the poor and most vulnerable. For this reason, the introduction of alternative measures, appropriately designed to mitigate impact on those most affected by subsidy removal, is crucial	One means for doing so would be compensating the immediate impact of the subsidy removal in the short term and replacing the subsidy model of social support with a different model centered on targeted social safety nets in the longer term. These measures can include cash and in-kind transfers. Mitigation measures are associated with successful outcomes in 100% of cases
Reform follow-up: governments must keep the reform momentum to resist the push-back from the vested interests that are likely to mobilize when the effects begin to be felt	In Iran, the reform was preceded by a broad communication campaign to educate the population on the growing costs of low energy prices. However, following its implementation, the government did not provide equally extensive public official information about the de facto implementation and outcome of the reform which limited the program’s success
*Support from international partners, particularly technical* assistance**	Collaboration with and support from international partners such as international financial institutions, multilateral agencies, and donors can be essential. They provide political legitimacy, peer pressure, research and technical assistance, sharing of best practices, establishment of rules, financial support, and increased accountability	88% of the cases where the reform was undertaken with technical assistance were associated with a successful outcome
Favorable economic conditions, particularly higher economic growth	Growth	Reforms launched in the context of low growth were less successful than reforms undertaken in an environment of high economic activity
Inflation and international commodity prices	A high level of initial inflation was associated with least successful outcome. Commodity prices do not seem to play a significant role
Public finances	Reforms have been more successful when they are part of a broad-based fiscal strategy to reduce fiscal deficits and free resources toward social spending and infrastructure
Presence of a coalition government at the time of reform	Political conditions	More successful reforms were associated with a multiparty government. Under a minority government, reforms are less likely to be revered because their implementation likely required support of the opposition