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Oil Prices Reduces Public Discontent
conceivably longer. Furthermore, for countries such as these that are dependent on oil exports, a move toward less-carbon-intensive value chains requires comprehensive commitments to stronger diversification of their economies so as not to be left with stranded assets.
Some countries have taken advantage of historically low global oil prices to initiate reforms to their fuel subsidy programs (box 3.4). The 2020 slump in oil prices, resulting partly from the COVID-19 crisis, opened up a window of opportunity for countries to reform their subsidy programs and minimize public backlash. Although many of the Middle East and North Africa economies have unfortunately not used this opportunity, others have implemented more or less far-reaching reforms.
BOX 3.4
Low oil prices reduce the knock-on impacts on the population from removing fuel price subsidies (Benes et al. 2015), because low global prices are passed through to consumers (Coady et al. 2019).
To further reduce knock-on impacts and public discontent, compensation for fuel subsidy removals (especially to the poor) and clear communication are important (see also box 3.3). Plans to protect the poorest and most vulnerable parts of the population from the effects of increased fuel prices are necessary if the subsidy reforms are to have a chance at success. For example, in the Islamic Republic of Iran, the major subsidy reform plan in 2010 was supplemented by cash transfers, with almost 90 percent of the general population receiving about US$40 a month to reduce the economic pressure caused by the price increases (Fassihi 2010). Clear, well-targeted communication campaigns that explain the reasoning behind the reforms are a key element in subsidy reduction programs.
In 2020, several Middle East and North Africa countries took advantage of low oil prices and began price reforms.
Tunisia introduced an “automatic monthly price adjustment mechanism” that liberalizes domestic prices of gasoline and diesel and lets them fluctuate with international prices (Cockayne and Calik 2020). Undertaking this measure when oil prices were low allowed the government to cut retail prices, avoiding the political pressure often accompanying such reforms.
Algeria raised the prices of gasoline and diesel because of fiscal pressure induced by the slump in global oil prices. The price of gasoline was increased by around 7.5 percent and diesel by more than 20 percent in June 2020 (Dzair Daily 2020), although domestic
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BOX 3.4
fuel prices continue to be subsidized (Ahmed 2020).
In Libya, the Ministry of Economy proposed reforms of fuel subsidies in March 2020, citing their distortive nature; furthermore, around 40 percent of subsidized fuel is smuggled outside the country.a At US$0.11 per liter, the price of gasoline is extremely cheap, even in the regional context. The proposal was to replace the fuel subsidies with direct cash subsidies, raise fuel prices, and potentially reduce fuel consumption by 30–40 percent (Zaptia 2020a). Similar proposals have been made by the Libyan policy reform think tank, the Economic Salon (Zaptia 2020b). This volume’s drafting team could not verify the implementation of these reforms. However, conflicts between tribal leaders and the Tripoli government in 2020 led to blockages of oil facilities, leading to soaring prices and increasing black-market sales in some parts of the country. Even though the official price of US$0.11 per liter of fuel was maintained, prices charged by gas stations varied depending on the location and were much higher during these periods (Westcott 2020).
Lebanon may have to stop subsidizing fuel, food, and medicine as its central bank reserves diminish (Reuters 2020). The country’s subsidy system is inefficient, with only 20 percent of subsidies reaching Lebanese citizens in need and the rest going to better-off residents or leaving the country through smuggling to Syria. However, removing fuel subsidies would be perceived as hitting the country’s small industrial sector (Rayess 2020).
Syrian officials announced in May 2020 that automobile fuel subsidies will be reduced to tackle the country’s deepening economic crises. Cars with engine displacements of 2,000 cubic centimeters or more as well as owners of more than one car were excluded from receiving subsidies (AP 2020). In October 2020, the government increased prices by more than 100 percent for diesel and more than 50 percent for gasoline amid a fuel shortage that also led to tighter rationing of both subsidized and unsubsidized fuel (Atalayar 2020).
In contrast, Saudi Aramco, the Saudi Arabian major oil company, slashed gasoline prices by almost 50 percent in May 2020 (Khalid 2020) after the kingdom introduced sharp increases on almost all fossil fuels in the course of a reform program in 2018 and smaller price increases in 2019.
a. On August 6, 2020, the US Treasury Department imposed sanctions on three Libyans and a Maltabased company, accusing them of acting as a network to smuggle drugs and Libyan fuel into Malta and thereby contributing to instability in Libya (Psaledakis 2020).
COVID-19 brought about some backtracking on subsidies. In response to the COVID-19 pandemic, some countries increased fossil fuel subsidies, contrary to green growth objectives. For instance, in Egypt, the government increased subsidies for the aviation and industry sectors (Moisio et al. 2020). Similarly, Saudi Arabia and the United Arab Emirates (temporarily) increased electricity subsidies for households and the industrial sector. These subsidies amounted to US$240 million in Saudi Arabia and around US$5.7 million in the United Arab Emirates (including water subsidies). In both countries, as in the rest of the Middle East and North Africa, electricity is still mainly produced from fossil fuels; hence, these measures can be considered fossil fuel subsidies (Moisio et al. 2020). In addition, Malta announced a €900 million (7 percent of GDP) package to stimulate economic recovery that includes a reduction in fuel prices. The hope is that these were just temporary measures and that the countries will return to green growth trajectories.
Introducing Environmental Fiscal Reforms
Environmental fiscal reforms in the form of green taxes in the Middle East and North Africa can be a suitable tool for decreasing pressure on fiscal budgets and promoting more sustainable patterns of consumption. Currently, environmental taxes play a negligible role in the tax-policy mix of most of the region’s economies. Although such taxes in 2018 accounted for around 10 percent of total tax revenue in several EU member states (such as Bulgaria, Estonia, Greece, and Latvia), in the Middle East and North Africa countries for which data are available, these taxes contributed around 5 percent and 6 percent of tax revenues in Tunisia and Egypt, respectively, and 1.7 percent in Morocco. In the GCC countries, pricing CO2 emissions could generate significant tax revenues (Saidi 2019) that they could use to combat the adverse fiscal effects of the COVID-19 crisis. Box 3.5 discusses international experiences with implementation of environmental fiscal reforms.
Several Middle East and North Africa countries introduced environmental taxes in recent years. In its budget law for the 2019–20 fiscal year, the Islamic Republic of Iran introduced a tax on goods that cause environmental damage in their manufacture or use. A 2 percent tax will be imposed on domestically produced paint, coating, primer, tire, tubes, plastic and electronic toys, plastic containers, polyethylene terephthalate, and melamine, with a 3 percent tax on imports of the same products. Furthermore, locally produced light bulbs, computers, linoleum, cellophane, and nylon will be taxed at 3 percent and imports thereof at 4 percent (Eghtesad Online 2019).
Algeria introduced an environmental (pollution) tax on all motor insurance policies of around US$12.50 for passenger vehicles and
