Kazakhstan reminds world leaders of costly fuel subsidy dilemma

By Karin Strohecker

LONDON (Reuters) – A deadly uprising in Kazakhstan sparked by rising fuel prices is a powerful reminder of the struggle governments face in trying to limit public subsidies on fossil fuels as expensive energy has fueled the inflation.

Most countries have measures in place to protect consumers and businesses from the full impact of energy costs and to boost domestic fossil fuel industries. Many have a mixture of the two.

But policymakers trying to reduce the fiscal impact of huge subsidies on strained public finances, as is the case in many emerging markets, must strike a balance between the risk of social unrest and the need for reform.

“It would have been easier before, when we had lower energy prices, but now that energy prices have gone up, it is much more difficult,” said Mark Mateo of the Cooperation Organization. and Economic Development (OECD) in Paris.

“One of the effects of this is social unrest, and it didn’t just happen in Kazakhstan, it happened in many other places.”

Data compiled by the OECD showed that the governments of 192 countries spent $ 375 billion on fossil fuel subsidies in 2020, less than half the amount a decade earlier. The trend is downward, except for a slight increase in 2018, mainly driven by the rise in oil prices.

The reduction in the overall subsidy bill masks the importance of fossil fuel subsidies in emerging markets. Richest oil-producing countries like Kuwait, the United Arab Emirates and Saudi Arabia have subsidized fossil fuels to the tune of nearly $ 500 per capita in 2020, according to data from the International Energy Agency https://www.iea.org/topics/energy- grants showed.

In terms of percentage of GDP, the blow is harder for less wealthy countries like Libya with more than 15% of production or Venezuela, Uzbekistan, Algeria or Iran where it reaches nearly 5% or more.

In Kazakhstan, where a rise in fuel prices on New Year’s Day sparked violent unrest, subsidies account for 2.6% of GDP.

Consumer subsidies, favored in many emerging economies, are a brutal tool intended to protect individuals. The bill for governments is heavy, the International Monetary Fund has repeatedly said.

It also hinders efforts to reduce budget deficits and competes with other needs, such as public spending on roads, schools and health care, while exacerbating inequalities as the wealthiest households benefit most. disproportionate because they consume more.

Nigeria has announced that it will remove long-standing fuel subsidies by mid-year, replacing them with monthly payments of 5,000 naira ($ 12.12) to the poorest families in return. transport subsidy.

Energy costs also represent a larger share of inflation baskets in many developing countries compared to developed countries, exacerbating inflationary pressures from rising food prices and prompting central banks to raise prices. rate from Russia to Brazil.

“Emerging markets have always been susceptible to a social backlash from rising prices,” said Daniel Moreno, head of emerging market debt at Mirabaud. “Gasoline, food prices, public transportation could be absolutely anything.”

High grain prices are among the factors cited as the triggers for the Arab Spring uprising ten years ago.

Social unrest linked to energy prices is not exclusive to emerging economies. An increase in the fuel tax sparked yellow vests protests in France in 2018, although the underlying issues were often more deeply rooted and diverse, as in Kazakhstan.

For oil-producing countries, the financial costs are somewhat offset by increased demand, although this is negative as the world seeks to wean itself off fossil fuels and subsidies come under increasing pressure from public support to combat it. climate change.

The gulf on this issue between emerging and developing countries was evident at the UN climate summit COP26 in November.

Fuel subsidies have been a major sticking point https://www.reuters.com/business/cop/china-saudi-seek-block-anti-fossil-fuel-language-un-climate-deal-sources-2021 -11-12 with large developing countries such as China and Saudi Arabia opposing wording that calls on governments to remove public financial support for oil, gas and coal.

Many analysts predict an increase in social unrest as policymakers struggle to navigate.

Around the world, riots, general strikes and anti-government protests https://www.reuters.com/world/pandemics-protests-unrest-grips-developing-countries-2021-07-28 have already increased by 244% during of the last decade, the 2021 Global Peace Index has been found. Changing economic conditions in many countries will increase the likelihood of political instability and violent protests, index researchers say.

In Ecuador, protests sparked by the removal of fuel subsidies for transport in 2019 https://www.reuters.com/article/us-ecuador-protests-idUSKBN1WT265 forced the government to reintroduce support soon after.

Now, indigenous groups and unions plan to revive last year’s protests against a price hike for Ecuador’s most widely used gasoline blend and other reforms promoted by conservative President Guillermo Lasso. Walks are scheduled for January 19.

($ 1 = 412.5500 naira)

(Reporting by Karin Strohecker in London, additional reporting by Marc Jones and Yury Garcia; editing by Barbara Lewis)