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IMF urges targeted subsidies in Middle East

The International Monetary Fund on Wednesday urged Middle East countries to target government subsidies at the poorest households after a wave of social unrest toppled rulers in Egypt and Tunisia

Reuters, Thursday 17 Feb 2011
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The protests have highlighted the need to ensure that economic growth benefits everyone and not just a select few, IMF Director for the Middle East Masood Ahmed told reporters.

"These events have brought into sharp focus the need for more inclusive growth and better governance," Ahmed said.

With anger still smoldering in Egypt and Tunisia over rising prices, low wages and economic hardships, governments face a delicate balancing act in accommodating demands unleashed by the protests.

Ahmed said while governments may feel the need to increase subsidies to ease social pressures, it would be more effective -- and affordable -- to target such assistance at those who need it the most instead of providing general subsidies that also help the rich.

"Instead of subsidizing products you'd be targeting people," said Ahmed.

Such targeted assistance would also help ease the burden on the poor from rising global commodity prices, especially for food.

"We think that it is important to improve and modernize the existing safety nets and to make them well-targeted and permanent," Ahmed added.

Such targeted social programs in countries such as Brazil and Mexico, in which governments provide the poor with cash in exchange for children going to school or mothers taking children to clinics, have been successful in tackling poverty.

Also, government subsidies on food most consumed by the poor are other examples of programs that have worked.

"Even where transitioning to that kind of scheme ... there are things you can do to look at what products you are subsidizing and whether those products are likely to be consumed by people who need them the most," he added.

Ahmed noted that fuel subsidies tend to be less effective in helping the poor than certain kinds of food subsidies. Surveys show that some 80 percent of poor families' disposable incomes is spent on basic foodstuffs.

NO NEED FOR IMF FUNDING

Ahmed said the turmoil in Egypt and Tunisia will impact economic growth but that neither country has requested IMF funding to deal with immediate pressures on their budgets.

The largest impact on Egypt's and Tunisia's economies from weeks of political and social turmoil will be from a drop in tourism and foreign direct investment, he said.
"If either the Tunisian or Egyptian authorities decide financial support would be useful from the IMF then of course it will be ready to help," he said.

"But at this stage neither Tunisia nor Egypt have indicated that they feel financial support from the IMF is something they are looking to get right now," Ahmed added.

He said it was hard to know when economic activity will rebound as it depends on how long it takes for tourism and investment -- both important sources of foreign revenues -- to pick up again.

He said it was difficult to make firm projections for economic growth in Egypt because the situation was still unfolding. For Tunisia, however, the government's 2011 growth forecasts of 2 to 3 percent were "reasonable," he added.

He said there would be pressure on Tunisian government finances, which would increase the budget deficit because of the fall in economic activity.

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