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Mr. Sanjeev Gupta, Mr. Benedict J. Clements, Mr. Kevin Fletcher, and Ms. Gabriela Inchauste
This paper discusses issues relating to the domestic pricing of petroleum in oil-producing countries. It finds that in most major oil-exporting countries, government policies keep domestic prices below free-market levels, resulting in implicit subsidies that equaled 3.0 percent of GDP, on average, in 1999. Moreover, the paper argues, these petroleum subsidies are inefficient and inequitable-entailing substantial opportunity costs in terms of forgone revenue or productive spending-and also procyclical, complicating macroeconomic management. Nonetheless, the elimination of petroleum subsidies is often politically difficult, although countervailing measures and publicity campaigns can help engender support for reform.
Mr. Sanjeev Gupta

groups in 1999. Cyclicality The policy of maintaining below-world-market prices for petroleum products has important implications for macroeconomic management. As noted earlier, many oil-exporting countries tend not to adjust domestic prices fully in response to changes in world prices. For net oil exporters, this means that implicit subsidies will be procyclical—subsidies will increase when world oil prices increase, which also tend to be periods of economic expansion for these countries. The procyclicality of subsidies will thus exacerbate the effects of

International Monetary Fund

Front Matter Page Regional Outlook September 2005 ASIA AND PACIFIC DEPARTMENT Contents Executive Summary I. Economic Developments and Outlook II. Policy Developments and Issues III. Saving and Investment IV. Exchange Rates and the Current Account V. Trade and Financial Integration Boxes: 1. Electronics Exports 2. Industrial Countries: Developments and Outlook 3. The Impact of World Oil Price Increases 4. The Impact of the Removal of Textiles Quotas 5. Avian Influenza: Is It a Serious Threat? Annex I. The Extent of

International Monetary Fund

to the terms of trade shock through fiscal and structural measures. The measures include passing on world oil price increases to consumers by reversing fuel excise cuts and reducing budget spending to accommodate the financing needs of the cotton sector. To close a residual financing gap of 0.9 percent of GDP, the authorities have requested increased concessional financing . Donors offered assurances to cover the financing gap, and the authorities have committed to covering any shortfalls that arise through further fiscal adjustment. The package will be finalized

International Monetary Fund. External Relations Dept.

holding down fuel prices In many developing countries, fuel subsidies have been popular and substantial, but they have taken a considerable toll on budgets and have offered little comfort to the poor. Bolivia Ghana Jordan Mali Sri Lanka Background Automatic formula introduced in 1996 as part of sectoral reforms but abandoned in late 1990s. Automatic formula introduced in January 2003. Formula abandoned when world oil prices increased. In early 2004, the government announced elimination of subsidy over four years in line

International Monetary Fund

Outlook 2. Fund Relations 3. Relations with the World Bank Group 4. Relations with the Asian Development Bank 5. Statistical Issues E xecutive S ummary India’s economic performance continues to be impressive for the third year running . Real GDP growth exceeded 8 percent y/y in the first half of 2005/06, led by strong domestic demand. Inflation remained low through August 2005, but has risen in recent months reflecting higher pass-through of world oil price increases and robust demand. Real GDP growth should moderate to 6¾ percent in 2006/07 as the