The macroeconomic costs of energy policies: Quasi-fiscal deficit in the Middle East and North Africa

Abstract

The annual electricity investments needed in the Middle East and North Africa region to keep up with demand have been estimated at about 3% of the region's projected gross domestic product. However, in most economies of the region, the ability to make those investments is limited by fiscal and macroeconomic constraints. This paper demonstrates that by improving the management and performance of the region's utilities, more than enough resources could be freed up in most economies of the region to finance the investments needed. These resources represent what is known as the quasi-fiscal deficit (QFD) associated with the management of the electricity sector in policy discussions. The paper presents the first evaluation of its size and composition in 14 economies of the region. Based on 2013 data, the average QFD is estimated at 4.3% of gross domestic product (GDP). It is lower than 3% for only four economies. For most, its main driver is the underpricing of electricity, which costs on average 3.3% of GDP. Commercial inefficiency comes next, at an average cost of 0.6% of GDP. Technical and labor inefficiencies represent, respectively, 0.5 and 0.2% of GDP.