Countries should reduce subsidies on energy: IMF

ISTANBUL - Hürriyet Daily News

Fuel prices in Turkey have been completely liberalized since Petroleum Market Law came into effect in 2005.

The International Monetary Fund (IMF) has urged countries to reduce subsidies on energy in its recent study, “Energy Subsidy Reform,” while praising the process of liberalizing petroleum sector in Turkey.
In a broad-reaching report, the IMF said subsidies of oil, petrol and electricity are aimed at helping consumers but end up costing them, as governments struggle to shoulder the financial burden.

Moreover, subsidies encourage energy waste, discourage investment in energy-efficient industries and exacerbate pollution and global warming.

Worldwide, direct subsidies on energy – when consumers pay less than the basic supply costs – amounted to $480 billion in 2011, according to the IMF. If post-tax subsidies are counted – when the prices do not cover such things as the negative impact on the environment – government support worldwide is $1.9 trillion.

Turkey’s case

The report stated that before 1990 in Turkey, the public distribution company Petrol Ofisi and the public refining company TÜPRAŞ were subsidiaries of TPAO, the public petroleum exploration and production company. At that time, the industry was governed by public decrees.

“Under a new law passed in 1989, private companies were allowed to set prices, and in 1990 public companies began to be privatized. Under the 1989 law, importers, refining companies, distribution companies and retailers were, in theory, to be allowed to set the prices of crude oil and petroleum products,” it said.

In 1998, the Automatic Pricing Mechanism was adopted by the government, which set a ceiling on the prices of almost all oil products based on international petroleum prices and the exchange rate. 
The Petroleum Market Law was passed in 2003 to achieve the institutionalization of the market economy and to comply with EU legislation and other international obligations, the report said, adding that the most important impact of the Petroleum Market Law was the full liberalization of fuel prices, which came into effect in 2005. Since then, fuel prices have been set by the market. 

“The short-run impact of energy reforms on household welfare has been limited because of relatively high household income. This assured the public that the country was moving in the right direction and prevented any setback to reforms from occurring,” the report said. 

The report underlined that some measures cause the impacts of reforms to migrate. The new Turkish Corporate Tax Law passed in 2006 exempts public transport companies owned and managed by provincial administrations value added and excise taxes.