World Bank Warns Against Unaffordable Energy Subsidies

World Bank President Ajay Banga has warned governments against implementing energy subsidies they cannot afford, stating that such measures could deepen fiscal strains and create larger economic problems.

The warning comes as the World Bank indicates that the conflict in the Middle East is expected to slow global economic growth and increase inflation. The institution cautioned that these macroeconomic pressures make it critical for nations to manage their spending carefully to avoid unsustainable debt.

Fiscal Risks and Oil Revenue

The World Bank has provided specific guidance to Nigeria regarding the management of its energy finances. The institution advised the federal government against using rising oil revenues as a basis for increased spending or the funding of subsidies.

While higher global oil prices are expected to boost government revenues in the short term, the World Bank warned that these gains should be treated as temporary and not as a permanent source of funding for subsidies.

The Shift Toward Targeted Support

The current warnings align with a long-standing World Bank position that universal energy support is often fiscally unsustainable. On October 26, 2022, then-World Bank President David Malpass stated that it is too expensive for governments to provide energy bill assistance to all citizens.

Governments are saying we will take care of everyone, which is just too expensive

David Malpass

Malpass noted that untargeted support schemes, similar to some Covid-era policies, push global debt to record levels and often fail to provide sufficient relief to those at the bottom of the income scale. He argued that subsidies should be temporary and strictly targeted toward the most vulnerable populations.

This perspective was supported by research from the National Institute of Economic and Social Research regarding the United Kingdom’s energy support scheme. The research suggested that the UK’s approach of limiting average bills for households was too expensive because it was untargeted, with a potential cost of £30bn.

The Institute further noted that households could save up to £20bn per year if they were incentivized to invest in energy-saving measures, such as the installation of solar panels, rather than relying on broad subsidies.

Citizen Attitudes and Reform Challenges

Despite the economic risks, the World Bank has acknowledged that policymakers historically find it difficult to implement meaningful energy subsidy reforms. To better understand this challenge, the World Bank conducted a study surveying 37,000 respondents across 12 middle-income countries.

The study used tools from experimental economics and a novel data collection method to systematically examine citizen attitudes and preferences toward subsidy reforms. This research was designed to help governments build public support for changes that are necessary to address growing debt distress and the global need to curb greenhouse gas emissions to combat climate change.

The World Bank continues to emphasize that while a social safety net is necessary to protect people during crises, the transition from broad subsidies to targeted assistance is essential for maintaining long-term fiscal stability.