By Karin Strohecker

LONDON, (Reuters) – A tragic uprising in Kazakhstan triggered a rise in fuel prices is a stark reminder of how governments struggle to reduce public subsidies for fossil fuels. This comes as high-priced energy fuels have fueled inflation.

Most nations have provisions in place to protect their citizens and firms from the effects of high energy costs. They also aim to increase domestic oil and gas production. A lot of countries combine both.

However, policymakers who want to decrease the fiscal impact of huge subsidy bills on stretched public finances like in emerging markets must balance the risks associated with social unrest and the necessity for reform.

“It would’ve been much easier when there were low energy prices. But now it is more complicated,” Mark Mateo from the Organisation for Economic Cooperation and Development in Paris stated.

Social unrest is one of these effects, which has occurred in many other countries as well.

According to data compiled by OECD, governments from 192 countries spent $375Billion in fossil fuel subsidies in 2020 – less than half what it was a decade before. With the exception of an upward trend in 2018, which was primarily driven by an increase in oil price, the trend has been downward.

The importance of subsidy subsidies in emerging markets is not being recognized by the reductions in total subsidy bills. Wealthier oil-producing nations such as Kuwait, the United Arab Emirates and Saudi Arabia subsidised fossil fuels to the tune of nearly $500 per capita in 2020, data from the International Energy Agency https://www.iea.org/topics/energy-subsidies showed.

The hit on GDP is greater for countries with lower incomes, such as Libya, which accounts for more than 15%, or Venezuela, Uzbekistan and Algeria, where the impact amounts to almost 5%.

Subsidies account for 2.6% GDP in Kazakhstan where an increase in fuel prices on New Year’s Day has caused violent unrest.

These subsidies to consumers, which are popular in emerging economies, serve as an effective tool for protecting individuals. As the International Monetary Fund repeatedly stated, there is a huge bill to governments.

This also makes it difficult to reduce budget deficits. It competes with other need, like public spending on roads and schools, and adds to inequality by allowing richer households to benefit more because they consume less.

Nigeria said that they will end long-standing fuel subsidies and provide 5,000 Nigerian naira (or $12.12 per month) to poor families in return for transportation subsidy.

Inflation baskets also include a higher proportion of energy costs in developing countries than they do in developed nations. This adds to inflation pressures caused by food price increases and prompts central banks to hike rates from Russia to Brazil.

Mirabaud’s Daniel Moreno, head of emerging market debt said that “Emerging Markets have always been vulnerable to experiencing a social backlash due to rising prices.” Gas, food prices and public transport can all be affected.

A decade ago, high grain prices were cited among other factors that triggered the Arab Spring.

Rising economies do not have to suffer from social unrest caused by rising fuel prices. France’s yellow vest protests in 2018 were triggered by a fuel tax hike. However, the underlying problems are often more complex and varied than they are here in Kazakhstan.

The financial benefits for oil-producing countries are partially offset by the increase in demand. However, this is still a problem as the world looks to reduce its dependence on fossil fuels and subsidy are being squeezed to the limit due to public support of climate change.

At the U.N. climate summit, COP26 in November, it was clear that there is a wide gap between developing and emerging nations on this topic.

Fuel subsidies were a major sticking point https://www.reuters.com/business/cop/china-saudi-seek-block-anti-fossil-fuel-language-un-climate-deal-sources-2021-11-12 with large developing nations such as China and Saudi Arabia objecting to wording that requests governments unwind public financial support for oil, gas and coal.

Analysts predict that there will be an increase in social unrest, as policymakers struggle to make sense of the situation.

Around the world, riots, general strikes and anti-government demonstrations https://www.reuters.com/world/pandemics-protests-unrest-grips-developing-countries-2021-07-28 have already increased by 244% over the last decade, the 2021 Global Peace Index found. Researchers for the index believe that changes in economic circumstances will increase the risk of violent demonstrations and political instability in many countries.

In Ecuador, protests sparked by the removal of transport fuel subsidies in 2019 https://www.reuters.com/article/us-ecuador-protests-idUSKBN1WT265 forced the government to re-introduce the support shortly afterwards.

Unions and indigenous groups plan to restart last year’s protests against the increase in gasoline prices and other reforms proposed by President Guillermo Lasso. January 19th is the date for marches

($1 = 412.5500 naira)