Fiscal Policy Beyond the Budget : Quasi-Fiscal Activities in the Energy Sectors of the Former Soviet Union

A decade into the transition, many successor states of the Former Soviet Union (FSU) continue to use pervasive energy sector quasi-fiscal activities, especially low energy prices and the toleration of payment arrears, to provide large implicit and untargeted subsidies to households and enterprises. These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances. Based on two case studies--one of an energy-exporting country (Azerbaijan) and one of an energy-importing country (Ukraine)--and a survey of other FSU countries, the study finds that energy quasi-fiscal activities have declined in some of the energy-importing countries (e.g., Armenia, Kyrgyz Republic, Ukraine), but risen in energy-rich countries (e.g., Azerbaijan, Russia, Turkmenistan), largely on account of higher international oil prices. We found that energy sector payment arrears have triggered tax and other payment arrears by energy companies, and helped to perpetuate a vicious circle involving arrears, offsets, netting operations, and noncash payments. Policy recommendations are straightforward, but politically difficult to implement: increase energy prices and eliminate preferential tariffs or the free provision of services for specific consumer groups, combined with the provision of explicitly budgeted and better targeted cash transfers to needy population groups, and, if necessary, explicit subsidies to enterprises. We also argue that greater efforts are required to capture energy quasi-fiscal activities through improved public data dissemination, fiscal analysis, and measures that promote fiscal transparency and accountability.