Energy subsidies tumble across GCC

MUSCAT, JUNE 18 - Energy subsidies plummeted dramatically across the Gulf Cooperation Council (GCC) states on the back of reforms fuelled by the slump in hydrocarbon export earnings — the mainstay of government revenues in the region, according to a report by the International Monetary Fund (IMF). Pre-tax energy subsidies are estimated to have tumbled to $47 billion in 2016, down from $116 billion, said the global multilateral institution in a report titled ‘The Economic Outlook and Policy Challenges in the GCC Countries’. While energy price reforms are well advanced in some member states of the bloc, the pace of reforms could be accelerated in others, it noted.

“Countries have made significant strides to reduce fuel subsidies,” the report said. “Gasoline and diesel subsidies have been fully eliminated in the UAE, and substantially reduced in Oman. Their prices were brought close to the international level and the authorities put in place automatic price adjustment mechanisms that link domestic prices to movements in international oil prices. The upward adjustment of lower grade gasoline prices, however, was capped in Oman in February 2017 until a mechanism to protect the most vulnerable has been put in place. While significant price increases have also taken place in Kuwait, Saudi Arabia, Qatar and Bahrain, fuel prices remain well below international levels.”

That mechanism referenced in the report has since been put in place in the Sultanate, with an estimated 200,000 Omani motorists earning RO 600 or less entitled to subsidised petrol or diesel up to a limit of 200 litres per month. A further 2,000 Omani fishermen are also part of the National Subsidy Scheme (NSS) which entitles nationals falling in low income categories to receive subsidised fuel. Recipient numbers are expected to burgeon post August 1, 2018 when the salary cut-off, currently set at RO 600, jumps to RO 950 per month, in line with a recent decision by the Council of Ministers to offset the effects of rising international crude prices on local fuel tariffs.

Electricity price reforms are also moving forward, but progress in this area has been slower, according to the IMF report. “In Bahrain, electricity and water prices are being increased for businesses and households based on a multi-year plan, and exemptions from increases have been provided for nationals on one property, and for small businesses. Kuwait and Oman increased electricity prices for businesses and other big consumers in the first half of 2017. Further prices increases are expected in Kuwait and Saudi Arabia, although in Kuwait, nationals will be exempt,” the report said.

While electricity prices in Saudi Arabia and the UAE are comparable to that of the US, the electricity generation costs are much higher in the Gulf region, primarily due to the usage of fossil fuel. “Reforms should continue in this area until full cost recovery is attained,” it noted.

As for water prices, reform has been very limited, the report states. “Water subsidies are substantial in the GCC as almost all the water for consumption is desalinated by burning fossil fuel,” it said. Qatar, Bahrain and Saudi Arabia all increased water prices during 2015-16, while Kuwait increased the rates in 2017 for businesses and expatriates. Some countries, notably Saudi Arabia, plan to further rationalize water prices to cost recovery over the medium-term.

The IMF report, drafted by staff of the Fund, however emphasises the importance of protecting the vulnerable from the impact of subsidy reforms. “To build public support, it is important to design mitigating measures to protect the most vulnerable households from the impact of subsidy reforms, which should be income-tested and well targeted. Such schemes are being designed in Oman and Saudi Arabia,” it added.

Conrad Prabhu