The government of the emirate of Abu Dhabi is looking at ways to reform its system of subsidies for electricity and water, a senior International Monetary Fund official told Reuters on Wednesday, in what would be a landmark move by the emirate.
Several Gulf oil-exporting countries are reviewing their generous cradle-to-grave welfare systems, as plunging global oil prices put pressure on their finances.
They ramped up spending to ensure social peace after the 2011 Arab Spring uprisings, and since then they have been reluctant to make politically sensitive changes to the subsidies, which encourage waste and drain state coffers.
Now, however, tumbling oil prices – Brent crude reached a four-year low of just below $82 per barrel on Wednesday – are giving them political cover to revive reform plans.
“We discussed it here at the policy level, particularly with the Abu Dhabi government, which indicated they are now looking at ways to streamline their subsidy policies and put in place something different, something better targeted,” said Harald Finger, the IMF’s head of mission for the United Arab Emirates.
“This is particularly the case of the electricity and water subsidies. It is probably too early to know exactly what is their plan, but the broad direction in which it is headed is the right one,” he said following meetings with local authorities.
The Abu Dhabi Department of Finance did not immediately responded to Reuters requests for comment.
Subsidies and transfers account for nearly 20 per cent of Abu Dhabi’s budget, or Dhs47.8 billion ($13.0 billion) this year, the IMF has estimated, using data from the Abu Dhabi Department of Finance.
Household electricity bills are so low some people leave their air conditioning on when they go on holiday. UAE citizens pay just five fils (about 1 U.S. cent) per kilowatt hour in Abu Dhabi and get water for free. Foreigners pay about 15 fils for electricity.
Abu Dhabi is by far the largest of the seven members of the UAE and exports most of its oil. Despite the oil price drop, it is not close to running out of money, so any reforms may be minor.
The IMF has estimated that the UAE as a whole will need an average oil price of about $77 per barrel next year to balance its state budget. Even if that threshold is breached, Abu Dhabi holds an estimated $773 billion in its largest sovereign wealth fund, so it can fall back on massive reserves.
Nevertheless, Abu Dhabi’s move appears to be part of a trend in the Gulf. Kuwait’s government said last month that it planned to cut subsidies for diesel fuel and kerosene, and Oman’s financial affairs minister told Reuters that his government was likely to start cutting some subsidies next year.
In 2010, when oil prices were at similar levels, the UAE raised its petrol prices by 26 percent. But at $0.47 per litre, they remain very low by international standards.
Finger said it would be important for Abu Dhabi to review its petrol subsidies in addition to electricity and water, but added: “We are not aware of concrete plans at the moment” in that area.
Abu Dhabi is expected to post a fiscal surplus of Dhs69.7 billion, or 7.0 per cent of gross domestic product, in 2014, up from Dhs55.6 billion or 5.8 per cent last year, the IMF has estimated.
“Looking forward, the drop in oil prices is a major topic, of course. For the Abu Dhabi government particularly, if oil prices remain around current levels for an extended period, it means lower oil revenue,” Finger said.
However, Abu Dhabi has done more than many other Gulf governments over the last few years to rein back some of the economic stimulus spending which it introduced during the global financial crisis.
As a result, it will not need to make any big adjustment in response to the drop in oil prices, which is expected to have only a marginal impact on economic growth next year, Finger said.
“The UAE has sovereign wealth fund buffers and they indicated to us that they want to continue on the path of gradual fiscal consolidation they had been on before.”