Gulf Economies Edge Towards Reform As Oil Price Slides

When Kuwait’s government said last month that it planned to raise domestic prices of diesel fuel and kerosene, some angry Kuwaitis took to Twitter to denounce the move as unfair.

A resulting increase in airline ticket prices will be “extracted from our hard work”, wrote one person who identified himself as Khalid Alenezi. Essa Bouresly suggested Kuwaiti consumers would end up paying for merchants’ higher costs.

Officials in Kuwait and some other Gulf Arab states may face more public indignation in coming months. After pampering their citizens for decades with lavish cradle-to-grave welfare systems, some countries are edging towards cutting the benefits as the slide in global oil prices pressures state finances.

The austerity measures are small compared to the tens of billions of dollars of oil wealth which the Gulf monarchies are spending on welfare to buy social peace in the wake of the 2011 Arab Spring uprisings.

In some cases, officials do not appear to be economising because they are running out of money – they are simply using the oil price slide as a political argument to persuade their citizens of the need for reforms.

But taken together, the austerity plans may be the first serious effort by the wealthy Gulf Arab states to economise since the oil price slump of the 1990s – and they could lead to more sweeping reforms down the road.

Last month, Oman’s financial affairs minister Darwish al-Balushi told Reuters that his government was likely to start cutting some state subsidies next year, and that the oil price slide had made public opinion more supportive of this.

“I think the people would be more understanding now, more accepting. They realise that this was natural wealth that is being overused, wasted…” Balushi said.

In Kuwait, the cabinet approved a report by a committee at the Ministry of Electricity and Water on cutting subsidies for diesel and kerosene, which could hike the prices that consumers pay for them more than threefold.

Ananthakrishnan Prasad, the International Monetary Fund’s mission chief for Kuwait, told Reuters last month after talks with the country’s authorities that he detected new momentum for reform.

“After a long time, I am really seeing some reforms on the fiscal and structural sides, and things are moving,” he said.

“Between the government and parliament I think there is a realisation that although the current development model of using oil revenues…has worked so far in realising growth, it is not sustainable in the future as global risks are increasing.”

OIL RESERVES

The oil price slide has not left Kuwait close to running out of money; the IMF has estimated it needs an oil price of only $54 to balance the state budget, far below Brent crude oil’s current price of around $85.

But subsidies, mostly for energy, gobble up about 5.1 billion dinars ($17.7 billion) annually, or roughly a quarter of the Kuwaiti government’s projected spending this fiscal year. They waste oil as well as money, removing any incentive for consumers to limit their use of fuel or electricity, and encourage smuggling of fuel into nearby countries.

For example, Kuwaitis can fill up their gas-guzzling four-wheel drives with petrol for a mere $0.24 per litre (91 U.S. cents a gallon), one of the lowest prices in the world, compared to some $2.01 in Britain.

The government knows the subsidies make no economic sense and may be unsustainable in the long term, but it has shied away from taking the politically unpopular step of reducing them. Now, however, it appears to be calculating that the current period of weak oil prices gives it political cover.

The country’s ruler, Emir Sheikh Sabah al-Ahmed al-Sabah, cited cheaper oil last week when he told parliament that it should cooperate with the cabinet to “protect our oil and financial wealth, which is not only ours, but is also the right of future generations”.

The cabinet has not yet announced any date for a hike in diesel and kerosene prices, but in a report earlier this year, state news agency KUNA estimated diesel price reform would save the government around $1 billion a year.

Few households actually use large quantities of diesel or kerosene in Kuwait; businesses are the main consumers. With a per capita income of about $48,000, among the highest in the world, Kuwaitis can easily afford higher prices.

But other reforms are in the pipeline. The government decided in September to slash the state allowance paid to Kuwaitis travelling to seek healthcare abroad, originally 300 dinars a day for a patient and his two travel companions, by 58 percent.

Oil minister Ali al-Omair last month ruled out raising petrol and cooking gas prices for now, but officials have been discussing higher electricity and water tariffs.

Electricity costs households just 2 fils (0.7 U.S. cents) per kilowatt hour, one of the lowest prices globally, so many people leave their home air conditioning running even when they’re out. Producing the power is estimated to cost around 30-40 fils per KWh.

Raising utility costs would strike at a tremendous sense of entitlement felt by many Kuwaiti citizens. When the electricity minister tried this year to force consumers to pay their outstanding power bills – allowing people to pay half their debt immediately and the rest in installments over 18 months – one member of parliament accused the minister of being uncivilised.

Asked how authorities could persuade the public of the need to cut subsidies, finance minister Anas al-Saleh told Reuters: “Through trying to talk transparently and with honesty to our people and our citizens. I think we are reaching the ground where people understand it’s necessary, what we are doing.”

Mohammed al-Sakka, economics professor at Kuwait University, said: “Of course the public will resist any attempt to increase prices, remove subsidies.

“It’s not going to be easy, I’m sure. But the government will have to take it on. It’s surgery we need to do.”

OMAN

Oman’s oil reserves are small compared to those of its neighbours and if the price of oil stays around $85 a barrel, the government looks likely to run a budget deficit next year. So it faces more immediate financial pressure to cut subsidies.

Balushi declined to give details of which subsidies might be reduced, but in the past has described petrol as an obvious target. He said the subsidy system was unfair because it benefited rich people as well as poorer ones.

“Everybody gets, people who deserve and people who do not. I think if we rationalise it and use the saving for better priorities, that will definitely have a return for the people of Oman,” he said.

His comments underlined one aspect of reforms in the Gulf: at least some of the money saved may be used to raise welfare payments to the lowest-income people – perhaps through direct cash payments – which would limit the impact on state budgets.

Another country that has been grappling with reforms is tiny Bahrain. Its oil and gas authority announced last December that it would gradually raise the domestic selling price for diesel, almost doubling it by 2017, but the hike has not gone ahead after some members of parliament protested. The oil price slide may now pressure the government into reviving the plan.

So far there is no clear sign that the region’s biggest economy, Saudi Arabia, is moving towards subsidy reform. In May last year, Economy and Planning Minister Mohammed al-Jasser told a Riyadh conference that subsidies needed to be cut, but there is still no indication of a serious plans in the works.

Saudi Arabia is in the midst of pushing through big changes to its labour market in order to move more local citizens into the private sector, so it may prefer to complete those reforms before raising energy prices for businesses and households.

Its neighbour the United Arab Emirates increased fuel prices by 26 percent in 2010, but prices are still very low by international standards and no fresh plans have been announced.

In the long term, however, progress in Kuwait and Oman could encourage policymakers in the rest of the Gulf to follow suit.

“Reducing energy subsidies is always a difficult subject for all Gulf economies,” said John Sfakianakis, director for the region at investment manager Ashmore in Riyadh. “But over the long run it will benefit the wider economy, as subsidies are a structural price distortion and an opportunity cost on state budgets.”