UAE energy price support costing $29 billion each year, says IMF

Total direct spending on subsidising energy products fell to $12.6 billion this year from $18.2bn in 2013, a 31 per cent decline.

The IMF estimates the UAE’s per capita spending on energy subsidies this year at $1,319.70. Fatima Al Marzooqi / The National

Energy price support is costing the UAE as much as US$29 billion a year despite substantial progress in their reduction over the past two years, says the IMF.

The country has reduced spending on pre-tax energy subsidies by a third over the past two years, IMF data shows.

That followed a collapse in global energy prices, with the government spending less on subsidising fuel consumption and beginning a reform of the UAE’s energy markets.

Total direct spending on subsidising energy products fell to $12.6bn this year from US$18.2bn in 2013, a 31 per cent decline.

This was driven by cutting subsidies on petroleum products to $7bn from $10.2bn. Electricity subsidies have fallen 44 per cent to $3.2bn.

The price of Brent crude has fallen from $108 per barrel in July last year to $56.90 yesterday.

And the lower cost of energy use has helped to ease spending on subsidies.

Initial steps to reduce subsidies, including ending discounts for expatriate consumers of electricity in Abu Dhabi this year, have also made a dent.

In January, the Supreme Council of Energy issued a report recommending that the Ministry of Energy begin gradually phasing out fuel subsidies.

Nevertheless, the indirect cost to the UAE’s economy of subsidising energy products remains high at 6.6 per cent of GDP, according to the IMF.

When the impact of lost revenues from taxes, the damage to the environment and people’s health, and the impact on congestion and traffic are taken into consideration, the cost of energy subsidies to the UAE is $29bn, which is 229 per cent more than the direct spending on subsidies.

The IMF released data on energy subsidies for individual countries last week.

The new data set provides the most up-to-date picture of what governments are spending on to reduce the cost of energy and its impact on the wider economy.

The UAE is the region’s third- biggest spender on energy subsidies, behind Saudi Arabia and Egypt, the data show.

Egypt spends $62.3bn on direct pre-tax subsidies, followed by Saudi Arabia with $37.2bn.

But both these countries have populations much larger than the UAE. Saudi Arabia’s population is about four times as big as the UAE’s, while Egypt’s is about nine times larger.

The IMF estimates the UAE’s per capita spending on energy subsidies this year at $1,319.70, ahead of all Middle East countries with the exception of Qatar, which has an estimated spending of $1,544.10.

The two Arabian Gulf states’ spending on subsidies have declined since 2013, with Qatar’s annual per capita spending falling from $3,340.90.

The IMF has repeatedly urged the UAE to cut energy subsidies.

Earlier this year, Masood Ahmed, the IMF’s director for the Middle East, said there had been “a shift in the sense of urgency” with which the IMF felt that Arabian Gulf states needed to reduce them.

Bassam Fattouh, a director at the Oxford Institute for Energy Studies, said governments in the Middle East had felt for some time that energy subsidies “cannot go on forever”.

“That’s why they have been thinking of reforming energy subsidies. The drive is not new, but lower oil prices may provide a favourable backdrop,” he said.

“In the Gulf, we have seen some very small steps until now. The focus has instead been on trying to diversify the energy base and trying to increase energy efficiency.

“Further energy subsidy reform is a political issue, and reform will be much easier politically if the Gulf acts collectively. Gulf governments don’t want to be in a situation where some countries are feeling the pinch, and others aren’t.”

Last month, the IMF said that total global energy subsidies amounted to about $5.3 trillion – far larger than previous estimates, and greater than global spending on health care.

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