The tricky question of over-reliance on energy subsidies is hard to answer

Energy subsidies in GCC nations need to be addressed, but in a slow and thoughtful manner to avoid problems

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All six GCC countries have traditionally extended generous energy subsidies to citizens and residents alike, but what is the best way forward for such allowances?

Since 1996, the electricity tariff in Kuwait has remained at two fils per kWh. The UAE, meanwhile, bears 85 per cent of the power and water production costs for Emiratis and 50 per cent for foreigners. The cost of diesel is so low in Oman that trucks regularly cross the border to fill up.

It is hard to make the case for such generous subsidies to remain in place in the long-term, particularly in the light of rising consumption and population increase.

Chatham House, the London-based independent policy institute, has reported that Gulf countries together consume more energy than the whole of Africa. According to a Wall Street Journal report, Saudi Arabia home consumption is rising by seven per cent per year. The cost of subsidising these increasing energy needs inevitably falls upon the government of that country.

In 2011, the International Monetary Fund (IMF) estimated the cost of energy subsidies at anywhere between nine and 28 per cent of government revenues in the Gulf.

But the bottom line is that oil is a finite resource (and income stream) for all of the Gulf countries.

Many in the region are already profoundly aware of this: Bahrain proposed an increase in diesel prices a month ago. Kuwait is planning to cut its subsidies on petroleum, water and electricity. The UAE has also discussed revising its programme of subsidies.

But, even if there is a general feeling that energy subsidies are unsustainable at their current levels, wholesale cuts are not advisable either.

As one expert put it, “The removal of oil subsidies in the short-term could severely hit the competitiveness of the economy and drive down economic activity, while resulting in increased prices of all goods and materials due to higher production and transportation costs …This could lead to stagflation.” Politically too, any dramatic fluctuation in the cost of living would be very tricky.

Abdullah Al-Shayji, political science faculty chief at the Kuwait University explains the complexity of the issue in his country: “Kuwaitis will cope with anything, but don’t come too close to their wallets.”

To date then, the GCC countries have largely circumvented this issue, but is it time to make a painful decision to avoid a future economic debacle?

Too much government support, in the form of subsidies, is moving the GCC not just towards over-consumption, but has also slowly created a culture of dependency. This should give cause for major concern.

A key benefit of lowering energy subsidies would be the freeing up of more oil revenue to fund the creation of a more complete knowledge-based economy.

Not only is this needed to fuel the sustainable development of the Arab people and the region, but also so that the legacy of oil amounts to something more than a lost opportunity.

Arshiah Parween is a freelance journalist