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  Economics
Energy subsidy cuts solution for GCC budget shortfalls - NBK
28/09/2015 | LOC20:43
17:43 GMT
| Kuwait News
تصغير الخطالشكل الأساسيتكبير الخط
the National Bank of Kuwait
the National Bank of Kuwait
KUWAIT, Sept 28 (KUNA) -- For decades, the Gulf Cooperation Council (GCC) countries have had some of the world?آ¦s most generous energy subsidies. With oil prices reaching new lows, authorities are increasingly turning to subsidy reform to help reduce large fiscal deficits, the National Bank of Kuwait said in a report on Monday.
According to the report, the cost of GCC energy subsidies have long been perceived as unsustainable in the long-term as has the strong growth in energy demand. Fiscal deficits are expected across the GCC as oil prices dropped below USD 50/bbl; this is well below the breakeven price of most GCC countries.
While most GCC countries can finance deficits for some time with substantial sovereign wealth funds, moves to rationalize budgets remain critical in the medium to long term.
The GCC countries have already started trimming government expenditures in part by introducing cuts in energy subsidies to alleviate the fiscal burden.
Citing IMF estimates, the NBK report said that energy subsidies in the GCC this year range from 1.1 percent of GDP in Oman to 4.6 percent in Saudi Arabia (KSA). While the recent drop in oil prices has reduced the cost of energy subsidies, the negative impact on oil revenues has been larger.
Bahrain's subsidy bill, for instance, shot up from 17 percent to 34 percent of oil revenues and KSA's from 11 percent to 20 percent between 2013 and 2015.
While the primary objectives of energy subsidies is to redistribute hydrocarbon wealth, promote industrial growth and improve the standards of living of GCC citizens, they also bolster wasteful energy consumption, deplete oil resources and reduce oil revenues, not to forget the environmental damage linked to excessive energy consumption, the NBK stated.
However, there are other more effective means to redistribute the hydrocarbon wealth in an effort to improve standards of living, and boost economic growth, integration and equality.
The report went on to say that low energy prices placed all six GCC countries among the top ten energy consuming countries on a per capita basis in the world, with Qatar topping the list at around 18,500 kg of oil equivalent per capita (koe/capita). Subsidies for gasoline and electricity constitute the biggest chunk of the energy subsidies.
Gasoline prices in the GCC are heavily subsidized and among the lowest worldwide. GCC countries started lifting gasoline and diesel subsidies, though steps remain timid and small relative to the size of the GCC energy subsidies. In May 2014, Qatar raised diesel prices by 50 percent, followed by Bahrain and Kuwait in early 2015. Most recently, Dubai lifted subsidies on gasoline and diesel prices. Prices would be set by the government but linked to international market prices.
Despite IMF recommendations, KSA remains the exception, showing no intention so far of deregulating fuel prices.
The report noted that electricity subsidies constitute almost half of the energy subsidy bill, with heavy reliance on natural gas as a main resource for production. Electricity prices in Kuwait have been fixed at USD 0.007 per kWh since 1966, although the Electricity Policy Research Group at the University of Cambridge estimated the cost of electricity production at USD 0.14 per kWh, or 20 times higher. The residential sector is the biggest consumer of electricity in the GCC along with the commercial and public services sectors, rendering subsidy cuts more difficult. With the exception of Qatar and the UAE, more than 50 percent of the electricity supply is consumed by the residential sector.
Kuwait residential sector consumes 58 percent of the total electricity supply versus only 17 percent for the industrial sector.
The IMF estimates the GCC energy subsidies in 2015 to be around USD 59 billion compared to a post environmental tax subsidy of USD 175 billion.
Given that energy subsidies in the GCC make up a significant share of government expenditures, the advantages of subsidy cuts are multiple; the main benefit is a direct positive fiscal impact from lower expenditures and higher oil revenues as more energy sources would be available for exports.
Other benefits include the more efficient use of energy resources, the developments of sustainable sources of clean energy, as well as a number of multiple environmental benefits such as cleaner air.
The social impact of energy reforms and subsidy cuts is large as well. With more income to spare, GCC governments can focus on improving the quality of education; tailoring education to better meet the needs of the private sector can reduce the reliance on the government sector as the primary employer and on high-skilled expatriate labor, the NBK report concluded. (end) mfs.jk.msa
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