Nabih Maroun, senior vice-president at Booz Allen Hamilton for MENA region, explains what subsidies cuts could mean for the region.
1. What reforms could we expect to energy subsidies in the GCC?
Regional governments have several potential subsidy reform options, but ultimately a successful phasing out of energy subsidies should carefully consider the short and long term implications on the business environment and household finances.
Any move will be far reaching, affecting everything from the price of fuel at the pump to the cost of water, electricity and food – much of the latter being imported. But the aim ultimately, is to create an economically sustainable framework around energy by liberalizing markets and ensuring consumer energy prices cover at least the government cost of their import and production.
Such market reforms are usually coupled with incentives for substitution to less subsidized energy products. Electricity tariffs will eventually be increased progressively, prompting manufacturing industries to shift to less costly and cleaner energy sources such as Natural Gas. The same holds true for households, where for example the deployment of urban Natural Gas grids has demonstrated its effectiveness to reduce domestic consumption of heavily subsidized Liquefied Petroleum Gas (LPG).
To mitigate any adverse economic reaction, such measures could carry in-built safety nets such as grace periods for key industries allowing them time to deploy any necessary innovations and efficiencies that bridge their transition to a de-subsidized environment.
2. What are the economic benefits of reducing energy subsidies?
The primary reason for a subsidy reform would be to reduce the burden on government budgets and improve fiscal balance. Leaner public finances will also allow governments to redirect capital to economic and social development programs and infrastructure projects – stimulating jobs and growth.
Governments may also have the opportunity to gain favorable public opinion by enhancing social equity, through better targeting of subsidies from richer to poorer segments of the population, and by increasing state investment in high priority social services such as education and healthcare.
There is also a resource story to consider. This region boasts among the highest consumers of energy products, power and water per capita in the world – both of which are increasingly scarce resources. Subsidy reforms may enhance resource and energy security by encouraging a more responsible attitude towards our highly stressed resources. And, by indirectly encouraging the move to an efficient, sustainable, low carbon economy we may also stimulate greater private sector investment in innovation and technology.
3. What would the consequences be of potential energy reforms?
The aftermath of the Arab spring and continued political and social instability has left the region’s non-oil rich countries with dormant economies and high public debt burdens. This is stifling their ability to stimulate growth and spur economic activity. In Egypt for example, subsidies were estimated to cost between 15 – 20% of public spending at peak oil prices last year. The current low oil prices offer a temporary shock absorber to the removal of subsidies, allowing governments to partially reduce subsidies and improve fiscal stability without affecting businesses or consumers.
From a long-term perspective, de-subsidizing will always be a sensitive move. The concern is that it may further compound the economic deprivation of people already living in relative hardship – particularly because subsidy removal will put inflationary pressure on goods and services such as food and public transportation.
