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KSA looks to reform energy subsidy programme

The IMF has estimated that energy subsidies cost Saudi Arabia $107 billion (Dh392.7 billion), or 13.2 per cent of gross domestic product in 2015.

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Saudi Arabia is studying a programme of sensitive energy subsidy reforms to reduce pressure on its economy, despite popular wariness of increases to the cost of living.

Low oil prices have encouraged radical thinking on the economy in Riyadh — including subsidy reform, which was avoided when government coffers were flush with petrodollars, reported the Financial Times.

One senior official said the government planned to outline how it will gradually lift energy subsidies in January during the public launch of a new national agenda that includes economic, financial and social reform measures.

As the government seeks to raise revenues, stem the draining of public money and boost private sector activity, it will also start to privatise state companies.

“Subsidies reform will help consolidate some public expenditure,” said Farouk Soussa, Citi’s head of Middle Eastern economics.

“The key is that markets are looking for signals that they are serious about consolidation.”

The reforms mark the realisation that big fiscal savings could be derived from reducing subsidies. The IMF has estimated that energy subsidies cost Saudi Arabia $107 billion (Dh392.7 billion), or 13.2 per cent of gross domestic product in 2015.

Expensive electricity

The official said the kingdom plans to extend existing welfare payments, such as unemployment benefit, to lessen the impact of the subsidy cut on the country’s poor and middle classes. He also said that businesses affected by more expensive electricity, for example, would get cheap loans to dampen the subsidy shock.

Less than half of all utilities subsidies go to households, with up to 60 per cent going to business consumers, such as industry, retail and services firms.

The lack of slab tariffs, in which prices rise along with consumption, has encouraged the overconsumption of precious resources, such as water.

The government has been studying similar reforms in other countries, including Argentina and Indonesia, and is convening focus groups with thousands of Saudis.

The UAE this year managed to lift subsidies on petrol with no public backlash, but when Kuwait raised the price of kerosene, it had to make exemptions for bakers after they went on strike.

But the potential for a negative popular reaction in Saudi Arabia overshadows the plan. Saudis have become accustomed to cheap electricity and petrol, part of a cradle-to-grave welfare state that forms a social contract with the kingdom’s 20 million nationals.

Not in dire need

Ali Al Nuaimi, the oil minister, this month signalled his disapproval for subsidy reform. He argued that with the kingdom’s low cost of production, cheap energy prices do not amount to a subsidy.

“You only go back and take away assistance if you are in dire need. And, fortunately, Saudi Arabia is not today in such dire need,” he told a forum in Riyadh.

Other senior observers are sceptical about effective indirect taxes without real political participation, which remains off the agenda.

“There is an intent for more sustainable consumption patterns,” said one senior official. “But there is a recognition that this will have a cascading impact on the population, economy, inflation and cost of living — so it has to be applied very carefully.”

Separately, the government is also carrying out a review of state-owned enterprises that could be privatised to raise funds, boost efficiency and take large numbers of public sector employees off the books. It is first identifying “low hanging fruit” that can be sold off quickly, such as water generation and grain silos.

Privatisation

The government is also looking at selling stakes in part-privatised companies, such as the Saudi Electricity Company, petrochemical giant Saudi Arabian Basic Industries Corporation and Saudi Telecommunications Company.

Plans to corporatise the “more complex” health care and education sectors ahead of potential privatisation at a later date are also being considered. All plans are subject to the approval of King Salman.

“Privatisation is positive — it can create a source of funding and let the private sector do more of the heavy lifting for growth,” said Soussa. “But this is a rather inopportune moment — markets are depressed, and there could be a tussle later when the market recovers.”

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