RIPPING OFF THE BAND-AID, SLOWLY
Discussions on subsidies and taxation are not new to the region. In fact, the International Monetary Fund has long been recommendating that GCC governments implement some far-sighted economic reforms. The slump in oil prices finally forced their hand, says Luay Al Khatteeb, Executive Director at Iraq Energy Institute and Fellow of Global Energy Policy at Columbia Univeristy.
When the UAE first tentatively announced an increase in fuel prices last year (only for transportation, not industries), Luay Al Khatteeb says it didn't come as a surprise. “It has long been expected and is in line with IMF recommendations. The fall in global oil prices made it inevitable. The oil market is flooded with oversupply and traditional oil producers are experiencing competition over market. The high oil prices of old might never return because of several variables like the shale revolution and budgets need to be adjusted to accommodate this new norm.” There needed to be an economic reform at a state level and, one after the other, many GCC member states followed suit in an effort to improve their fiscal buffer in the future.
While the trend is undoubtedly a step in the right direction, the path for energypricing reform will be long and fraught with risks. Governments need to adopt mitigation policies such as compensation for households, especially those with low incomes, and technical assistance and loans to help industries adjust. “It's not just about putting in place such schemes but the governments should also launch an education policy to communicate candidly the need and the benefits of such policies to their citizens,” Al Khatteeb says.
On that note, it bodes well to remember that there have been instances, like in Kuwait, where subsidies were once rolled back due to public dissatisfaction. “Public pressure will continue on governments,” he says. “Especially from the non-upper class families who, traditionally speaking, thrive on cheap fuel. The removal of subsidies has to be gradual, giving people the time to adjust and mentally embrace a rational use of energy, whether it be electricity or transportation.” In a region which has one of the highest per capita consumption of water and energy, only tough and tangible measures like these can force users to consider the implications of rampant and uncontrolled use of resources.
While this was a long time coming, the price slump definitely helped move things forward and speed up the process of phasing out subsidies. “It was always part of the reform process. The talk on subsidies has been going on for many years. Now the region is facing fiscal challenges in adjusting their budgets, populations are growing and other costs are mounting, like money spent on security and wars. The governments no longer has the luxuries of the past decades.”
Even in a country like Qatar, which is a special case because of its enormous wealth, slashing subsidies is a good move. “Although Qatar can afford to be more generous, if they want to develop a viable economy and improve their fiscal position, steps need to be taken in phasing out subsidies. I don't believe it would massively impact the citizens who enjoy a very high standard of living and the government always has the option of making some sort of financial agreement to help citizens who are impacted,” he says. It is very likely that the removal of subsidies will open the door to tax reforms like the implementation of VAT, income or corporate taxes. Analysts have already started speculating on and preparing for this scenario. “Adopting new tax systems is necessary to diversify sources of income for the state as opposed to staying reliant on just hydrocarbons,” Al Khateeb says. The need for these reforms is clear. Now it's all about how governments shape up and plan their economic development and, more importantly, how they explain to their citizens the long-term benefits of these plans themselves.