Qatar Today - - DEVELOPMENT -

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.

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