Saudi Arabia eases energy reforms for public good

▶ Kingdom will raise prices gradually to limit impact on citizens

Saudi Arabia is allowing for a breather in its radical reform push and plans to implement a more gradual phase-in of energy prices reforms in its 2018 budget – the largest spending programme in its history.

A week prior to the budget announcement, reports had circulated in the press that the kingdom was targeting an 80 per cent hike in gasoline prices in 2018 – a move that is now unlikely to take place next year.

With the introduction of a 5 per cent value added tax, the increase of electricity tariffs for consumers and a

5 per cent stake sale of cash cow Saudi Aramco all set for the new year, there will be a lot to digest.

To avoid overwhelming the economy, in particular the private sector and small businesses, the kingdom has realised that a gradual phase out of the subsidy programme may be more palatable for consumers and industries overall.

Last week, just after the new electricity tariffs were announced, the Saudi council of ministers approved a citizen’s Account that will allow for low and middle income households to receive cash transfers from the government to mitigate any adverse impact of the new price regime.

The kingdom has realised that a gradual phase-out of the subsidy programme may be more palatable

This will cushion the impact of any hike in energy prices on a segment of society that will initially grapple with the subsidy reforms.

Saudi economists remain largely positive about the kingdom’s deferment of the energy price reform. They stress it’s a gradual process and one that will only help boost diversification efforts away from an oil-based economy.

Subsidy reform is long overdue for the Saudi economy. In 2013, the share of energy price subsidies to GDP stood at 9.4 per cent – the highest for any oil exporting country, according to the IMF.

By 2016, the share had almost halved but remains significantly high in comparison with its regional oil-exporting peers.

However, consumer response to the price regime remains untested. Shortages are expected end of the year as consumers brace for the onset of several reforms.

Their response as well as that of the industry will likely shape Saudi Arabia’s plans to push for further reforms by 2025.