Saudi cuts on subsidies to promote GCC efficiency

Saudi Arabia followed the UAE, which deregulated petroleum prices and linked them with international benchmarks. Bahrain and Kuwait have also made announcements regarding fuel. - Getty Images

The removal of subsidies initiated by the UAE is spreading in the oil-rich region as after Saudi Arabia, Bahrain is likely to be next to follow the footsteps of its neighbours.
"In my opinion Bahrain is next. According to my calculations and assuming the 2015 oil price average is around $55, Bahrain is expected to register budget deficit of -14 per cent of GDP. Also, they are expected to deplete close to $9 billion worth of foreign assets 20 per cent reduction from 2014 levels.," Alp Eke, senior economist at National Bank of Abu Dhabi.
Bahrain's cabinet on Tuesday approved a new pricing system for diesel and kerosene, which is set to start in January.
Saudi Arabia also surprised its citizens by hiking petroleum prices by 50 per cent. Eke said the UAE's neighbour Oman is also expected to register severe budget deficits during 2015 and 2016.
Riyadh has finally decided to follow the UAE, which deregulated petroleum prices and linked them with international benchmarks.
Kuwait also lifted subsidies on diesel beginning January.
"If Saudi Arabia allows petrol prices at the pump to follow international benchmarks, the additional reduction in budget expenditure will be around $15 billion. This is a significant contribution and much more than the impact on the UAE, because gasoline prices in Saudi Arabia were the second-lowest in the world. Selling gasoline at such low levels was causing a serious burden on the budget," Eke said.
Jean-Michel Saliba, Mena economist, at Bank of America Merrill Lynch, said: "We think this is due to [a number of] main factors. First, it likely marks the end of material overspending practices given tighter controls. Second, it starts to introduce a credible medium-term fiscal consolidation strategy to address the oil price slump through revenue- and expenditure-side measures, the first round of which saw sweeping energy, water and electricity administered price changes."
He believes the era of material overspending is over as spending controls have been introduced through the setup of medium-term budget ceilings and of the National Project Management Agency to optimise and review capital expenditure.
"A Royal Order was in addition simultaneously passed to prevent the issuing of an order of commitment or disbursement that exceeds the allocated budget. Also, that the source of past overspending this past decade has been supplemental budgets passed during the fiscal year when the oil price turned above the internally budgeted oil price assumption. This is unlikely to be the case in 2016."
The budget intends only to slow the growth in recurring expenditures going forward, he said. On-budget defence spending is a risk item in this regard, as the $5.3 billion disclosed increased military and security projects over 2015 amount to a $15 million per day cost.
- haseeb@khaleejtimes.com