Muscat: Revamping the fuel subsidy will greatly reduce financial risks posed to Oman’s government and impart stability, a World Bank expert said.
Lubna Abdulatif, a World Bank expert at the Ministry of Finance, said the ministry, in collaboration with a multilateral bank, has prepared the state budget in a bid to enhance the efficiency of public expenditure, reduce financial risks, which in turn impart financial sustainability.
She said revising public expenditure policies is of paramount importance as it gives priority to the policies that enhance the welfare of the Omani family, promote economic diversification, develop the private sector and create job opportunities. She also pointed out that revising the energy subsidy and lifting the subsidy on fuels is of great importance.
Abdulatif added that some believe that the welfare economy’s philosophy is the one which provides subsidy to energy. Experience has proved that the subsidy on education, healthcare and economic diversification will have greater effect on enhancing social welfare.
She also pointed out that providing greater subsidies for energy creates undesired social and economic effects. In the medium to long run, huge subsidies result in a substantial financial imbalance, have a negative effect on the priorities of the public expenditure and change the allocation of resources by encouraging excessive consumption, capital-intensive industries and accelerating the exhaustion of natural resources.
The World Bank official noted that the studies conducted by the bank between 2012 and 2014 found that energy subsidies need to be revised and that lifting such subsidies is good for the society as a whole.
"The World Bank studies also pointed out that the value of energy subsidy in the Middle East region stood at $237 billion (OMR91.25 billion), which represents 48 per cent of the total subsidies at the global level. The Middle East countries paid almost 8.6 per cent of their gross domestic product or 22 per cent of their revenues for subsidy — a very high level, compared to the world average, which ranges between 0.7 per cent and 2.1 per cent respectively," she added.
"Oil-exporting countries in the Middle East have borne the biggest share of this cost, which affected their abilities for financial sustainability and made them bear great financial risks.
he equilibrium price for an oil barrel in 2015 for Bahrain and Oman, as estimated by World Bank, was more than $100,” added Abdulatif.
"Subsidies distort the market price and affect the proper allocation of resources. They encourage the smuggling of fuel, which may lead to a shortage of subsidised products. It is also a universally acknowledged truth that subsidies lead to excess consumption, streaming resources away from alternative uses and consequently affect expenditure on education, healthcare and infrastructure. It also leads to low energy efficiency and encourages capital-intensive technology, which in turn has a negative effect on the growth of employment opportunities.”
Abdulatif also said that in the medium-to-long-term, lifting subsidies would have a positive effect on growth and efficiency, which would also help absorb the possible effects on inflation in the short term.
High fuel prices would encourage companies to create job opportunities for the youth and encourage the growth of small and medium enterprises. Moreover, it would also encourage companies to rely on more efficient technology to address the energy of price hikes.
Initial research reports found that there is a significant relationship between the fuel price and growth in per capita income in the short and long terms. As per the simulation model provided by the World Bank to Egypt in 2014, reducing an energy subsidy by 25 per cent increases job opportunities and wages by 1 per cent.
The experiences of many countries show that subsidies are not an effective tool for the distribution of income within society because energy subsidies benefit the rich and major consumers more than those with less income and smaller producers.
This means that a large chunk of subsidies goes into categories that can live without it.In other words, ceasing an open subsidy policy for all and streaming revenues from lifting the subsidy to meeting social needs will have a better effect on society. Moreover, rationalising energy and its consumption will alleviate pollution, congestion and water exhaustion.
The World Bank expert said that the Oman government’s revision of the energy subsidy and introducing a spontaneous mechanism for pricing is very important for liberalising the general resources and streamlining them to achieve bigger benefits for the wider sectors of Omani society, especially when such a revision comes at a time when oil prices are plunging sharply.