analysis

Gulf states turn soft oil prices into opportunities

Much headway has been made in doing away with subsidies and raising new revenues

11:22 September 17, 2016

Today’s low-oil price environment is providing a lifetime opportunity for the Gulf countries to eliminate obligations burdening the public finance on the one hand and to consider new revenues sources on the other. Measures include limiting subsidies, raising tariffs for utilities and introducing new fees, plus preparing for applying value-added tax (VAT).

The authorities managed to sell the argument to the general public for the need to streamline governmental expenditure and enhance revenues since mid-2014. Similarly, the public could appreciate the merits of governmental actions for doing away with unnecessary expenses where possible. This kind of opportunity to restructure the use of public finance was not available before the plunge of oil prices.

A common factor across the Gulf relates to the raising of fuel prices as part of broader moves to re-engineer subsidies. Kuwait was the last Gulf country to join the trend of hiking petroleum prices, but differed from the rest by announcing a future implementation date, ostensibly to allow for adjustments. Effective September, the price for “ultra petrol” — or the environmentally-friendly low-emission grade — was augmented by 83 per cent to $0.55 per litre while the cost of low-octane petrol was increased by 41 per cent to $0.28 per litre.

Bahrain new price hike for petrol became effective a mere nine hours following a cabinet decision to raise prices for premium petrol by 60 per cent to $0.43 per litre. In another move, the state lifted subsidies for red meat in 2015, but offered financial transfers to qualified local families registering online for support.

However, no support was extended to foreign nationals, in turn compromising the bulk of the workforce. Another move involves introducing higher incremental charges for use of electricity and water on the business community, foreign residents and nationals having more than a single place of residence.

There were other opportunities to generate new revenues. From June 30, Dubai started levying a fee of Dh35 on all passengers using or transiting through Dubai International and Al-Maktoum International, except those below two years. The emirate expects to generate $700 million per annum from the new fee, designed for further expansion and development of airport facilities.

Qatar followed suit by announcing 35 riyals as tax for travel starting December 1 onwards on top of existing ones on passengers leaving and transiting through Hamad International Airport. The logic used in both cases was that passengers have to pay for use of airport facilities. The possibility of other GCC airport authorities introducing new taxes cannot be ruled out.

Much to their credit, certain GCC airports and carriers have imposed themselves on the global aviation industry reflecting their extraordinary network capacities and aircraft quality. Emirates is the largest global operator of the Airbus A380 and Boeing 777. Many passengers transit through Dubai, Doha or Abu Dhabi en route to other places.

Plans are underway to introduce limited VAT in 2018 in the GCC as well as revamp public finance. The assumed tax could start in the range of 3 to 5 per cent, heralding a new era for Gulf economies.

The measures could help strengthen transparency of public sector finances and enhancing the pace of change in society through initiatives such as carpooling.

Clearly, the oil challenge is being turned into opportunities.

The writer is a Member of Parliament in Bahrain.