Lubna Abdulatif, an expert to the World Bank (WB) at the Ministry of Finance said that the Ministry of Finance in collaboration with the World Bank has updated the operations for preparing and implementing the state budget in a bid to enhance the efficiency of public expenditure, reduce the financial risks and affirm the financial sustainability.
She said that revising the public expenditure policies is very important 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 pointed out that revising the energy subsidy and lifting the subsidy on fuels have great importance.
She added that some believe that welfare economy philosophy is the one which provides subsidy to energy. Experience proved that subsidy for education, health and economic diversification has greater effect on enhancing social welfare.
She pointed out that providing great subsidy to energy creates undesired social and economic effects. On the medium and long run great subsidy contributes to exacerbating financial imbalances, have negative effect on the priorities of the public expenditure and deforms the allocation of resources through encouraging excessive consumption, encouraging capital-intense industries and accelerating the exhaustion of natural resources.
She said that the studies conducted by the World Bank between 2012 and 2014 point out that the energy subsidy needs revision and that lifting such subsidy is good for the society as a whole.
“The WB studies also pointed out that the value energy subsidy in the Middle East region stood at $237 (RO91.25 billion) which represents 48% of the total subsidy on the world level. The ME countries paid almost 8.6% of their GDP or 22% of their revenues for subsidy; a very high level compared to the world average, which ranges between 0.7% to 2.1% respectively,” she added.
“Oil-exporting countries in the ME have born the biggest share of this cost, which affected their abilities for financial sustainability and made them bear great financial risks. The equilibrium price for oil barrel in 2015 for Bahrain and Oman, as estimated by WB, is more than $100, she furthered.
“Subsidy distorts the market price and affects proper allocation of resources. It encourages smuggling of fuel, which may lead to a shortage of the subsidized products. It is also a truth universally acknowledged that subsidy leads to excess consumption, streaming resources away from the alternative uses and consequent affects expenditure on education, health and infrastructure. It also leads to low energy efficiency and encourages capital intense technology, which in turn have a negative effect on the growth of employment opportunities.
WB expert Lubna Abdulatif affirmed that on the medium and long term lifting subsidy has a positive effect on growth and efficiency, which helps in absorbing the possible effects on inflation on the short term. The high fuel prices encourages companies to create job opportunities for youths and encourages the growth of SMEs. Moreover, it encourages companies to rely on more efficient technology to address the energy of price hike.
The initial researches pointed out that there is a statically significant relationship between the fuel price and the growth in per capital income on the short and long terms. As per the simulation model provided by the WB to Egypt in 2014, reducing the energy subsidy by 25% increases the job opportunities and wages by 1%.
The experiences of many countries point out that subsidy is not an effective tool for the distribution of income onto society because energy subsidy benefits the rich and major consumers more than those with less income and small producers. This means that the large chunk of subsidy goes to the categories that can live without it.
In other words, ceasing open subsidy policy for all and streaming the revenues from lifting the subsidy to meeting the social needs will have better effect on society. Moreover, rationalizing energy and its products’ consumption will alleviate pollution, congestion and water exhaustion.
The WB expert affirmed that the Sultanates’ government revision of the energy subsidy and introducing spontaneous mechanism for pricing is very importance in liberalizing the general resources and streamline them to achieve bigger benefits for the wide sectors of the Omani society especially such revision comes at a time the oil prices are plunging sharply. This revision at this time make the possible effects on lifting energy subsidy limited on the local inflation and on the real income for the family and business sectors.
