DUBAI: The government of the emirate of Abu Dhabi is looking at ways to reform its system of subsidies for electricity and water, a senior International Monetary Fund official said yesterday, in what would be a landmark move by the emirate.
Several Gulf oil-exporting countries are reviewing their generous welfare systems, as plunging global oil prices put pressure on their finances. Now, however, tumbling oil prices — Brent crude reached a four-year low of just below $82 per barrel yesterday — are giving them political cover to revive reform plans.
“We discussed it here at the policy level, particularly with the Abu Dhabi government, which indicated they are now looking at ways to streamline their subsidy policies and put in place something different, something better targeted,” said Harald Finger, the IMF’s head of mission for the United Arab Emirates. “This is particularly the case of the electricity and water subsidies. It is probably too early to know exactly what is their plan, but the broad direction in which it is headed is the right one,” he said following meetings with local authorities.
The Abu Dhabi Department of Finance did not immediately respond to requests for comment.
Subsidies and transfers account for nearly 20 percent of Abu Dhabi’s budget, or Dh47.8bn ($13bn) this year, the IMF has estimated, using data from the Abu Dhabi Department of Finance. Household electricity bills are so low some people leave their air conditioning on when they go on holiday. UAE citizens pay just 5 fils per kilowatt hour in Abu Dhabi and get water for free. Foreigners pay about 15 fils for electricity.
Abu Dhabi is by far the largest of the seven members of the UAE and exports most of its oil. Despite the oil price drop, it is not close to running out of money, so any reforms may be minor.
The IMF has estimated that the UAE as a whole will need an average oil price of about $77 per barrel next year to balance its state budget. Even if that threshold is breached, Abu Dhabi holds an estimated $773bn in its largest sovereign wealth fund, so it can fall back on massive reserves.
Nevertheless, Abu Dhabi’s move appears to be part of a trend in the Gulf. Kuwait’s government said last month that it planned to cut subsidies for diesel fuel and kerosene, and Oman’s financial affairs minister said that his government was likely to start cutting some subsidies next year.
Abu Dhabi is expected to post a fiscal surplus of Dh69.7bn, or 7 percent of GDP, in 2014, up from Dh55.6bn or 5.8 percent last year, the IMF has estimated. Reuters
