29 May 2016
Muscat - The recent domestic fuel price increase of 33 per cent will increase poverty incidence in the sultanate by about one per cent from the base level, according to a study.

This simulation study was conducted by Dr H B Kotagama, H Boughanmi, H A I al Farsi and N S M S al Hamedi from the Department of Natural Resource Economics at the College of Agricultural and Marine Sciences, Sultan Qaboos University.

The surge and volatility of food and fuel prices between 2008 and 2014 has changed to decreasing food and fuel prices since 2015. However, the rate of decrease in food prices has been less than the drastic rate of decrease in fuel prices. This scenario of relatively high food prices to low fuel prices will adversely impact poverty and food security in countries that are highly food import and oil export dependents, such as Oman.

"The trade balance of Oman though was in surplus up to 2014, with the decrease in the oil price, has been in deficit in 2015. The Government of Oman, through its budgetary proposals for 2016 has initiated reforms to augment government revenue, through increases in business taxes and phasing down subsidies on fuel," Dr Kotagama said.

Oman imported 44 per cent of the food consumed, 100 per cent of rice and about 95 per cent of wheat. Expenditure on food is the largest percentage (31 per cent) of the total household income followed with transportation (17 per cent) that is largely cost on fuel. Thus changes in either, food or fuel prices, would have a significant impact on poverty. In Oman, a family is classified as poor if it spends more than 60 per cent of the household expenditure on food (erstwhile Ministry of National Economy, 2010). Based on this standard 12 per cent of Omani families were classified as poor based on Household Expenditure and Income Survey conducted in 2007-08 compared to eight per cent in 1999-2000.

Studies, done post 2008 on surge in global food prices, have quantified the resulting increase in food insecurity in Oman, measured as percentage of households unable to access Nutritionally Adequate Socially Preferred Least Cost diet as 5.3 per cent. The phasing down of fuel subsidies may further aggravate poverty and household food security. In this context, quantitative analysis on the impact and sensitivity of food and fuel price changes on incidence of poverty will be useful to assess policy options to mitigate poverty and manage public finances.

Researchers at the WTO Chair at SQU used a simulation model developed by the World Bank to estimate the poverty impacts caused by changes in food and fuel prices.

The model estimated that poverty incidence at present as 12.8 per cent and the transfer of finance required to bring down poverty incidence to zero per cent at about RO500 per year/household and the required total financial transfer as RO20.4mn. According to national statistics, the transfer of finance as food subsidy has been RO19.3mn in 2014. The simulation on the recent (2016) domestic fuel price increase (decreased subsidy), which was an increase of 33 per cent, indicated that poverty incidence would increase by about one per cent from the base level.

If food prices were also increased by 30 per cent with an increase of 33 per cent fuel price the poverty incidence would increase by about three per cent. The incremental cost to compensate households that fall below the poverty line due to the recent increase in fuel prices is estimated at about 0.82mn compared to the cost saving to the government of RO162mn on phasing down oil subsidy (increase of fuel price by 33 per cent).

© Muscat Daily 2016