Will price of fuel, water, power and even bread rise if Oman subsidy cut?

Debate over whether the Sultanate should stop subsiding the cost of petrol, electricity, water and even housing loans for nationals, has been reignited by the Central Bank of Oman (CBO) which said it backs the move in a 'phased manner'.

25 June 2015
Muscat: Debate over whether the Sultanate should stop subsiding the cost of petrol, electricity, water and even housing loans for nationals, has been reignited by the Central Bank of Oman (CBO) which said it backs the move in a 'phased manner'.

Oman government grants subsidies to producers of various essential items, which include petroleum products, housing loan interest, electricity, water and essential food items, including wheat flour.

It also offers subsidies to oil firms, housing bank, power producers, flour mills and poultry feed manufacturers and asks them to sell their products and services at a government determined price in a move to help the common people by controlling prices and inflationary pressure within the country.

The banking regulator in its recent Financial Stability Report said, "The seemingly gradual approach to address the issue of price subsidy - aimed at improving social and political economy - looks worthwhile considering the fact that it bears profound impact on the price of energy/petroleum products, which could turn Oman into a high-cost economy adversely affecting the economic growth."

Oman government has been contemplating withdrawing fuel subsidy for the last couple of years, but no decision has been taken so far due to its far-reaching implications on the entire people.

The apex bank said that in 2014, while subsidies fell by 17.11 per cent, Oman still had a bill of about OMR1.69 billion. The fall in subsidy was mainly on account of plunging oil prices.

Total subsidy and exemption estimate for 2015 is at OMR1.8 billion, mainly for providing subsidy for petroleum products, interest subsidy for housing loan, electricity and water and some essential food items.In fact, the overall subsidy constitutes almost 13 per cent of budget expenditure, which is a growing concern for the government.

"The opportunity cost of delaying subsidy cuts has increased with record low oil prices since September, 2014. This places fiscal pressure on Oman's budget, which incurred a deficit of OMR1.06 billion in 2014 and is projected to increase to OMR2.5 billion in 2015. That been said, there has been plans to address this issue suitably," the CBO report explained.

"It has to be done in a phased manner and that is what is mentioned in the report," Hamoud Sangour Al Zadjali, executive president of the Central Bank of Oman, told Times of Oman. "(However) it is up to the government to look at this issue," he added.

There has been debate on whether expats should bear the burden for subsidy cuts, for example with foreigners charged more for fuel and power than nationals.

But Tawfiq Al Lawati, a Majlis Al Shura member representing Mutrah, said while he has called for subsidies to be they should not target expatriates exclusively, but be based on monthly income.

"Those earning over OMR 800 as a monthly salary should not get subsidy benefit. It should be for low income people only," said Al Lawati.

He added that as of now most high income group people enjoy the subsidy benefits.

"If we just check who the maximum number of beneficiaries of the subsidies is, I am certain that it will be the high income families. Remember each house has at least five to six vehicles," said Al Lawati.

"This money which is wasted in the subsidies is the next generations' money and the government should consider that and start a move to protect it," said Al Lawati.

"The government should sell the oil much higher than the current price. It should impose taxes on vehicles with a capacity of over two and half vehicles. This will push the motorists to opt for low fuel consuming vehicles," said Al Lawati.

Meanwhile Ahmed Al Hooti, an Oman Chamber of Commerce and Industry (OCCI) member says that it is difficult to determine who can benefit from subsidies based on nationalities or even monthly income.

"The OCCI has gone through a study conducted by the government on cutting subsidies on diesel only. Although the government says that this will target only companies, but in turn this will affect the public too," said Al Hooti.

He added that many essential commodities will witness price rise as a result.

"Saving one million Omani rials, the study carried by the government which was given to the OCCI included a list of the most affected essential commodities as far as price in concerned. Vegetables and fruit topped the list," said Al Hooti.

He added that the current financial situation of the government is a result of the short term plan made by the government.

"The government might opt for loans in the coming period but it has to think of others way for the income," said Al Hooti.

He added that the OCCI suggested the idea of providing cards for diesel vehicles or boats owners including a limited use of the fuel.

"If the owners of the vehicle or boat want to exceed the limit he should be then able to pay the diesel price along with the subsidy amount," said Al Hooti.

© Times of Oman 2015