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Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Fuel Subsidy Regime Falls Like Dominoes Across Middle East

KNPC gas station

Two weeks ago, news broke that the International Monetary Fund had reached a “tentative” agreement with Egyptian officials regarding a $12 billion loan that the Washington-based pool would pay out over the next three years.

The IMF’s Egypt mission chief, Chris Jarvis, said, “Egypt is a strong country with great potential but it has some problems that need to be fixed urgently.”

One of those problems, it turns out, is the country’s fuel subsidies.

Reuters reported on Tuesday that Egyptians will pay 65 percent of the actual cost of fuel at pumps during the 2016-17 fiscal year, and by the time the IMF distributes the last portions of its massive loan in 2020, the fuel subsidies will be completely dismantled.

To be clear, the fuel subsidy cuts do not represent a new political position in Egypt. In October 2014, Acting President Adly Mansour released a five-year economic development plan that would be valid through the 2018-2019 fiscal year.

The strategy – or Strat-EGY, as the government put it – scheduled fuel and electricity price reforms for the 2015-2016 fiscal year, but current President Abdel Fattah el-Sisi did not follow through on the proposed measures.

Now, as cash flows from neighboring Gulf States – which had kept Egypt’s ailing economy afloat– start to run dry, the republic has reached out to the IMF for financial buoyancy.

Egypt represents the latest Arab League country to implement austerity measures hostile to existing oil and gas subsidy structures.

In May, war-torn Iraq also signed an IMF deal for a $15 billion loan over three years on the condition that oil and food subsidies are phased out. The Ministry of Finance, seeking funds to fight the last vestiges of the Islamic State (ISIS), agreed to the terms, assuring its citizens that social and health services would remain fully functional. Related: Can Fire Ice Replace Both Oil And Renewables?

Arab monarchies – particularly those in the Gulf Cooperation Council (GCC) – have also adopted a subsidy reduction policy as the costs of oil and gas production and refining exceed per-barrel revenues in the bear market.

Under Saudi Arabian Deputy Crown Prince Mohammed bin Salman’s plan to rebalance the kingdom’s underfunded budget, oil, water and electricity subsidies have been slashed, while welfare payments to citizens have stagnated.

As Bloomberg described last week, the Saudi family’s policy of denying citizens a voice in public affairs, while offering welfare money in exchange for loyalty, has come under direct threat during the oil price crisis.

The misalignment between the political goals of the king’s men and the economic state of the Saudi Arabian people becomes clearer when set in the context of the nation’s bitter rivalry with Iran.

As ordinary Saudi Arabians face a rising cost of living, Prince Mohammed has made a policy out of increasing production rates to record highs as part of a coordinated effort to prevent Iran from regaining the customers the KSA had won over when international sanctions against Iranian oil were in place.

The members of the Organization of Petroleum Exporting Countries, of which the KSA is considered to be the de facto leader, have twice failed to agree on a freeze on oil production to combat the global supply glut, because of Saudi Arabia’s unrelenting rivalry.

Iran has also stood firm, arguing that it deserves a chance to rebuild production capacity as more states become willing to do business with the country in recovery. Related: The Eagle Ford: Down But Not Out

OPEC’s September meeting in Algeria - a nation that, in lockstep with regional trends, upped gasoline prices in January – could lead to an agreement to halt production, though mixed signals regarding Iran’s attendance abound.

Qatar and Kuwait, both GCC and OPEC member states, raised fuel prices this year to grapple with massive budget shortfalls.

A World Bank report released last month estimated Qatar would see an $8 billion budget deficit, equivalent to five percent of the nation’s total gross domestic product (GDP) in 2016.

In mid-January, Qatar's state-owned oil and gas company, Woqod, increased gas prices by 30 percent, bringing the cost of a liter of unleaded gas to $0.36 in the first fuel price hike the country had seen since 2011.

Kuwait’s drastic petroleum pricing reforms earlier this August made it the last GCC country to increase domestic energy prices. Fuel costs to consumers soared from 40 to 80 percent for the first time in 20 years.

Net energy importers Jordan and Morocco - both of which stand to benefit from low global oil prices - have pursued subsidy cuts in recent years to satisfy the requirements for a $2 billion loan and a $6.2 billion credit line from the IMF, respectively.

As the oil and gas subsidy structures in the Arab world crumble – mostly due to the budgetary effects of record low energy prices, but also as a direct result of IMF loan conditions in some cases – what will the future of energy consumption in the Middle East and North Africa region look like?

Governments that have previously used oil and gas subsidies to manage the domestic cost of living have lost the funds, or the financial support from once oil-rich Gulf allies, to maintain the quasi-sustainable status quo. The system buttressed political systems that restricted democratic freedoms, but allowed citizens to afford their day-to-day expenses. For a majority of Arabs, the arrangement was not appealing, as revealed in the frustrated protests of the Arab Spring, but at least it allowed many of them to eat or pay for transportation.

As unemployment stagnates, or even increases in some places, and the regional costs of fuel, food and other basics skyrocket, ordinary Arabs face a fresh set of financial challenges.

By Zainab Calcuttawala for Oilprice.com

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  • evodevo on August 30 2016 said:
    Not a good move. The reduction in subsidies will add to the economic burden of the regular Joe (Mohammed?) and he will not respond politely. Expect an even more volatile Middle East as a result.

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