North Africa, West Asia

Bahrain’s attempts at subsidy reform

The burden of debt is being pushed onto the shoulders of citizens, and so subsidy reform may tip the delicate balance of the political and economic impasse.

Abdulla Abdulaal
27 January 2014

As Bahrain’s public debt approaches its legal ceiling of five billion dinars, the subsidy programme is in dire need of reform. The dip in oil prices following the global financial crisis led to a stark fall in revenues, while expenditures grew steadily to accommodate high population growth rates and the economic shock. This left a widening gap in the public budget as debt is expected to surpass fifty per cent of GDP this year, raising questions of fiscal sustainability.

Revenues are dictated by oil production representing ninety per cent of state income, while alternative sources such as taxation and fees are politically difficult to implement.  There has been fierce resistance, particularly from the traditional merchant class, to the foreign labour tax and the proposed value added tax; direct taxes are completely out of the question at this juncture. Hence, expenditures must be rolled back to reduce the deficit, and subsidies are a prime candidate as they are directly linked to consumption.

Subsidies have been draining the state budget in recent times, mainly due to imported inflation associated with the dollar peg. A sustained period of high economic growth, migration inflows, commodity price volatility, and global food supply strains has led to an ever increasing burden on the state, while empowering the rentier structure of the political economy.

Data from the Ministry of Finance shows that total spending on subsidies and social support programmes have increased remarkably from BD 1 million to BD 306 million between 2001 and 2011. This includes food and fuel subsidies, inequality and inflation targeting transfers, and royal gestures. Food subsidies alone soared from BD 1.5 million in 2002 to BD 67 million in 2012.

Early in December, the Central Bank Governor announced plans to revamp subsidies following recommendations by the International Monetary Fund. However, the regime’s official spokesperson said that there are no such plans after the last cabinet meeting. It seems that there is no coherent strategy yet, as the regime is hesitant to tackle such a sensitive issue.

The National Oil and Gas Authority announced a price hike for diesel related products, and rumours have been circulating regarding cuts to food subsidies. The price of diesel is to increase by twenty per cent to one hundred twenty fils per litre starting January next year, and continue to rise by twenty fils until it hits one hundred eighty fils in 2017. Subsidies on asphalt will also be reviewed, but it is unclear whether food subsidies on red meat will be changed.  Flour and chicken, as well as electricity and water subsidies have not yet been addressed.

Cutting down subsidies is long overdue, but the political and economic climate will not allow it. The regime lacks political leverage and support, as the current crisis closes on three years with no resolution in sight. The government’s financial performance has come under scrutiny with the National Audit Office report, which highlighted allegations of misconduct and fraud. Bahrain’s global governance rankings in terms of transparency, perception of corruption, and government effectiveness have been declining since 2009.

On the economic front, wage and employment growth has been minimal, if not negative in most sectors. A decade of high inflation in food prices and a real-estate bubble skimmed national savings and the purchasing power of local consumers in particular, as foreign workers gained the lion’s share of growth in the private sector. Today, consumers and producers alike are calling for higher government intervention and support, whether through the Tamkeen labour fund, tariffs on imports, or direct state subsidies.

Austerity measures seem inevitable given economic conditions, and as the regime aims to maintain the allegiance of the political and economic elite. However they are difficult to swallow considering political realities, and the fact that the middle and working classes will bear disproportionate costs. Subsidies should have been gradually eroded during years of high economic growth, when oil prices were favourable and the budget was registering surpluses. Inefficient allocation of resources and the lack of strategy and vision dug the hole which the Bahraini state finds itself in today.

The burden of debt is being pushed onto the shoulders of citizens, and so subsidy reform may tip the delicate balance of the political and economic impasse, as it did in Jordan for example. The state needs to be careful in choosing its battles; however this does not long postpone the desperate need for a genuine political solution. A new social contract is in order as Bahrain’s regime needs to reassess its role in society, and only then will subsidy reform be successful. 

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