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Tue 3 Dec 2013 01:43 PM

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Bahrain said to plan revamp of subsidies

Central Bank governor Rasheed al-Maraj says changes may start as early as this month

Bahrain said to plan revamp of subsidies
Bahrain Central Bank governor Rasheed al-Maraj.

Bahrain will revamp subsidies that have led to excessive consumption of energy and some foods, Central Bank governor Rasheed al-Maraj was quoted as saying on Tuesday.

The changes may start as early as this month and will include “certain mitigations” to avoid fueling inflation, he said in comments published by Bloomberg.

“We are very much aware that the level of consumption in energy and some of the foods is not sustainable,” al-Maraj said, adding: “The philosophy of directing the subsidies toward the needy is now being reflected into the programmes.”

His comments follow reports last month that Kuwait's government plans to form a special committee to review subsidies on goods and services which are costing the Gulf Arab state more than KD4.5bn ($15.9 billion) a year.

Like other wealthy countries in the region, Kuwait does not tax earnings and provides a generous welfare system for its citizens. All residents, including foreigners, benefit from subsidised petrol, cheap electricity and water, while Kuwaiti nationals get extra support for housing and food.

The IMF has repeatedly urged Gulf countries to reduce energy subsidies, and has said Bahrain’s budget deficit will widen to 5 percent of gross domestic product next year, almost double the 2012 gap.

The IMF expects growth in the GCC's state spending to slow further in coming years; it forecasts an average rise of just over 4 percent annually in 2013-2018, compared to the 15 percent clip seen over the last decade.

But on current indications, this spending restraint will not be enough to prevent state budgets in many countries from going into the red, the IMF predicted.

Bahrain is currently the only GCC country in the red; it is expected to be followed by Oman as soon as in 2015, and Saudi Arabia in 2018.

King Hamad bin Isa Al Khalifa ordered a handout of BD1,000 ($2,650) per family in February in 2011, a month before Bahrain declared a state of emergency as protesters demanded more civil rights.

In September, Moody's Investors Service cut Bahrain's government rating by one notch to Baa2 and warned further cuts could be coming, citing the government's weak fiscal position and an outlook for lower-trend economic growth over the medium term.

"The negative rating outlook reflects the high degree of event risk, particularly regarding Bahrain's susceptibility to domestic and regional geopolitical instability, as well as potential negative impact from an oil price shock," Moody's said.