* Political sensitivities have held back reforms in Gulf
* Saudi move gives political cover for other states to act
* Governments will proceed gradually
* Bahrain, Kuwait, Qatar and Oman all reviewing subsidies
* Saudi backing means regional VAT likely to go ahead
By Katie Paul
DUBAI, Dec 30 An austere state budget released
by Saudi Arabia this week is likely to mark the end of an era
for the Gulf's lavish cradle-to-grave welfare systems,
encouraging governments around the region to roll back costly
handouts to their populations.
Struggling to narrow a huge budget deficit created by low
oil prices, Riyadh on Monday announced government spending cuts,
reforms to energy subsidies and a drive to raise revenues from
taxes and privatisation next year.
Gulf governments have tightened their belts in the past
during periods of slumping oil prices. But the Saudi budget went
further than usual by including steps that will directly hit the
purchasing power of citizens - in particular, raising domestic
gasoline, kerosene, water and electricity prices.
It was the biggest step a rich Gulf Arab oil exporting state
has taken so far to change an arrangement in which governments
heavily subsidise fuel, water, food and other essentials for
their populations in exchange for social peace.
Because of Saudi Arabia's role as the political leader of
the Gulf Arab states and the biggest Arab economy, other Gulf
governments are now expected to follow suit as they impose their
own austerity programmes in response to the prospect of years of
shrunken oil and gas revenues.
"The initiatives announced in the Saudi budget will be
game-changers in the Gulf," said Kristian Coates Ulrichsen, a
political scientist at Rice University's Baker Institute in the
"If the reforms can be implemented without a significant
backlash, that would boost the political courage of governments
that hitherto have been hesitant to introduce such sensitive
In postings on Twitter, ordinary citizens in the Gulf also
saw the Saudi budget as signalling tougher times for the region.
"Saudi Arabia's budget deficit is terrifying! We fear that
it will be echoed around the Gulf," tweeted a Kuwaiti high
school teacher who identified himself as Bu Dujan, adding that
fuel price hikes in the region would raise the costs of goods.
Some countries had already launched reforms before Riyadh
made its move. In August, the United Arab Emirates abandoned a
system of fixed gasoline prices in favour of one linked to
global oil prices; gasoline has barely risen, but the way is
clear for it to do so in future when oil eventually recovers.
Bahrain more than doubled prices of beef and chicken in
October as it removed subsidies on them, and this week the
Bahraini cabinet approved a new system for diesel and kerosene
that would allow prices to rise gradually in coming years.
Bigger changes are on the way. Governments in Bahrain,
Kuwait, Qatar and Oman, which face financial squeezes of varying
intensity, have all said they are conducting broad reviews of
their subsidy systems, though they have not yet committed to
Because of political sensitivities, governments are likely
to move cautiously; Saudi officials stressed this week that they
wanted to minimise the impact on the living standards of lower-
and middle-income people.
Although the Saudi price of 95 octane gasoline jumped 50
percent, it remained very low by global standards, at 0.90 riyal
($0.24) per litre. Water and electricity price hikes were
structured to impose most of the burden on big corporate users.
Nevertheless, Riyadh made clear that the price hikes were
only the first in a series, saying it would adjust subsidies for
water, electricity and petroleum products over five years.
Once governments start cutting subsidies, it may be hard for
them to resist the huge savings available from more reforms. The
International Monetary Fund estimates Riyadh spent $107 billion
on energy subsidies this year - more than its entire budget
deficit of $98 billion.
"We think that the Saudi consumer fuel price changes will be
the first of many to come over the next few years" around the
Gulf, said Mohamed Al Hajj, associate at investment bank EFG
Hermes in Dubai.
In the wake of the Saudi budget, Kuwait's Finance Ministry
Undersecretary Khalifa Hamada told the AlQabas newspaper that
his ministry would present a proposal to "rationalise" subsidies
to an economic committee in the cabinet at the end of this week.
The proposal would save the government 6.2 billion dinars
($20.5 billion) over the next three years, Hamada said,
estimating that without reforms, Kuwait would spend 16 billion
dinars on subsidies over three years.
Saudi tax policy is also expected to influence the Gulf,
because of the close ties between the region's economies.
In its budget announcement, the Saudi Finance Ministry said
it planned to introduce value-added tax in coordination with
other countries in the region - a measure that would directly
affect the spending power of ordinary consumers, even if it is
mitigated by exemptions for items such as food.
Officials have said countries would need to introduce the
tax jointly to avoid smuggling and loss of economic
competitiveness, but Gulf Arab governments have been discussing
the idea inconclusively for years.
Previously, the main impetus for the tax came from the UAE;
Saudi Arabia's decision to endorse it publicly means the project
looks likely to go ahead in the next few years.
(Additional reporting by Hadeel Al Sayegh and Noah browning;
Editing by Andrew Torchia and Anna Willard)