Bahrain is set to reduce subsidies for its expat population of 1.3 million as the slump in the oil price hits the country’s finances.
Subsidies on fuel, electricity, water and meat will be phased out, with cash payments introduced to reduce the burden on Bahraini citizens, said Isa bin Abdulrahman Al Hammadi, minister of state for information affairs, according to the state-owned Bahrain News Agency.
“The majority of beneficiaries from subsidy of consumer goods and services are foreign nationals resident in the kingdom and companies but not individual Bahraini citizens,” Mr Al Hammadi said.
He did not say when or by how much subsidies would be cut.
It was not immediately clear how the new system would operate.
"Bahrain and Oman stand out as the Gulf states that most need to tackle their fiscal positions," said William Jackson, senior emerging markets economist at Capital Economics. "They are the most dependent on high oil prices, they have the worst fiscal positions in the Gulf and they don't have the fiscal buffers needed to weather the low oil price."
The near-halving of the oil price from more than US$110 in September 2014 to $65 yesterday has led to budget deficits across the region as government hydrocarbon revenues fall.
Bahrain’s government expects its budget deficit to climb to $3.9 billion this year, equivalent to 11.2 per cent of the country’s GDP.
The government expects to run a deficit of 12.4 per cent of GDP in 2016.
Some $2bn of spending on energy subsidies is included in the government’s estimates.
Bahrain needs the oil price to return to $82 per barrel to break even, according to data from Deutsche Bank.
Oman is set to run a budget deficit equivalent to 8 per cent of GDP this year, as it draws on its reserves to finance its deficit. The country has an estimated fiscal break-even point – the oil price at which government expenditure equals government revenues – of $90 per barrel.
Both Bahrain and Oman have less than two years’ worth of cash reserves left at current levels of spending, according to Deutsche Bank estimates.
The IMF has repeatedly called on Gulf states to cut spending on energy subsidies, and estimates that Middle East governments spend $250bn on reducing fuel prices for consumers. But the IMF says that fuel subsidies mainly benefit the better off, and are unaffordable when Gulf states are running significant deficits.
Masood Ahmed, the director of the Middle East at the IMF, said last month that the fall in oil prices had led to “a shift in the sense of urgency” with which Gulf states need to begin cutting fuel subsidies.
“Even before the fall in oil prices, a number of Gulf countries were spending more than would be the optimal level, in terms of leaving enough resources for future generations,” he said.
The region’s governments have introduced measures to curtail spending on energy subsidies, but they are likely to remain major budget line items for some time to come, analysts said.
* with Reuters
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