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The imbalance in Bahrain’s generous subsidies

Bahrain’s subsidy programme continues to be notably generous notwithstanding the fact that the country has the smallest economy among the Gulf Cooperation Council member-states. For instance, Bahrain’s gross domestic product is $30 billion compared with the UAE’s near $400 billion.

Yet, the total cost of its subsidy programme is alarming, amounting to nearly $3.4 billion in 2013. This comprises more than 11 per cent of the country’s GDP, something quite out of the ordinary by global standards. Some contend these numbers suggest that the programme must be modified to make its more sustainable in the longer term.

There are subsidies for petroleum products, including gas, as well as utilities, plus for three essential food commodities — red meat, flour and chicken. Still, details matters, as a sizeable portion of the cost of subsidy is associated with those extended to industrial undertakings.

The gas component alone compromised 47 per cent of the overall subsidy cost in 2013. A notable portion of the subsidised gas is provided to industrial enterprises like Aluminum Bahrain (Alba). Yet, this is a debatable issue in the country given that this extension of support has been on offer to Alba since its inception in the early 1970s.

The provision of subsidies to Alba and to other industrial projects elsewhere in the region is one of the sticking points getting in the way of concluding a free-trade agreement between the EU and the GCC. The EU is displeased with the level of state support for crucial industries and how it gets in the way of market forces.

The second largest component of Bahrain’s subsidy is for electricity and water, and costs the state some $925 million, and equivalent to 27 per cent of total subsidy finance. This essential service is provided at subsidised rates to households and enterprises, though at different tariffs.

The next expensive subsidy is petroleum products such as fuels for vehicles, accounting for 21 per cent of the overall subsidy scheme. Recently, authorities attempted to increase diesel prices as part of a move to restrict efforts by smugglers intent on profiteering from price differentials.

However, officials abandoned the idea following threats of walkouts by legislators in the lower house. The MPs argued that higher diesel prices would undermine consumers, as enterprises tend to transfer the additional costs onto end-users. However, another attempt to raise prices cannot be ruled out.

Subsidies on the three food essentials cost around $180 million, or 5 per cent of total programme. Strangely, there is a considerable amount of focus on this set of subsidies, possibly reflecting general consumption trends.

There is no discrimination with regard to recipients of the subsidies, as both nationals and expats currently benefit from it. It is believed that some foreign workers are among the neediest in the country, reflecting the very basic levels of their salaries. Hence, they deserve to receive products at subsidised rates.

The IMF continues to impress on Bahrain to reconsider the structure of the programme by possibly expanding on the subsidised goods and services to the needy. However, it rightly questions the policy of extending the same for the well-to-do. The same argument applies to providing subsidy to established and profitable businesses.

The subsidy schemes are partly responsible for both the budgetary deficit and a growing public debt problem. Projected budgetary shortfall in fiscal year 2014 amounts to $2.4 billion and the public debt in early 2014 stood at $14 billion, or about 47 per cent of the GDP.

Among other things, subsidies undermine treasury revenues by charging lower than market prices for petroleum products on the one hand and compensating poultry importers on the hand.

The writer is a Member of Parliament in Bahrain.