Reeling from sustained low oil prices, Bahrain is desperately looking for ways to reduce its government expenditures. Consumer subsidies are a tempting target, but the government is having difficulties trying to strike the right balance between fiscal responsibility and shielding consumers from a price hike. A proposed termination of meat subsidies was recently pushed back again, from September 1 to October 1. On Wednesday the government said a panel will consider all options, and is still collecting data.
Earlier in the summer Bahrain announced that meat subsidies would cease on August 1, but that was soon postponed. They cost about $125 million annually — much less than the other generous subsidies that the government provides on fuel, water, and electricity. Oil subsidies are approximately $275 million, while total non-oil subsidies are in the range of $1.73-2 billion. These hefty outlays come at a time when the national budget envisions a deficit of $3.98 billion in 2015, up from an originally planned deficit of $2.42 billion.
Fuel and electricity subsidies may be trimmed or eliminated eventually, but that looks unlikely if Bahraini politicians can’t even agree on meat subsidies first. The budget’s passage was delayed six months due in part to parliament’s opposition to the proposed subsidy removals of P.M. Prince Khalifa bin Salman Al Khalifa and his ministers. In finally passing the budget, parliament succeeded in winning some control over the subsidy decision-making process, hence the joint Government-Parliamentary Subsidy Review Committee.
Bahrain’s government has been leaning towards an approach that protects Bahrainis while pinching foreigners, who make up half the population of around 1.3 million. Subsidies are to be scrapped, and then the government will supposedly make cash deposits to Bahraini citizens only, not to foreigners. Bahraini families wishing to receive compensation for anticipated higher costs of living would register online. The ministries of finance and social development would then use that database to compile a list of eligible recipients and start cash payments in October. And the 116,000 Bahraini families which already receive financial aid via government-funded grant programs would be exempted from registration, since they would receive automatic compensation in their bank accounts once the policy takes effect. (The other main option for compensation would be to issue ration cards.)
Reducing subsidies would help the government’s finances, but it is not an automatic cure-all. Subsidy cuts could push up consumer prices in Bahrain and put upward pressure on foreign workers’ wages, potentially hurting companies’ competitiveness. Information Affairs Minister Isa bin Abdulrahman Al Hammadi said the policy would take into account the issue of competitiveness, without giving any specifics.
So for now, the government is stalling for time, and making piecemeal structural adjustments. It is seeking to raise alternative revenue by taxing households and private businesses, and on July 7, it announced plans to charge for sewerage services currently provided for free. Regardless, a gaping deficit is unavoidable.
And Bahrain’s other preoccupation is domestic unrest. If the subsidy cuts exclusively hurt foreigners, most of whom are poor laborers, discontent and resentment are inevitable. And any cuts affecting Bahrainis would be radioactive in parliament. So the easiest political response is to keep delaying, but as long as oil prices stay low, doing so will only make Bahrain’s fiscal pit worse.