RIYADH — Saudi Arabia may reduce energy and water subsidies for wealthy citizens among other reforms to diversify its economy away from oil amid a sustained fall in prices, its Deputy Crown Prince Mohammed Bin Salman was quoted as saying on Wednesday.

His interview with The New York Times also appeared to suggest he could foresee oil prices dropping far below their current level of around $45 a barrel.

The newspaper paraphrased the prince’s reform plans, adding: “So even if oil falls to $30 a barrel, Riyadh will have enough revenues to keep building the country without exhausting its savings,” but without making clear if that figure was its own or had been mentioned by Mohammed Bin Salman.

The world’s top oil exporter has previously said it was studying increases in domestic energy prices, the introduction of value-added tax (VAT) and the installation of nuclear and solar power.

Low oil prices and expected deficits in coming years have spurred a new focus on reforms in the conservative kingdom with the aims of diversifying the economy away from a dependence on crude revenue.

“The key challenges are our overdependence on oil and the way we prepare and spend our budgets,” he said in the interview.

Benchmark Brent oil futures eased on Wednesday to trade around $45 per barrel as the dollar strengthened and investor focus shifted back to a deep global supply glut.

The glut arose on the back of the US shale oil revolution as well as a Saudi decision last year to persuade the Organisation of Petroleum Exporting Countries to keep the taps open to fight for market share with rival producers.

Besides reducing subsidies, the reforms might include imposing a VAT and taxes on unhealthy goods like cigarettes and sugary drinks, he was quoted as saying.

The newspaper reported that he also said he would privatise and tax mines and undeveloped land, and intended to reduce domestic oil consumption by installing nuclear and solar electricity capacity, without giving further details.

Mohammed Bin Salman, who is also defence minister, heads a supercommittee on the kingdom’s economy and development as well as a National Performance Centre that oversees efficiency in all government ministries.

Under King Abdullah, who died in January, Saudi Arabia privatised big state companies, opened main sectors of the economy to private and foreign investment, joined the World Trade Organisation and reformed labour laws.

However, economists say the government can do more to strengthen the role of Saudi nationals in the private sector economy, including via education reform, and to make the government more efficient.

Separately, faced with heavy losses from low oil prices, Gulf states have embarked on belt-tightening measures to cut spending and boost non-crude revenues, but analysts warn much more needs to be done.

After more than a decade of abundant surpluses thanks to high oil prices, the six Gulf Cooperation Council (GCC) states are projected to post a combined record shortfall of $180 billion in 2015 and the drought is expected to continue for years.

Some countries have already cut subsidies, while others are considering measures to reduce their spending.

International Monetary Fund (IMF) chief Christine Lagarde told GCC finance ministers in Qatar this month that “global energy prices could remain low for years” and urged them to adjust their budgets.

Lagarde warned that the GCC, which has relied on energy income for 90 per cent of their revenues, should reduce dependence on oil and gas.

In 2014, GCC states — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) — posted a small surplus of $24 billion, down from $182 billion the previous year, according to IMF figures.

Each of Bahrain, Oman and Saudi Arabia ended 2014 in the red for the first time since the global financial crisis in 2009.

World oil prices have dropped by more than 50 per cent since June 2014 and the IMF has projected that it will result in a $275 billion drop in GCC revenues this year.

‘Much larger’ problem this time

But having amassed a wealth of around $2.7 trillion over the past decade, the IMF advised GCC states to take a gradual approach to implementing reforms and diversifying the economy.

Although the measures may not be easy to enforce in countries that have long offered generous welfare systems, analysts believe this time fiscal consolidation, diversification and reforms must be deeper, long-term and sustainable.

“The magnitude of the problem is much larger this time because subsidies and salaries have immensely increased in the past few years, together they form 90 per cent of current expenditure,” indicated the head of economic research at Kuwait Financial Centre (Markaz), M. R. Raghu.

“They cannot roll back on salaries because this is too sensitive,” Raghu told AFP.

Spending in Gulf states, mostly on salaries and subsidies, almost doubled to $550 billion between 2008 and 2013, according to IMF statistics.

The six nations have a population of 50 million, half of them foreigners, and pump around 18 million barrels per day.

The steep rise in expenditures greatly increased the breakeven price for oil, to $106 a barrel in the case of Saudi Arabia from under $70 a few years ago. It is higher for Bahrain and Oman.

IMF and the World Bank estimate that the direct cost of energy subsidies in the GCC was $60 billion last year.

Steps taken by the GCC states to cut spending and raise non-oil income have been modest so far.

The UAE took the lead by liberalising fuel prices in June and raised electricity charges in Abu Dhabi. Both measures are expected to save billions of dollars.

Having the most diversified economy in the Gulf, the UAE said it has earmarked more than $80 billion for projects away from oil.

Kuwait began selling diesel and kerosene at market prices at the start of 2015. It has cut spending by 17 per cent and is in the process of raising petrol prices and charges on electricity and water.

However, it has still awarded projects worth a record $30 billion so far this year, according to officials and experts.

Saudi Arabia, for its part, said it was considering delaying “unnecessary” projects and studying energy subsidies reforms.

Gas-rich Qatar said it is also considering some spending cuts and reducing subsidies. Oman and Bahrain, the poorest members of the GCC in terms of energy wealth, have announced similar plans.

“This is not enough. They have a long way to go,” stressed Shanta Devarajan, World Bank chief economist for the Middle East and North Africa. “This is just the beginning… the measures must focus on reforms, unemployment and diversification. Much more steps are needed.”

The IMF said reforms should include comprehensive energy efficiency and price alterations, expanding non-oil revenues, reviewing capital and current expenditures and reducing the government wage bill.

The IMF said Saudi Arabia, Oman and Bahrain will spend all their fiscal reserves in under five years if they fail to take additional austerity measures.

“GCC states must be serious this time… The $100 a barrel days are gone and they have to live with a $40-$50 price,” Raghu said.
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