x Abu Dhabi, UAEFriday 28 July 2017

Gradual process to lift utility subsidies

Electricity rates in the UAE are among the lowest in the world, petrol costs a fraction of what it does in most countries, and even water is heavily subsidised.

Electricity rates in the UAE are among the lowest in world, petrol costs a fraction of what it does in most countries, and even water is heavily subsidised. There is no doubt that consumers enjoy these savings. There will be teething pains as subsidies are gradually lifted, but it is in the long-term interest of us all. The other side of the coin is that subsidies distort the market and consumer behaviour. If water or electricity is priced artificially low, there are no incentives towards conservation, which has consequences both for the environment and national development. This week, The National has carried stories about the possibility that electricity rates in Abu Dhabi will be raised and agricultural subsidies which encourage profligate water usage will be ended.

This will be a gradual process, but it is already well underway. Abu Dhabi's Executive Affairs Authority (EAA) has already committed to reducing the demand-side consumption of oil, power and water. In terms of water alone, an EAA study completed last year showed that over 10 years it would be possible to cut the growth rate of consumption by as much as 30 per cent. One example of unsustainable water use is related to Rhodes grass crops. Subsidies given to farmers amounted to Dh800 million ($217.8m) in 2006, as we report today. In turn, cultivation of the crops accounted for 60 per cent of agricultural water usage in the emirate - even though the crop does not make economic sense without subsidies.

As this subsidy is phased out in the Western Region this month, there has to be consideration for the welfare of farmers who have depended on it. To ensure their long-term economic welfare, farmers should instead be encouraged to grow crops that are better adapted to the region's environment. Equally, as the Abu Dhabi Executive Council decides on whether to raise electricity prices in line with market costs, there may be some economic pain. At present, Abu Dhabi's electricity rates of 15 fils per kilowatt-hour for expatriates and five fils for Emiratis are among the lowest in the world. Mohammed al Bowardi, the Council's Secretary General, has promised to "do everything to rationalise the electricity consumption".

In part, lifting subsidies will save the Government money that could be spent on other long-term projects. Even more important, this gradual process will build a more efficient economy - where power and water cost what they are worth. That is the road to long-term sustainable use of resources.