Impact of Food and Fuel Prices on Poverty in
Food Import Dependent and Oil Exporting Economies:
The Case of Sultanate of Oman
H. B. Kotagama, H. Boughanmi, H. A. I. Alfarsi, N. S. M. S. Al Hamedi
Department of Natural Resource Economics, College of Agricultural and Marine Sciences,
Sultan Qaboos University, Sultanate of Oman
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2000M1
2000M6
2000M11
2001M4
2001M9
2002M2
2002M7
2002M12
2003M5
2003M10
2004M3
2004M8
2005M1
2005M6
2005M11
2006M4
2006M9
2007M2
2007M7
2007M12
2008M5
2008M10
2009M3
2009M8
2010M1
2010M6
2010M11
2011M4
2011M9
2012M2
2012M7
2012M12
2013M5
2013M10
2014M3
2014M8
2015M1
2015M6
2015M11
Price index
Food and Fuel Prices
Food and Fuel Price Index: 2005 =100 (Source IMF)
300
250
200
150
Food
100
Fuel
50
0
Year
2
Oman’s budget and fuel prices
•
•
Oman's budget
•
Billion OR
Total Revenue
Oil revenue
Non-oil revenue
Expenditure
Subsidy
2015
11.6
14.1
1.8
2016
8.6
6.15
2.45
11.9
•
•
•
•
72% of revenue is from oil.
The drop in oil prices decreased revenue by
36% in the first eight months of 2015.
Subsidy has been decreased by 64% from 2015
to 2016.
Fuel subsidy in 2015 has been 580 Million OR
• (25% of total subsidy expenditure)
• (5% of government revenue)
Food subsidy in 2014 has been 19.3 Million OR
Austerity proposals for 2016:
– Reduce fuel subsidy
– Tax increases and reform
– Reduce public expenditure
Estimated savings due to recent increase in fuel
price (33%) to government 162 Million OR
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Rationale for phasing-out Fuel Subsidies
(Coady et.al., 2015)
• Remove market distortion
• Reduce negative environmental impacts
• Improve income distribution
– Rich benefit more from fuel subsidies (Rich:Poor = 6:1)
• Remove fiscal constraints (fuel subsidy 3% of GDP in
Oman)
• Crowds out public expenditure that can be used for poverty alleviation
• Yet governments are reluctant to remove fuel subsidies,
perhaps due lack of information on above.
• Oman has been now been compelled to phase-out fuel
subsidies for fiscal reasons.
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Food and poverty in Oman
•
•
•
Nationally Oman imported 44% of the food consumed, 100% of rice and about
95% of wheat. Import dependent for staples.
Household expenditure on food is the largest percentage (31%) of the total
household income followed with transportation (17%) that is largely cost on fuel.
– Thus changes in either, food or fuel prices, would have a significant impact on
poverty.
Poverty: In the Sultanate of Oman a family is classified as poor if it spends more
than 60% of the household expenditure on food.
– Based on this standard 12% of Omani families were classified as poor based on
Household Expenditure and Income Survey conducted in 2007-2008 compared
to 8% in 1999-2000.
– Studies, done post 2008 surge in global food prices, have quantified the
resulting increase in food insecurity in the Sultanate of Oman, measured as
percentage of households unable to access Nutrionaly Adequate Socially
Preferred Least Cost diet as 5.3%.
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Rationale and objective of the study
• Rationale: Information on the distributional
impact of removal of fuel subsidies and
possibilities to target and protect those
vulnerable/poor may facilitate effective policy
decision making.
• Objective: The objective of this study is to
estimate the impact on poverty due to phasing
down of fuel subsidy and to estimate the required
public expenditure to compensate those who
would be adversely effected.
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Poverty
The Model
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/0,,conte
ntMDK:22586359~pagePK:148956~piPK:216618~theSitePK:336992,00.html
This simulation model and documentation have been developed by Varun
Kshirsagar, Ken Simler, and Hassan Zaman (PRMPR). (February 20, 2009.)
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Data
• Household Expenditure and Income Survey of
the Sultanate of Oman.
• Central Bank of Oman
• National Centre for Statistics and Information,
Oman
• Data bases of IMF, World Bank, FAO
• News papers
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Demonstration on model
application
• OMAN food_simulation_review.xls
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Results: Base scenario
Estimated Poverty incidence
(% households)
12.8
Estimated transfer/subsidy to make
PI = 0% (OR/Year/Household)
500
Estimated transfer to make PI =O%
(OR Million)
20.4
Real transfer for food 2014 (OR
Million)
19.3
Real transfer for food 2013 (OR
Million)
27.9
• Base scenario: No
increases in food or fuel
prices
• Model is validated with
official national estimates
• Results are most sensitive
to the poverty line.
– A 5 OR change in poverty
line changes PI by about
3%.
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Oman fuel price increase
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Results:
Actual Scenario: 33% increase in fuel prices
Simulati
on: 33%
increase
in fuel
Baseline prices
Poverty Incidence (%)
Incremental transfer to
equate baseline PI
(OR/Year/Household)
Incremental total transfer
required to equate baseline PI
( Million OR)
12.8
13.7
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0.82
• The recent increase of 33%
fuel price has increased PI
by about 1%.
• If food prices are also
increased by 30% PY
increases by about 3%.
• The incremental cost to
compensate the poor is
around 0.82 million
compared to the cost saving
of 162 Million OR on
phasing down oil subsidy
(increase of 33%).
• A win-win policy.
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Results:
Possible scenario: Equate national fuel prices to world prices
Baseline Simulation
Poverty Incidence (%)
12.8
23.0
Incremental transfer to equate baseline
PI (OR/Year/Household)
220
Incremental total transfer required to
equate baseline PI ( Million OR)
12.3
• International petroleum
price 0.414 OR/Liter
and Oman petroleum
price 0.120 OR/Liter
• Yet the incremental
transfer required (12.3
Million OR) is less than
cost savings of reducing
the subsidy (by
increasing 33%) 162
million OR.
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Implementation
• Win-win policy
– Fiscal saving could be used for socially worthy
alternative investments
– The poor impacted by fuel price increase can be
compensated
• Oman already has a social security transfer
mechanism.
• Hence can be done.
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Conclusion
• Removal of fuel subsidies may
– Remove market distortion
– Reduce negative environmental impacts
– Improve income distribution
– Reduce fiscal constraints and release finances for
socially worth expenditures.
• However governments have been reluctant to reduce fuel
subsidies due to uncertainties of its impact on the poor.
• This study has shown that reduction of fuel subsidies in Oman
– whilst would reduce fiscal constraints,
– could also alleviate increased poverty due to increased
fuel prices through transfers (financial or otherwise) to
those adversely impacted.
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