Impact of Food and Fuel Prices on Poverty in Oil Exporting Economies: The Case of Sultanate of Oman

The drastic drop in fuel prices and the resulting fiscal constraints have compelled oil exporting countries to phase down fuel subsidies. The government of Oman raised gas prices for industrial users by 100% in 2015 with 3% annual increase, and in early 2016 increased oil fuel prices by 33% with possibility of monthly adjustments, in future. The increase in the fuel prices resulted to an increase in domestic food prices too. The phasing down of fuel subsidies would influence poverty and household food security in Oman. In this context, the objective of the study is to quantitatively analyze the impact and sensitivity of food and fuel price changes on incidence of poverty in Oman. This study uses a simulation model developed by the World Bank that estimates the impact of increase in food and fuel prices on poverty incidence and the required fiscal allocation to neutralize the poverty incidence. The results indicate that poverty incidence is responsive to fuel price changes in Oman. It is estimated that increase of fuel prices by 33% increases poverty incidence by 1% from current baseline of 12.78%. The financial transfer that is required to neutralize poverty incidence due to increase of fuel prices by 33% is substantially lower than the savings made by phasing down fuel subsidies. The government could use the existing mechanism and institutions of social security provisions to target and provide financial transfers to poor household that would be adversely affected by phasing down of fuel subsidies.