Reforming consumption subsidies in the state of Kuwait : the case of electricity and water

Abstract EN

This paper estimates the economic impacts that would result from restructuring the electricity and water subsidy programs in the Kuwait residential sector.

The empirical findings show that implementing the new price systems, as proposed in the Kuwait Development Plan for the years 2002/03 – 2005/06, would reduce the annual subsidy on utilities by KD87.2 million; of which, the welfare losses to consumers measured by the reduction in consumer surplus amounts to KD52.1 million, and the benefit to society measured by the reduction in the deadweight loss is KD35.1 million.

Although, the welfare losses to consumers from the partial reduction in subsidy rates is found to be small as a percentage of households’ income, a target cash payment approach, not exceeding KD52.1 million, may accompany this policy so that consumers would accept and tolerate higher prices.

It is believed that adopting the suggested policies combined would rationalize annual consumption of electricity and water in the residential sector by approximately 9% and 7%, respectively, as well as reducing the financial burden of the subsidy by KD35.1 million annually.