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Fuel price hikes unlikely to make a dent in budget deficit
August 6, 2016, 4:11 pm

The government’s decision to increase petrol prices from 1 September “to bring it in harmony with average rates in other Gulf Cooperation Council (GCC) states” has, as expected, received bouquets and brickbats.

Many economic experts and oil companies, as well as international institutions such as the World Bank and International Monetary Fund, who have been urging the government to rein-in its liberal subsidies on utilities, applaud the recent move as a step in the right direction.

On the other hand, many legislators in the National Assembly have labeled the government’s unilateral decision as “hasty” and said they had not been consulted on the price hike. They warned of the negative impact that price hikes could have on the finances of citizens, especially low- and middle-income groups, as the fuel hike could lead to commodity prices going up by 20 to 30 percent.

For its part, the government held that it introduced the price hikes following extensive study and recommendations by the economic affairs committee that had been set up to research and revise various state subsidies. The government maintains that by cutting profligate subsidies, especially during the current low oil phase, it could increase revenues, curb wasteful consumption, preserve national resources and encourage sustainable development.

Kuwait is a late-comer in raising fuel prices among the six-nation Gulf Cooperation Council (GCC) bloc. In June 2015, the United Arab Emirates set the ‘fuel-price-hike’ ball rolling by removing subsidies and deregulating prices, through linking it to the monthly average price of oil on international markets. In late December, Saudi Arabia followed suit and increased prices by as much as 50 percent, while Bahrain, Oman and Qatar did the same in January.

Bahrain raised prices by up to 60 percent, while Oman and Qatar followed the UAE and linked their price at the pump to a formula that takes into account fluctuation in the international oil prices.

The new fuel prices in Kuwait, which are slated to come into effect from 1 September, will be subject to review every three months by a government-appointed committee that will adjust it in line with international oil prices. At least for the next three months, vehicle owners in Kuwait will have to spend 165 fils per liter for Ultra-super gasoline (up 74% from its earlier price of 95 fils). Meanwhile, super-premium will cost 105 fils per liter (a hike of 62% from 65 fils) and premium will be 85 fils per liter (rising 42% from the earlier 60 fils).

The belated decision by Kuwait to raise fuel prices now brings it in line with prices in neighboring GCC states; nevertheless prices at fuel stations in Kuwait will still remain among the cheapest in the world, and in the region with the possible exception of Saudi Arabia. Premium 91 Octane, which is the most widely used in the region, currently retails for around 140 fils in the UAE, 130 fils in Oman, 100 fils in Bahrain, 95 fils in Qatar, 85 fils in Kuwait and 60 fils in Saudi Arabia. Meanwhile, the average price around the world is around 300 fils per liter.

Kuwait has been introducing subsidy cuts in a gradual manner. In January, the government raised diesel prices by 180 percent to 170 fils per liter from the earlier 55 fils. However, following protests from legislatures on subsequent price increases in the market, the government toned down the hike to 110 fils per liter. Kuwait also approved measures to increase electricity and water prices in April with the cost of electricity planned to go up from its present 2 fils per kilowatt to 5 fils and all the way to 15 fils per unit depending on consumption. But this increase is limited to expatriates and industrial users, with citizens being exempted.

So how much will the government save by the slated fuel price hikes? By extrapolating from available fuel sales figures of around 3,750 million liters of total gasoline sales in 2012/13 and using a back-of-the-envelope calculation based on annual fuel usage increase of around 5 percent, an estimated sale of 4,344 million liters of petrol in 2016 will net the government around KD393 million. While this would be an additional KD138 million, or an increase of about 54 percent on a projected sale of KD255 million in 2015, this would nevertheless hardly make a dent in the government’s estimated budget deficit of KD9 billion for 2016/2017.

According to global rating agency Moody’s Investor Service, though the recent moves to reform subsidies signal a political willingness on the part of GCC states to address the damaging effect of low oil prices on budgets, however they fall far short of the scale of economic and fiscal reform required to achieve budget balance. The agency points out that savings from increased fuel prices in the six GCC states will average 0.5 percent of gross domestic product (GDP) this year, or around $7 billion, while the estimated deficit will be close to 12.4 percent of GDP.

As low oil prices continue to push state finances into the red, Kuwait’s attempts to cut subsidies and rein-in spending alone are unlikely to reduce the country’s burgeoning budget deficit unless more meaningful reforms are introduced.


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