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Higher utility tariffs to push inflation up from mid-year
March 18, 2017, 4:50 pm

Earlier this month, the Minister of Oil, Electricity and Water Essam Al-Marzouq announced the new tariffs for consumption of electricity and water as per law 20/2016. The price for electricity used per month by investment and commercial sector, which includes apartments where the majority of expatriates live, will be five fils per kilowatt and KD2 per 1,000 gallons (3785 liters) of water used.

The agriculture and industrial sector will be charged at a rate of three fils per kilowatt and KD1.250 for 1,000 gallons. Other sectors such as chalets and stables will pay 12 fils per kilowatt and KD2 per 1,000 gallons of water. The maximum tariff will be levied on the government sector, where each kilowatt used will be charged 25 fils and every 1,000 gallons used will incur a cost of KD4. A notable exemption in the tariff hikes is that it is not applicable to private homes, where most of the country’s citizens live.

Article 6 of Law No. 20/2016, which pertains to electricity and water charges and was published in the 1289 edition of Kuwait Official Gazette in May 2016, stipulates that the law will be implemented in a stage-by-stage manner for the different sectors, one year from the date of publication.

Accordingly, the law will come into effect, first for the commercial sector on 22 May, the investment sector on 22 August; the agriculture and industrial sector on 22 November and for other sectors on 22 February, 2018.

According to analysts at National Bank of Kuwait (NBK), the country’s leading commercial bank, inflation in consumer prices, which remained steady at 3.3 percent year-on-year (y/y) at the start of the year, is likely to face upward pressure from May, when the government begins implementing its utility tariff hikes.

Inflation, which remained stable across most components since January, could begin to witness renewed pressure as tariff hikes begin to bite on agriculture and industrial sectors, which are among the heaviest consumers of water and electricity in the country.

In particular, local food inflation could be adversely impacted with the new tariff hikes to this sector. Analysts point out that in recent months, the price growth in the local food component was primarily weighed down by soft global food price inflation. However, we may see inflation in this segment gain momentum in the near-to-medium term on the back of gains in global food price inflation. According to the Commodity Research Bureau, international prices of commodity foods rebounded and jumped to a multi-month high of 2.9 percent y/y in January following several months of deflationary prices. The global food price inflation, together with the upcoming tariff hikes for the agriculture sector, could see increases in local food prices starting in the second-half of this year.

Analysts say that though the new tariffs are well below those initially approved in legislation last year and are now in the range of 50 to 150 percent for the various sectors, nevertheless, the upward pressures could push average inflation to around 3.5 percent in 2017, up from3.2 percent in 2016.

Another sector that could be adversely affected by the tariff hikes is the real estate sector, where inflation has remained largely unchanged since January of this year. The NBK economic report noted that inflation in the housing component, which is mostly comprised of housing rents and is updated quarterly, eased from 7.4 percent y/y in 3Q16 to 6.4 percent y/y in 4Q16. Nonetheless, on a quarter-on-quarter basis the 4Q16 increase remained surprisingly strong at 2.8 percent. We expect the momentum in this segment to see some further easing in the near term on a year-on-year basis before gathering pace in the second half of 2017on the back of utility hikes.

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