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Partial deregulation of gasoline prices aligns with Kuwait’s vision to diversify economy — WB

By JT - Aug 14,2016 - Last updated at Aug 14,2016

Kuwait, the oil-rich Arab nation, has recently cut subsidies to save money (Reuters photo)

AMMAN — Kuwait's partial deregulation of gasoline prices is a politically and economically bold move on energy subsidy reforms, for a country where, on a per capita basis, subsidies are amongst the highest in the world, according to a recent World Bank (WB) statement.

Earlier this month, Kuwait’s government approved an increase in prices of gasoline sold locally by as much as 83 per cent, becoming the latest oil-rich Arab nation to cut subsidies as lower crude prices squeeze finances.

Energy subsidies have been a major burden on public finances, ranging from around 1.3 per cent to 5.7 per cent of the country’s gross domestic product, when environmental, health and other extra expenses are taken into account, the WB statement said. 

Because of the size, they result in major distortions, with extremely high levels of energy consumption, much higher than those driven by demographic and growth trends, and in comparison to other high income countries, the statement pointed out. 

The WB said the recent adoption of an automatic mechanism should be viewed as the first stage of a transition to a fully liberalised pricing and supply regime, which has typically been a more effective approach to avoiding subsidies and protecting the budget. The current environment of low oil prices presents an opportunity to reform energy subsidies with minimal impact on consumers while generating fiscal savings at a time when fiscal pressures are increasing. 

The decision to remove subsidies is also strategically aligned with the Kuwait’s vision to further diversify the economy and enhance its competitiveness. In the medium and long run, subsidy reforms is expected to encourage a move towards more labour-intensive industries, which is expected to lead to job creation for nationals, a particularly important consideration for Kuwait, where foreign labour has been subsidised.

The impact of higher transport fuel retail prices depends on the short run and long run responsiveness of consumers to the price shocks. International experience shows that consumption of transport fuel is less responsive to price increases than other fuels, such as electricity. 

While higher retail prices will increase the cost of running a car, Kuwait remains relatively cheap compared to markets in Europe.  On a per litre basis, the new retail gasoline price is still less than half of the cost of gasoline in Europe and is still the lowest in the GCC countries. Accordingly, car ownership and use may still increase at least in the short run.

 

 International experience suggests that the impact of transport fuel subsidy reforms is more effective when undertaken in conjunction with complementary policies, which Kuwait is also actively pursuing, such as strengthening public transport, which benefit all segments of the population, especially the poor. It also improves economic efficiency in other important ways, by reducing congestion and air pollution, according to the WB statement.

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