The United Arab Emirates will be First Persian Gulf Country to Cut Subsidies

The United Arab Emirates (U.A.E.) will become the first country in the Persian Gulf to remove fuel subsidies. The move will increase unleaded gasoline prices 24% next month when the decision takes effect, reports the Chicago Tribune.

Motorists will pay 2.14 dirhams per liter ($0.58 per liter/about $2.20 per gallon) for 95-octane unleaded gasoline starting August 1 as the U.A.E. deregulates fuel prices. Prices for diesel, which will also be linked to global markets, will increase? 29% starting the first of the month as well. A fuel price committee, including Energy and Finance Ministry representatives and the CEOs of Adnoc Distribution and Emirates National Oil Company, will set prices monthly based on a review of average global prices and operating costs, according to Gulf News.

The increase in gasoline prices will have “minimal” impact on individual motorists, said a member of the Price Review Committee. “It will promote rationalized consumption and incentivize people to choose most fuel-efficient cars, while curbing the increase in the number of cars on the country’s roads.”

Subsidies have cost U.A.E. state energy companies about $1 billion a year over the last decade, Energy Minister Suhail Al Mazrouei said in February.

Other Persian Gulf countries may follow suit

Energy subsidies in the Persian Gulf are some of the highest in the world per-capita, with the U.A.E. expected to spend about 2.87% of its GDP on energy subsidies, according to Fitch Ratings. Saudi Arabia spends 4.62% of GDP on energy subsidies, while Kuwait and Qatar spend 1.81% and 1.64%, respectively.

The change in the U.A.E. could set a precedent for other Gulf producers. “We think that governments in the region understand the benefits of subsidy reform, including both fiscal cost savings, and more efficient resource allocation and energy consumption,” said Fitch. “Successful implementation in the U.A.E. while oil prices are low could increase public acceptance of subsidy reform elsewhere in the region, boosting the prospects for reform.”

Fitch forecasts budget deficits of 13% and 10.9% of GDP for Saudi Arabia and Bahrain in 2015. Qatar will move to a small budget deficit of 0.9% of GDP this year and Kuwait will post another double digit surplus though smaller than in recent years, of about 10.6% of GDP.

“With the current low oil prices, which might last for years, subsidies will become a rising problem in the region,” said Francisco Quintana, head of economic research at Asiya Investments. “These changes are unavoidable and the sooner the governments start the more they will be in control of the process and avoid social unrest.”

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