Kuwait’s recent decision to raise gasoline prices by up to 83% is likely to face opposition, say analysts. Unlike other GCC states where the move to reduce fuel subsidies met little resistance, the small OPEC producer might face serious opposition like it did last year when the government tried to increase the prices of diesel and kerosene.
“In neighbouring countries like the UAE, where fuel prices were already high, or Saudi Arabia, where prices remain very affordable despite significant increases, subsidy reductions did not spur any discontent,” said Farrah Boularas, senior analyst with IHS Energy.
“In Kuwait the cost of such a reform could be higher given the political opposition and public anger that followed the 2015 move to raise the price of diesel,” Boularas added.
Nonetheless, Kuwait is left with little choice but to press ahead with subsidy reform regardless of the political cost. Following the sharp drop in oil prices since mid-2014, Kuwait was one of the GCC monarchies whose finances were dealt a major blow. According to some statistics, the cost of pre-tax energy subsidies rose from 1.9% to 6.4% of the country’s GDP over the five years to 2015.
The country’s finance minister and acting oil minister, Anas al-Saleh, said in July the OPEC producer is facing a staggering $31.49bn budget deficit for the current fiscal year, which began on April 1.
Energy subsidies encourage inefficiencies and waste with higher income groups benefitting equally or even more than lower income groups to whom subsidies are generally targeted, said Saji Sam, partner at international consultancy firm Oliver Wyman.
“In the past two years since the oil prices have fallen by 60%, Kuwait has been significantly impacted since more than 90% of its revenue is dependent on the oil industry.”
He added: “Kuwait, like many of its peers in the region, has little choice but to manage its budget deficits through rationalising investments and cutting subsidies among other initiatives.”
Raising fuel prices, hailed by analysts as long overdue, is expected to cushion the impact of low oil revenue at least in part, with the finance ministry estimating savings of $8.7bn over a three-year period.
While many remain sceptical about this estimate, independent energy analyst Gaurav Sharma says the figure is quite realistic and believes cost savings could be even higher.
“At a time when the oil price is staying lower for longer, the removal of such subsidies would boost the country’s finances,” said Sharma.
Kuwait is the last GCC country to reduce fuel subsidies, with Saudi Arabia, the UAE, Qatar, Oman and Bahrain all raising energy and utilities prices in recent months. The small Arab Kingdom announced earlier in August that the price of ultra-grade gasoline will rise to 165 fils per litre from 95 fils currently, with super grade set to retail at 105 fils from 65 and premium at 85 from 60. This is the biggest fuel price hike in Kuwait’s history and though it might meet criticism from inner political circles, it is expected to help keep the country afloat at a time of protracted low oil prices and global demand slowdown. But Kuwait has followed rather than led and socio-political pressures are bound to come into play, according to Sharma.
“The latest move comes a whole 12 months after the United Arab Emirates decided to do away with its fuel subsidies across the board. Whether the Kuwaiti government can hold its nerve this time around would be a litmus test,” he said.
Cutting fuel subsidies is just one step towards alleviating pressure from the government coffers and more reforms would be needed to diversify Kuwait’s revenue and safeguard it from future oil price fluctuations.
“With oil prices not expected to recover substantially over the next two to three years, additional reforms in the form of both continued energy subsidy reduction and economic diversification are much needed,” said Boularas.
“The government has already announced an increase in electricity and water prices for foreign residents, which could have a substantial impact given that 70% of the population is composed of non-nationals.
“In addition, some parliament members have proposed quotas on fuel consumption and the differentiation of fuel prices among different user groups, but this remains to be agreed upon by the parliament,” he said.
Diversification is a major issue in Kuwait, where reliance on oil has actually risen over the past 15 years from 85% in 2001 to a massive 95% in 2015, said Sharma citing figures from the International Monetary Fund (IMF).
“The government needs to act fast, and would do well to look at Bahrain and Dubai, and how both have diversified.”
From tourism, finance and technology, to petrochemicals, fertilizers and cement, Kuwait can fall back on its non-oil industries to decarbonise its economy, says Sharma.
Encouraging more private sector investment could also play a key role in the government’s plans to reduce its reliance on oil.
“Economic diversification is key in the context of the budgetary constraints that the country is facing now, not only to diversify revenue streams but also to develop the private sector that would ultimately reduce the burden on the state by creating new sources of employment and growth,” said Boularas.
On the question whether or not we would see more energy reforms from Kuwait in the coming months, analysts say that would largely depend on how the current reforms are received and if the government forges on with its decision to cut fuel subsidies.
“Kuwait is making all the right noises. However, the backtracking we saw in January 2015 has made the market sceptical.
“I suspect if the administration holds firm on the latest gasoline price hike, then we can expect further overtures in this direction,” said Sharma.
