Saudi to decide timing of fuel price hike by month-end - Gulf Business
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Saudi to decide timing of fuel price hike by month-end

Saudi to decide timing of fuel price hike by month-end

The energy minister said last week that the hikes were still on the cards for 2017

Saudi Arabia is expected to decide by the end of this month on the timing of domestic fuel and electricity price hikes that could risk pushing the economy further into recession, sources familiar with the matter told Reuters.

The dilemma over energy prices shows economic reforms, designed to eliminate a huge state budget deficit caused by low oil prices while weaning the economy off dependence on oil exports, are running into a difficult phase.

Austerity steps so far, including an initial round of energy price hikes announced in December 2015, have begun to reduce the deficit. But this has come at a high cost to the economy: data last week showed Saudi Arabia in recession during the second quarter, and unemployment among Saudis at 12.8 per cent.

That means further austerity will be hard to introduce without risking a sharp economic slowdown which would deter the private investment that the reforms aim to attract. A prolonged recession could turn public sentiment against reforms.

A government official said Riyadh was delaying a decision on energy prices until it had finished designing a system of cash payments to lower- and middle-income households, which would partially compensate citizens for the pain of austerity.

“There are still some discussions over who is going to be compensated and who is not,” he said. “The government has to consider the implications of higher taxes and ways to mitigate risks for both gross domestic product growth and the budget.”


At the end of 2016, officials indicated rises in heavily subsidised energy prices would occur around mid-2017. Along with water price reforms, the changes would save the government SAR29bn ($7.7bn) in 2017, according to a long-term fiscal plan which Riyadh released in December.

But since then, the economy has slowed more than expected. The non-oil sector expanded only 0.6 per cent year-on-year in the second quarter, casting doubt on the International Monetary Fund’s forecast of 1.7 per cent non-oil growth this year.

The economy’s weakness has already caused Riyadh to partially reverse one austerity step: this year it restored financial allowances for civil servants that it had abolished last year, although it is now disbursing allowances much less generously than previously.

The timing of energy price increases may be another casualty of the recession. Although some sources said they still expected hikes to occur this year, others said they could be delayed into 2018.

One thing which could force a delay is the government’s plan to introduce a 5 per cent value-added tax in January. The tax will hit domestic demand; if it is closely preceded by fuel price hikes, the impact could be severe.

Energy Minister Khalid al-Falih implied last week that the hikes were still on the cards for 2017, telling a Moscow conference: “We in Saudi Arabia are putting a lot of emphasis on energy efficiency. We will be reforming our energy prices in due course this year…”

Major Saudi newspaper Okaz, quoting anonymous sources, reported last month that gasoline prices would rise 80 per cent by end-November, with 95 octane climbing to 43 U.S. cents a litre. Even then, Saudi prices would remain among the lowest in the world.

Sources said that hike was not set in stone, however. The IMF has been urging Riyadh to delay fuel price rises to protect the economy; it said last week that Saudi officials were not yet convinced, but were reconsidering the speed of austerity steps.

“The authorities indicated that they were considering the appropriate pace of fiscal adjustment given the weak growth,” the IMF said.

Even if gasoline prices rise sharply, other energy reforms may be watered down or delayed. Diesel prices – key for Saudi Arabia’s fleet of trucks – would increase only moderately, and prices of jet fuel would be raised only cautiously for fear of hurting the aviation industry, the sources said.

Under the fiscal plan, Riyadh intended to raise electricity prices for households this year. It is not clear if this will occur in 2017, however, partly because electricity prices are linked to restructuring and partial privatisation of utility Saudi Electricity Co, still under consideration.

The government’s plan to sell shares in oil giant Saudi Aramco by the end of 2018 may limit any delays to energy reforms. Riyadh is keen to get a high valuation for the company – officials have talked of at least $2 trillion – and investors will want to see the new structure of energy price regulation before committing themselves.


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