The impact of a gasoline price hike will not be drastic on consumers in the United Arab Emirates, experts have predicted.
The UAE announced this month that it would deregulate gasoline and diesel prices from August 1 and introduce a new pricing policy linked to global levels.
The move is being introduced to help decrease fuel consumption, preserve natural resources and encourage individuals to adopt fuel-efficient vehicles, the UAE’s energy minister said.
On Tuesday, the government said that the price of a litre of octane 95 gasoline will climb 24 per cent to Dhs 2.14, while diesel will fall 29 per cent to Dhs 2.05 at the start of August.
According to Strategy&’s vice president Georges Chehade and senior associate Yahya Anouti, residents will not be severely affected.
“The richer groups will not feel the pinch as their transport fuel bill represents a very small percentage of their disposable income.
“As for the poorer groups, the impact of the price reform will be lessened by the availability of public transport that the country continues to invest in heavily and shift to higher efficiency vehicles,” Chehade said.
Moody’s Investors Service similarly stated that the inflationary effect from the move is likely to be moderate.
“Fuel consumption is less than 4 per cent of the UAE’s consumer basket and gasoline prices are already higher in the country than in the rest of the Gulf,” it said in a report.
However, the price increases will limit growth in domestic fuel consumption – which has been 8.1 per cent a year on average over the past five years – and support export volumes.
“Rising fuel consumption has been eating into oil exports and the share of oil consumed domestically has increased to 23.5 per cent in 2014 from less than 20 per cent before 2009,” the report elaborated.
The removal of subsidies by increasing gasoline prices will also help the UAE boost its finances.
According to the International Monetary Fund, post-tax petroleum subsidies in the UAE would have cost the government $7bn in 2015 (1.9 per cent of gross domestic product) under the current system, a decline from $10.2bn in 2013 (2.5 per cent of GDP).
Per capita, UAE fuel subsidies equal $730 per resident per year, compared with $2,810 in Qatar and $2,522 in Kuwait.
“Fiscal gains from subsidy reform are likely to be moderate this year and accelerate when oil prices increase, as we expect they will next year,” Moody’s said.
“We estimate that removing fuel subsidies will reduce the UAE’s consolidated fiscal deficit by 0.4 per cent of GDP this year and contribute another 0.6 per cent of GDP to the fiscal balance in 2016, which we expect will return to a small surplus.”
Linking retail prices to global prices also makes public finances more predictable because the public sector will no longer absorb increases in global oil prices, the report added.