The government of the United Arab Emirates will save only a modest amount of money from reforms to its fuel price system in 2015 but the savings are likely to rise sharply in coming years, an International Monetary Fund official said on Tuesday.
Last week the government shifted from a system of fixed, subsidised domestic prices for gasoline and diesel to adjusting prices monthly in response to global trends. In the first adjustment, gasoline rose 24 per cent and diesel fell 29 per cent.
It was the first big fuel pricing reform in a rich Gulf Arab oil exporting country for many years, and has aroused speculation that others in the region will follow suit to cut the burden of subsidies on state finances.
Kuwait, Oman and Bahrain are considering subsidy reforms; some analysts believe Saudi Arabia may eventually take action.
Zeine Zeidane, adviser in the IMF’s Middle East and Central Asia Department, estimated the UAE’s reform would save it about $500m by the end of this year, or a little over 0.1 per cent of gross domestic product.
But annual savings are expected to rise sharply over the medium term to around 0.6 per cent of GDP, Zeidane told a conference call with reporters.
The IMF’s projections assume the UAE’s average crude oil export price will increase gradually from $61.5 a barrel this year to $67.2 next year and $75.0 in 2020.
Under the UAE’s new pricing formula, the government would no longer have to spend growing amounts of money to keep domestic fuel prices down as global oil prices climbed; it could let them rise, increasing the savings to its budget.
The IMF now expects low global oil prices to push the UAE’s consolidated state budget into a deficit of 2.9 per cent of GDP this year, its first deficit since 2009.
Oil prices have dropped steeply in the last few weeks, with Brent crude currently around $50 a barrel, at its lowest levels since January, and Zeidane said this could result in a wider deficit than projected. The IMF estimates a $10 drop in oil prices cuts the UAE’s fiscal balance by about 2.3 percentage points of GDP.
Zeidane said that in addition to gasoline and diesel, there was huge potential for the UAE to save money by reducing natural gas subsidies, which he estimated to be worth about 3 per cent of GDP. He said reform of the domestic natural gas pricing system would be possible in future.