Rationalization of fuel prices bold move: Raad – ‘Decision to enhance Kuwait’s competitiveness’

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KUWAIT CITY, Aug 7, (KUNA): Kuwait’s partial deregulation of gasoline prices represents a politically and economically bold move in a country where subsidies are amongst the highest in the world at a per capita level, said Firas Raad, World Bank Country Manager in Kuwait Sunday. Energy subsidies in Kuwait represent a major burden on public finances with estimates ranging from 1.3 to 5.7 percent of GDP, with the higher estimates taking into account the costs of energy subsidies to public health and the environment, Raad told KUNA.

These significant energy subsidies in Kuwait have resulted in major distortions in the economy including staggeringly high levels of energy consumption, much higher than those expected given the demographic and economic growth trends of the country, he said. The adoption of an automatic mechanism by Kuwait should be viewed as the first stage of a transition to a fully liberalized pricing and supply regime. Such a regime has typically been a more effective approach to avoiding subsidies and protecting the budget. The current environment of low oil prices represents an opportunity to reform energy subsidies with minimal impact on consumers while generating fiscal savings at a time when fiscal pressures are increasing.

The decision to remove subsidies is also strategically aligned with Kuwait’s vision to further diversify the economy and enhance its competitiveness. In the medium and long run, subsidy reforms are expected to encourage a move towards more labor-intensive industries, which in turn is expected to result in greater job creation for Kuwaiti nationals. The impact of higher retail transport fuel prices depends on the short and longrun responsiveness of consumers to price shocks, he said.

International experience shows that consumption of transport fuel is less responsive to price increases than other consumer items such as electricity. While rising retail prices will increase the cost of running a car, Kuwait remains relatively cheap compared to markets in Europe. On a per liter basis, the new retail gasoline price is still less than half of the cost of gasoline in Europe and is still the lowest in the GCC countries. Accordingly, car ownership and use may still increase at least in the short run, Raad added.

International experience suggests that the impact of transport fuel subsidy reforms is more effective when undertaken in conjunction with complementary policies which Kuwait is also actively pursuing. Such policies include the strengthening of public transport which benefits all segments of the population especially the more vulnerable. It also improves economic efficiency by reducing congestion and air pollution. Last but not least, energy subsidy reforms provide a significant opportunity to reform the energy sector and remove inefficiencies along the entire value chain.

The high subsidies that have been maintained over many years have created substantial distortions in the energy sector driving extensive use of crude oil in electricity generation whereas natural gas would be technically more efficient. It has also driven the inefficient use of consumer appliances particularly air conditioning which in turn has fueled the growth in electricity demand.

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