Planned petrol price hikes at the start of September, along with earlier increases in the price of kerosene and diesel, will help Kuwait decrease its current expenditure and allow the government to boost its finances that have tumbled on the back of low oil prices, say analysts.
Despite the fall in oil prices, Kuwait still relies on exports from the oil and gas sector for 70 percent of its revenues; in an earlier higher oil price scenario, this dependency was as much as 80 percent. The overwhelming reliance on the energy sector for revenues, places Kuwait in an unenviable position of being vulnerable to any sharp drop in oil prices, especially when compared to other Gulf Cooperation Council (GCC) states.
Welcoming Kuwait’s initiatives to streamline its subsidies and partially deregulate fuel prices, the World Bank said that the energy subsidy reforms were a “politically and economically bold move” in a country where handouts to citizens are among the highest in the world.
In a statement, the World Bank said that energy subsidies in Kuwait represents a major burden on public finances, with estimates ranging from 1.3 percent of GDP to 5.7 percent of GDP, when environmental, health and other externalities are taken into account.
The statement went on to note that the energy subsidy reforms provided a significant opportunity for the government to significantly reform the energy sector and remove many of the inefficiencies along the value chain.
Pointing out that the size of the subsidies had led to major distortions, including consumption levels that were far higher than other high income countries and was unrelated to country’s demographic and growth trends.
Suggesting that Kuwait adopt an automatic mechanism as a first step towards a fully liberalized pricing and supply regime, the World Bank said this would be a more effective approach to avoiding subsidies and protecting the budget.
"The current environment of low oil prices presents an opportunity to reform energy subsidies with minimal impact on consumers while generating fiscal savings to the budget at a time when fiscal pressures are increasing," added the Bank.
The World Bank said 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 as strengthening public transport, which benefit all segments of the population, especially the poor, and improve economic efficiency in other important ways, by reducing congestion and air pollution.
Meanwhile, Kuwait’s Labor Union totally rejected the government’s decision to raise fuel prices as part of its plan to lower the country’s budget deficit. The council said the surge in petrol prices would harm the working class and would benefit only the business group.
The Union called on other unions and NGOs to resist the government’s attempts to raise gasoline prices. In a statement, the Union said the government’s planned hike would, “burden the working class with the budget deficit, and this is rejected by the labor union, which considers it in favor of one group only.” The statement added that a surge in fuel prices would further upset the economic and social rights of workers, especially those with limited income