The recently-approved restructuring of fuel prices by the State of Kuwait will be helpful for implementing the State tight-belt policy and lowering spending, according to the internationally-renowned Moody's Corporation.
These fuel price reforms are credit positive for the sovereign because they will lower current expenditures and bolster government finances dented by the downturn in global oil prices, while reducing wasteful overconsumption.
The Cabinet (of the State of Kuwait) approved a series of fuel-related subsidy reforms, including an 83% increase in higher-quality ultra-premium petrol prices and a 42% increase in lower-quality octane-91 petrol prices, which will go into effect on September 1.
Kuwait, also according to Moody's report, has been slower than regional peers in developing its non-oil and private sectors and is particularly vulnerable to oil price declines because oil-and gas-related revenues have historically accounted for around 80% of government revenues, although this decreased to 70% in 2015 because of the sharp drop in oil prices.
Total revenues declined by approximately 41% in 2015, and it is forecast that another 14% decline this year. At the same time, total expenditures declined 16.5% in 2015, but they are budgeted to increase by 1.8% in 2016.
Although fiscal gains this year from subsidy reform are likely to be moderate, it is forecast that gains to accelerate should oil prices increase because the government will review prices every three months to ensure that they move in tandem with global rates.
Kuwait budgeted about $7.8 billion, or 6.4% of GDP, to cover the cost of all subsidies in 2015, according to the International Monetary Fund (IMF). On top of this direct cost, the IMF estimates that the opportunity cost from low energy prices in Kuwait was 7.4% of GDP in 2015.
The inflationary effect of fuel subsidy reform will likely be moderate because energy products make up only 2.63% of the Kuwaiti consumer price index basket. The cabinet decision follows adjustments to diesel and kerosene prices last year.
In January 2015, the government raised the price of diesel and kerosene from $0.18 per liter to $0.56 per liter, but a month later, revised down these prices by about 35% to $0.36 per liter following public discontent.
The government's ability to successfully implement the price hikes this time around will be indicative of its institutional capacity to move its economy beyond oil.