Kuwait's partial deregulation of gasoline prices represents a politically and economically bold move on energy subsidy reforms where handouts are among the highest in the world, according to the World Bank.
It said in a statement that energy subsidies in Kuwait represents a major burden on public finances in Kuwait, 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.
Part of the fuel reforms, which will go into effect on September 1, will include an 83 percent rise in the price of premium petrol and a 42 percent rise in the price of lower-quality octane-91 petrol.
"Energy subsidy reforms provide a significant opportunity to significantly reform the energy sector and remove the inefficiencies along the value chain," the statement said.
Because of the size, they result in major distortions, with extremely high levels of energy consumption, much higher than those driven by demographic and growth trends, and in comparison to other high income countries.
The World Bank said: "The adoption of an automatic mechanism should be viewed as the first stage of a transition to a fully liberalised pricing and supply regime, which has typically been 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 at a time when fiscal pressures are increasing."
It added that in the medium and long run, subsidy reform in Kuwait is expected to encourage a move towards more labour-intensive industries, which is expected to lead to job creation for nationals, a particularly important consideration for Kuwait, where foreign labour has been subsidised.
While rising retail prices will increase the cost of running a car, Kuwait remains relatively cheap compared to markets in Europe.
On a per litre basis, the new retail gasoline price is still less than half of the cost of gasoline in the Europe and still the lowest in the GCC countries. Accordingly, car ownership and use may still increase at least in the short run.
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.
Source: Arabian Business