Fuel subsidies in the UAE amount to 8% of GDP

The UAE’s implicit fuel subsidies amount to 7-8 per cent of the country’s GDP, the International Monetary Fund (IMF) points out in its just released Regional Economic Outlook for the Middle East and Central Asia.

“Energy subsidies are prevalent across all MENAP [Middle East, North Africa and Pakistan] oil exporters,” the IMF notes. “For example, in 2008, implicit fuel subsidies relative to GDP are estimated to have amounted to 15 per cent in Iraq, 12 per cent in Iran and Yemen, 7-8 percent in Kuwait and the UAE, 4-5 per cent in Libya and Qatar, and 3.5 per cent in Oman,” the regional outlook highlighted.

The IMF, which advises governments to phase out energy subsidies, also cautioned however that the phasing-out should be done in a manner that limits the impact on the weakest sections of society.

“Countries that phase out energy subsidies need to be mindful of the impact of higher energy prices on the poor and ensure that social safety nets can effectively mitigate this impact,” the report recommended.

Consumers in the UAE have already weathered two hikes in petrol prices this year (April and July), which together increased the price of petrol by 35 fils a litre. International observers including Economist Intelligence Unit (EIU) reckon that a third hike in local fuel prices is likely this year.

“After two increases in the past five months, more rises in the price of petrol are in the pipeline before the end of the year,” the EIU said in a report published earlier this month. The firm added that fuel prices at petrol stations in the UAE must go up by another 47 fils/litre for local distributors to break even.

The IMF has recommended that countries in the region end explicit fuel subsidy in order to reform their consumption patterns and enhance industrial efficiency. “A number of governments have recently become increasingly concerned about the fiscal costs of such subsidies, the corresponding waste of resources, and the dependence of the industrial base on indefinite subsidies,” the IMF says.

“Accordingly, some countries have begun to tackle these issues. An essential first step to that end is to identify subsidies explicitly in the budget, as Libya has done recently,” it adds. “In Iran, where retail gasoline prices are among the lowest in the region, comprehensive energy subsidy reform has been approved for implementation in 2010, although its ultimate impact on the budget is likely to be neutral.”

The IMF report maintains that “[o]ver the medium term, all oil producers – to differing degrees – will need to pursue fiscal consolidation to safeguard the sustainable use of hydrocarbon revenues, while promoting diversification and employment creation. Measures to support these goals include reorienting spending toward social and development needs, revisiting energy subsidies, and diversifying the revenue base.”

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