Revised fuel prices in the UAE to have modest impact on inflation

Tuesday, Jul 28, 2015

Dubai: The new set of fuel prices announced on Tuesday following the UAE’s decision to deregulate fuel prices and remove subsidies is likely to have moderate fiscal and inflation impact, according to economists and analysts.

The new prices that will come to effect on August 1 are expected to have minimal impact on headline inflation and unlikely to impact the overall consumption levels in the country adversely.

“We estimate that the rise in gasoline prices will add about 1.3 percentage points to headline consumer inflation. The pace and the change in prices in the coming month will be critical,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.

Analysts said the manner in which the diesel prices and prices of different grades of petrol sold in the UAE have been revised will reduce the indirect inflationary impact of oil prices on sectors such as public transport, construction and goods movement across the country.

The new diesel price at Dh2.05 per litre instead of the previous Dh2.90 is down by 29 per cent while the prices of different grades of petrol are up by 23 to 29 per cent.

“Lower diesel price is expected to modestly lower operating costs to industrial users or the transportation sector,” said Jean-Michel Saliba, Mena economist at Bank of America Merrill Lynch. “With the cost of gasoline representing 3-4 per cent of average UAE income, price deregulation is unlikely to materially impact household cost of living, in our view,” he said.

While the inflationary impact is minimal on consumers, analysts say the fuel price reform timing clears the way for further adjustments in the medium-term. The timing of the announced lifting of fuel subsidy is opportunistically well chosen, in our view.

“This is because the lower oil prices reduce the differential between market and subsidised prices, and make the size of initial one-off adjustments more manageable. The linking of domestic fuel prices to international benchmarks would also set the way for near-automatic price increases in the future, eliminating the subsidy costs that would have been incurred if international oil prices increase going forward,” said Saliba.

The reforms are clearly seen as a progressive step in fiscal reforms in the context of falling oil prices and a decline in government revenues by 22.5 per cent this year as estimated by the UAE Central Bank. Though positive, analysts say the fiscal impact will be marginal.

“Fuel consumption is less than 4 per cent of the UAE’s consumer basket and gasoline prices are already higher in the UAE than in the rest of the Gulf,” said Mathias Angonin, analyst at Credit rating agency Moody’s.

The UAE is one of the most diversified economies of the region and ranks favourably on various competitiveness indicators. While structural reforms should aim at further diversifying the economy, fiscal reforms such as removal of subsidies and diversification of government revenues are expected to strengthen public finance.

“The increase in the gasoline price seems to balance fiscal reform on one side and contain the impact on growth. The changes to fuel prices continue to indicate that the UAE is being the most proactive out of the GCC in fiscal reform,” said Malik.

By Babu Das Augustine Banking Editor