Efforts at rationalising subsidies to help UAE government


Wednesday, Sep 16, 2015

Abu Dhabi: Efforts at rationalising subsidies and increasing non-hydrocarbon revenues through taxes would help the government to adjust to the prospects of persistently low oil prices, according to an analyst from credit rating agency, Moody’s.

Mathias Angonin said the drop in global oil prices is denting government revenues in the UAE.

“Hydrocarbon revenues are projected to fall by $35 billion or 37 per cent in 2015, compared to 2014. As a result, the UAE is likely to face a fiscal deficit of 2.5 per cent of GDP (gross domestic product) from a surplus of 5 per cent in 2014.”

He added that lower oil prices also affect negatively export revenues, but the country’s current account balance is likely to remain in surplus. “Nonetheless, the UAE is better positioned than its neighbours to cope with lower oil prices, with a well-diversified economy and large foreign exchange buffers.”

To cope up with the loss of revenue due to lower oil prices, the UAE government is undertaking major reforms. It has scrapped fuel subsidies and linked fuel prices to international average levels.

It is also considering introducing Value Added Tax (VAT) on certain goods in coordination with other GCC (Gulf Cooperation Council) countries.

“Setting domestic fuel prices in line with global market prices reduces the economic cost of subsidies for the UAE’s public sector. We estimate that the recent reform carries moderate fiscal gains as it reduced the UAE’s consolidated fiscal deficit by 0.4 per cent of GDP this year and will contribute another 0.6 per cent of GDP to the fiscal balance in 2016.

“The prospect of fluctuating fuel prices will encourage consumers to invest in fuel-efficient technologies,” Angonin said.

GCC countries facing the highest fiscal challenges, in particular, Bahrain and Oman, are expected to follow the UAE’s example over time and raise petroleum prices.

According to the Oman’s Ministry of Finance, Oman aims to reduce the cost of fuel subsidies by 50 per cent in 2016.

“The implementation of fuel subsidy reforms can be slowed by their negative impact on domestic sentiment. For example, Kuwait’s government raised diesel and kerosene prices in January 2015 but backtracked following opposition in parliament and postponed further energy reforms,” Angonin added.

The UAE government will announce new fuel prices at the end of the month for October.

The Ministry of Energy reduced fuel prices by more than 8 per cent for the month of September. The price of Special 95 petrol is fixed at Dh1.96 per litre for September when compared to Dh2.14 for August.

The price of diesel has been fixed at Dh1.86 per litre, down by more than 9 per cent from the August price of Dh2.05 per litre.

By Fareed Rahman Senior Business Reporter

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