UAE move to cut fuel subsidies could encourage Gulf neighbours to follow suit, ratings agency Fitch says

The ratings agency Fitch said the recent move by the UAE to remove the subsidy on transport fuel could encourage other countries in the region to follow suit if it is successful.

“We think that governments in the region understand the benefits of subsidy reform, including both fiscal cost savings, and more efficient resource allocation and energy consumption,” Fitch said. “However, reforms have so far been uneven and incomplete.”

Fuel prices in the UAE will be deregulated from next month and a new policy linked to global prices will be adopted, the Ministry of Energy said last week.

The UAE has some of the most affordable petrol prices in the world at Dh1.72 a litre, which is less than a third of the cost in western Europe.

However, the cost of fuel in the UAE is already three times the price of other GCC countries, according to a study by Carmudi, an online car marketplace.

Fitch said pre-tax energy subsidies in the UAE are slated to amount to 2.8 per cent of GDP this year, while the figure for Saudi Arabia and Bahrain is almost two-thirds higher at 4.6 per cent of GDP. In Kuwait and Qatar, those figures are 1.8 per cent and 1.6 per cent, respectively.

“The Kuwaiti experience shows that cutting or removing subsidies can be politically contentious,” Fitch said. “However, we do not expect adverse political repercussions in Abu Dhabi, which enjoys very high GDP per capita and good growth prospects. Successful implementation in the UAE while oil prices are low could increase public acceptance of subsidy reform elsewhere in the region, boosting the prospects for reform.”

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