The energy-pricing reforms by GCC governments will have direct and indirect effects on the welfare of households and the profitability and competitiveness of the regional industry, according to a report.

 

The latest edition of Apicorp Energy Research, titled 'Energy price reform in the GCC: long road ahead,' said that the fiscal pressures due to the decline in oil revenues are forcing GCC governments to rationalise their spending, implement long overdue fiscal and economic reforms, including to energy prices. 

 

However, the ability of the GCC governments to put in place effective measures to mitigate the impact of higher energy prices and develop a coherent communication strategy are key to the success of their reform plans, it said.

 

Saudi Arabia and the UAE are leading the GCC in raising energy prices and cutting subsidies. 

 

While the provision of low energy prices in the past few decades has helped the GCC to achieve key developmental and social objectives, this policy has come at a huge cost and has resulted in a wide range of distortions. 

 

The Saudi Arabian government’s plans, which it announced in December last year, included reform prices of water, electricity, natural gas and petroleum products over the next five year, raising the price of various fuels with immediate effect.

 

Other countries in the GCC such as Kuwait, Bahrain and Oman have followed suit, outlining plans to increase energy prices in the near future, it said.

 

For decades, the provision of cheap energy has been a main pillar of GCC development strategy aimed at achieving key economic, social and political objectives.

 

These low energy prices resulted in rapid growth in energy consumption beyond what can be explained by factors such as the rising income levels and population growth.

 

Despite the known distortions that cheap energy has brought on, the move to increase its price can induce negative shocks affecting households, industries and the wider economy, said the report.

 

It can spur inflation, especially if they result in a shift in expectations and wage-prices spirals, while also increasing input costs for industries, which will in turn reduce profits, it said.

 

Despite its strong fiscal position, the UAE was one of the first countries in the GCC to liberalise its gasoline and diesel prices, while Saudi Arabia opted for a gradual but broad-based reform and Kuwait is in a better financial position to deal with the current weakness in oil prices due to its large fiscal buffers, as compared to some of its neighbouring GCC countries.

 

OMAN VULNERABLE

Meanwhile, Oman's economy is one of the most vulnerable in the GCC to the oil-price slump, with low levels of foreign assets. Bahrain, which also has limited options like the Sultanate and had raised the prices of natural gas to industries last year, said there would be a 'gradual increase' in the cost of both fuels to domestic customers in the coming years.

 

Qatar, however, has followed an ad hoc approach to its energy-price increases and has plans to cover its projected deficit by raising debt in international markets, according to the report.

 

While the GCC countries have taken a step in the right direction, the path for energy-price reform will be long and fraught with risks, it said.

 

For reforms to succeed, a clear vision, political resolve, the involvement of different segments of the society, effective and transparent communication strategy, and well-designed compensatory schemes to mitigate the negative impacts on households and industry are all essential, said the report.

 

In the GCC countries, the jury is still out as to whether the preconditions for a successful pricing reform programme have been appropriately put in place, it added. - TradeArabia News Service