The dismantling of administered domestic fuel price mechanism, which became effective from May 1, is expected to be positive for the Qatari economy but could have ‘one-off’ impact on inflation, according to experts.
“Given that fuel subsidies create a deadweight loss because low fuel prices lead to higher consumption at the expense of lower exports, the removal of the fuel subsidy is positive for the economy,” according to Giyas Gokkent, senior economist (Middle East and Africa) of Washington-based Institute of International Finance.
Observing that Qatar’s fuel subsidies were at the low end of the spectrum in the Gulf estimated at less than 1% of non-oil gross domestic product (GDP) in 2015; he said the fuel subsidies were implicit, but their removal will allow higher dividends from state hydrocarbon companies than would have been the case if subsidies remained.
Qatar’s move is on the back of the International Monetary Fund (IMF) asking the GCC (Gulf Cooperation Council) countries to address the issue of subsidy removal in view of falling oil prices.
The implicit cost of low energy prices in the GCC, in terms of foregone revenue, is estimated to be around 5% of GDP (about 8% of non-oil GDP) in 2015, IMF had said, highlighting that the average gasoline and diesel prices in the GCC, except the UAE, are about 40% and 90% below pre-tax prices in the US, respectively.
Post deregulation, a committee, with members drawn from several government agencies, has been set up to review prices of petrol and diesel on a monthly basis. The panel will make recommendations with proposed prices based on a price formula that factors in changes on the prices of petroleum products in the global market, and operational costs related to the production and distribution of fuel in the local market, as well as fuel prices in the countries of the region.
“The subsidy removal is not very material to the budget but the government is applying this across the board in the economy in my view,” Afa Boran, head of Asset Management, Amwal, said.
Highlighting that the dismantling of subsidies is a joint decision of all the GCC countries, Doha Bank Group chief executive Dr R Seetharaman said “they (Qatari government) have to look at revenue options as part of diversification measures.”
Edison Investment Research last week said infrastructure spending in Qatar over the next few years is generally anticipated to be around $200bn ahead of the 2022 FIFA World Cup, in line with the Qatar National Vision 2030. The vision focuses on transforming the Qatari economy away from its dependence on hydrocarbon production; non-hydrocarbon nominal GDP increased from 41% of total GDP in 2011 to 62.6% at the end of 2015.
Super petrol (97) currently costs QR1.30/litre, up 30% from its previous price of QR1/litre, while the price of Premium (90) has gone up 35% from QR0.85/litre to QR1.15. Gold petrol rose to QR1.25 a litre.
On the potential impact of deregulation on general price level in the country, Gokkent said “with transport accounting for 14.6% of the CPI (consumer price index) in Qatar, there will be a modest one-off direct impact on inflation and there will be some indirect impact as a result of pass through to other sectors.”
However, Seetharaman said it would not have “significant” impact on inflation.