A test of resolve for the Kuwaiti government

15 August 2016

Will the government be able to implement the planed hike in fuel prices amid public discontent?

It is a testing time for the government of Kuwait and its council of ministers, who are trying to implement fuel subsidy reforms. The oil-rich country desperately needs to cut expenses and bridge an ever-widening budgetary gap.

It is the second time in two years that the government has announced changes to fuel price structure. It only partially succeeded in 2015 and the prospects of fully implementing the reforms in 2016 are not very bright either.

Kuwait’s cabinet on 1 August approved a series of fuel-related subsidy reforms, including a 73 per cent increase in higher-quality ultra-premium petrol prices and a 42 per cent increase in lower-quality octane-91 petrol prices, which will go into effect on 1 September.

The cabinet endorsed plan to “start rationalising fuel subsidies where the prices will be restructured in harmony with average rates” in the six-member economic bloc of the GCC.

The price for the ultra gasoline grade would rise to 165 fils a litre from 95 currently, the super grade to 105 from 65, and premium grade to 85 from 60, according to state news agency Kuwait News Agency (Kuna), which added that the new prices have been set after examining global rates.

The cabinet decision follows adjustments to diesel and kerosene prices last year. In January 2015, the government raised the price of diesel and kerosene from $0.18 a litre to $0.56 a litre, but only after a month it revised down these prices by about 35 per cent to $0.36 a litre, following public discontent.

US ratings agency Standard & Poor’s (S&P) says subsidy reforms are credit positive for Kuwait as they will lower its current expenditures and bolster finances dented by the downturn in global oil prices.

S&P says the government’s ability to successfully implement the price hikes this time around will be indicative of its institutional strength and capacity to move its economy beyond oil.

But will Kuwait be able to fully implement the decision? It is anybody’s guess.

A divided Kuwaiti parliament sometimes makes it difficult for the government to implement policy decisions. Already, vocal members of parliament are voicing their opinions against the government’s move to increase fuel prices.

MP Yusuf al-Zalzalah, chairman of the Parliamentary Priorities Committee, says the government’s plan to lift subsidies will negatively affect the parliament-government relationship. MPs are taking this matter seriously and the citizens’ interest is a “red line’’ that nobody is allowed to cross, he told local daily Arab Times, adding that “this issue is non-negotiable and there is no room for delays”.

The central council of the Labour Union in Kuwait, headed by Abdelaziz Bu Rashed, has called upon other labour unions and non-governmental organisations to confront “such decisions through which the government will burden the working class”, it said in a statement carried by the Kuwait Times daily.

There is strong public discontent against subsidy rationalisation and that probably is the reason why Kuwait is lagging behind other GCC states in implementing its economic reform agenda.

The hydrocarbons-reliant GCC economies have faced significant economic challenges after oil prices fell from a mid-2014 peak of more than $110 a barrel. The governments have cut spending and have reduced subsidies for fuel and public utilities, which ran into billions of dollars annually. Some countries have frozen or slowed the growth of public sector wages as they try to plug budget deficits in the wake of reduced falling oil revenues, their main source of income.

Saudi Arabia, the UAE, Qatar, Oman and Bahrain have all taken such steps in recent months. However, it remains to be seen what Kuwait will do on 1 September.

Will the government buckle under popular pressure or will it choose to take on the parliamentarians and labour union activists? It could also end up negotiating a deal along the lines of withdrawing subsidies for expatriate residents and keeping it in place for Kuwaiti citizens, as suggested by some lawmakers.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications