Lower diesel to benefit residents
Moody's said that scrapping fuel subsidies would cost UAE residents an average of $387 per head this year.
Dubai - Transport costs, subsequent softening commodity prices to look forward to.
While motorists in the UAE stand to incur higher cost towards fuel prices from today, a nearly 30 per cent drop in diesel prices across the country bodes well for residents as it promises to bring down transport costs and subsequent softening of prices of essential commodities, analysts said.
Under the new pricing mechanism announced on Tuesday by the UAE Ministry of Energy, the price of diesel is set at Dh2.05, a 29 per cent drop from its previous price of Dh2.90, while petrol prices will go up by 23.6 per cent to Dh2.14 from Dh1.72 per litre.
"The lower price of diesel has been fixed in line with the current depressed global oil price. So for the time being, and as long as crude oil remains at this level, it will have an offsetting impact on residents with reduced transportation costs of cargo. The widely-anticipated food price inflation can therefore be kept at bay for the time being," an analyst at a bank, who did not want to be identified, said.
Global oil prices fell to a four-month low on Monday on concerns about a selloff in Chinese stock markets and increased oil drilling in the US. Brent, the global benchmark, fell $1.15, or 2.1 per cent, to $53.47 a barrel, the lowest level since March 16. Brent prices have fallen 21 per cent from a recent high reached in May, meeting the common definition of a bear market. UAE inflation for 2015 has been forecast at four per cent. According to June data issued by the National Bureau of Statistics, inflation rose 4.22 per cent year-on-year in the UAE. It is higher than the International Monetary Fund forecast in June of 3.8 per cent on average this year. In June 2015, the housing and utilities category costs increased by two per cent month-on-month and 6.7 per cent year-on-year.
An analyst at a ratings agency said normally the direct impact of an increase in the price of fuel will be food price inflation due to higher transportation costs.
"In the current pricing scenario, the opposite is happening thanks to lower diesel price. So the immediate impact is that the price of essential items like food will resist any inflationary pressure," he said.
Moody's Investor Service in a report that scrapping fuel subsidies would cost UAE residents an average of $387 per head this year.
Quoting data from the IMF, it showed that the annual subsidy rate for transport fuels in the UAE is $730 for each of its 9.6 million residents based on an average 2015 oil price of $58 per barrel. Since 47 per cent is "external" costs related to environmental damage, traffic congestion, road maintenance and other taxes that would not be transferred to the public, the direct subsidy this year would be about $387 per head, compared to a direct subsidy of about $583 per head in 2013, when oil prices averaged more than $90 per barrel, the report said.
Other rating agencies as well as analysts had endorsed Moody's view that the new fuel policy move would have a positive fiscal impact on the UAE and Abu Dhabi's finances, and those of other countries across the GCC.