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Deregulation of fuel prices to create inflationary pressure, say experts in Oman
January 2, 2016 | 10:06 PM
by A. E. JAMES [email protected]
 
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Muscat: Oman’s decision to deregulate the prices of petrol and diesel fuels, as part of the nation’s fiscal reforms announced last week, is expected to prop-up prices of essential food items, leading to an inflationary pressure in the short run, experts said.

Beginning in mid-January, the country will deregulate prices of refined petroleum products, which is expected to save millions of rials spent as fuel subsidies.

The anticipated increase in diesel prices, which is used to fuel trucks for transportation, would lead to an increase in the cost of transporting essential goods and result in higher retail prices, according to Kanaga Sundar, head of research at Gulf Baader Capital Markets.

“Initially, there is likely to be a steep increase when the subsidies are removed. However, in the long run, it will stabilise at par with other GCC countries,” added Davis Kallukaran, managing partner of Crowe Horwath Oman.



“Naturally, the increase in gasoline prices will definitely have a spiralling effect, as living expenses shoot up,” added Kallukaran.

There might also be a cascading effect across the board, as even restaurants revise their tariffs.



“There will be a short-term inflationary pressure on food products and other consumer goods. The companies will try to pass on the additional burden to end consumers, while government agencies will be closely monitoring this situation,” Sundar noted.

According to recent statistics, Oman posted the lowest average inflation rates among GCC states at 0.43 per cent, while the United Arab Emirates (UAE) witnessed the highest rate, at 3.68 per cent, in the first ten months of 2015.

“Within the Oman consumer price index components, almost 50 per cent is related to food, non-alcoholic beverages, transport and restaurants, and this clearly points to the impact”, Sundar added.

The government already made it clear that the Public Authority for Consumer Protection would strengthen its monitoring mechanisms. The authority will ensure that any increase in prices is justified, after taking into account additional costs.

In fact, the International Monetary Fund (IMF) and global rating agencies will consider deregulation of oil prices to be a positive step in the nation’s fiscal management. For some time, the multilateral agencies have been asking the Sultanate and other GCC states to reduce subsidies,in a bid to increase fiscal discipline.

Fuel subsidies for 2015 were estimated at OMR580 million, and with deregulation the government will be able to save this money, which is expected to be a great help in reducing the deficit.

Exemption estimates

Total subsidy and exemption estimates for 2015 were OMR1.8 billion, mainly for providing subsidies for petroleum products, interest subsidies for housing loans, as well as for electricity, water and some essential food items.

Although the government has not set the new fuel price, market sources said that there could be roughly a 30 per cent increase in prices of petrol and a 15 per cent growth in diesel prices beginning in mid-January.

This is based on the prevailing price of Oman Crude in international markets, the experience of the United Arab Emirates, which decontrolled prices of fuel in August last year, and on the assumption that both Oman and the UAE have more or less similar refining costs and margin structures. The impact of diesel price revisions will be relatively less, in view of the fact that the price was raised some years ago.

The price of premium grade petrol in Oman is 120 baisas per litre, while the diesel price is set at 146 baisas per litre. The revised price might be roughly set in the region of 160 baisas for petrol and 167 baisas per litre for diesel.

However, clarity will emerge only after the government announces the revised prices two days before implementing the decision on January 13.

A committee consisting of members from the ministries of oil and gas, finance, commerce and industry, and Oman Oil Refineries and Petroleum Industries Company (Orpic), is expected to finalise prices.

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