Inflation set to rise on removal of subsidies

Eppco gasoline station along Sheikh Zayed Road. File photo

A total removal of energy subsidies will result in inflation going up by five percentage points, says Dr Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB).
"We don't expect that to be the case. Any adjustment is likely to be a gradual one," she adds.
Dr Malik currently forecasts inflation for 2015 at four per cent. "We will only change our inflation forecast once we get a better understanding of pricing mechanism."
Wissal Ahmed Khan, chief executive officer (CEO) at Alam Supermarkets in Abu Dhabi, agrees with Malik only if inflation is estimated in nominal terms. However in real terms, it will be much higher because "perception will inflate inflation," he says.
Any increase in oil prices will have a multiplier effect on the economy due to its wide usage, says Khan. Each sector, industry and service will have a different impact, he adds.
M.R. Raghu, senior vice-president of research at Kuwait-based investment bank Kuwait Financial Centre or Markaz, said "essential items like food could suffer" from inflation.
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 (IMF) 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.
Mathias Angonin, an analyst at Moody's, says the direct impact of inflation will be an increase in the price of fuel and transportation services. All other things equal, the inflationary effect will reduce the disposable income to purchase other goods and services, he said.
Energy subsidies promote fuel consumption. "We could expect a reduction in subsidies to limit the increase in fuel consumption going forward," Angonin adds.
Carla Slim, economist Mena, Standard Chartered Bank, says: "Inflation is on the rise in the UAE. Inflation in Abu Dhabi is at a six-year high, driven by housing costs and the cost of water, electricity, gas and other fuels."
A new pricing structure for utility costs in Abu Dhabi includes higher water and electricity prices. Alp Eke, a senior economist at the National Bank of Abu Dhabi, says that removal of energy subsidies would only partially hurt the common man.
Removal of subsidies will lead to more efficient use of resources and reduce government expenditure, Eke says. It has been proven that energy subsidies do not benefit the low income group. Often, business owners and big investors benefit from it. Similarly, it has been proven that energy subsidies are wasteful.
The measures applied today may hurt the common man in the short run, however in the long term, as fiscal standing improves, the economic impact will be immediate, Eke concludes.
- haseeb@khaleejtimes.com