Saudi Arabia, the world's biggest oil exporter, has pushed back the implementation of major energy subsidy cuts by up to five years to 2025 in its latest budget - the largest in its history - as it looks to balance spending cuts with growth commitments.
The timeline for the lifting of subsidies on gasoline and other crude products has been delayed as the kingdom looks to boosts spending in a bid to reignite economic growth, with GDP forecast to contract 0.5 per cent in 2017.
Prices for benzene, diesel and gasoline are set for a gradual hike starting next year until 2025, according to this year’s budget. The budget for 2017 stipulated all energy products were to be linked to international benchmarks by 2020.
Energy subsidies have cost the Saudi economy billions of dollars annually in lost revenue. Following some fuel price reforms in 2015, the share of petroleum subsidies to Saudi GDP halved to four per cent in 2016 from eight per cent in 2013 but remains the highest for any oil exporting country in the region, according to the IMF.
"The government is not looking for fiscal incomes, they're looking to rationalise consumption. It's going to be gradual,” said Mazen Al Sudairi, head of research at Riyadh-based Al Rajhi Capital.
“We're seeing some estimations, for example, gasoline [grade] 91 will be lifted from 70 per litre to 127 per litre gradually through 2025."
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The gradual phase-in of a subsidy regime over an extended period of time will allow for the economy to breathe, according to Fahad Al Turki, chief economist and head of research at Riyadh-based Jadwa Investment.
"We will not see a steep increase. The target [of the government] is to diversify away from oil. Certain policies have been reconsidered to support the growth of the private sector," he said.
"There's been a realisation to become more flexible to balance the budgets, which means the policies are adjusted [to support growth]," he added.
Subsidies on some products are being removed earlier than previously scheduled however; jet fuel used by state carrier Saudi Arabian Airlines will be linked to international benchmarks from next year, compared with the previous target of a gradual shift between 2019-2020.
As part of the revised strategy, natural gas and ethane that will see rising demand to meet power generation requirements as well as in the downstream sector as the kingdom pushes for mega-projects, will see prices revised in 2020-21
Liquefied petroleum gas (LPG), including propane and butane that find use in steam cracking in the chemicals sector are also targeted for a price hike in 2020, while the price for retail LPG is set for a lift in 2019.
The kingdom is set to increase electricity tariffs for residential and commercial customers from January 1, with some customers believed to be in line for tariffs more than double their current level. Prices will reflect the cost of producing the electricity, based on the fuels used, by 2025, the ministry of finance said.
To ease the burden on consumers, some savings from this policy will be diverted to a Citizen's Account approved last week by the Saudi council of ministers, that will allow for cash transfers from 21 December onwards to low and medium income households impacted by energy price hikes.
In the short-term economists expect the Saudi market to face shortages as consumers brace for a new regime.
"Consumers will be cautious, they will rationalise consumption and we can see shortages in December. It will take around three months for consumers to adjust to this," added Mr Al Sudairi.