Increased Fuel Prices Will Have Positive Impact On UAE Economy

On August 1, 2015, for the first time in thirty-five years, the Petroleum prices will be allowed to float freely in UAE, marking the end of an era of fixed Fuel prices in the country. Even though, economists worldwide have welcomed the change, the decision of UAE government to scrap the fuel subsidies was met by negative consumer sentiments who feared further cuts in their savings.

Nonetheless, the decision to de-regulate oil prices is strategic and is in line with the long-term economic interest of UAE as it will allow the government to channelize the funds towards more constructive investments in the country.

Economic Growth

Currently, UAE Government spends over $3.5 billion in fuel subsidies every year. With the de-regulation of oil prices, UAE government will be able to free up the amount and invest in various sectors of the economy, such as in social development, infrastructure, health care and education. As a result of such spending, there will be a long-term effect on Economic Growth of the country, increasing UAE’s GDP rate on y-o-y basis apart from improving UAE’s global competitiveness as well. Similarly, the move will boost economic activity in the country and further aid foreign direct investment (FDI).

FDI Confidence Index – UAE projected to be in Top 10 Countries

In 2014, UAE ranked 11th on A.T. Kearney’s FDI Confidence Index moving 3 positions upward from 2013. With the de-regularized fuel prices, UAE is likely to enter in the list of Top Ten Countries in FDI Confidence Index, which means there will be lot more investment in the country hence boosting business and employment opportunities in Dubai and Abu Dhabi.

Impact of Fuel Prices on Businesses

Diesel Prices are set to drop by near around 13% (30 fils per litre), which means that the cost of operations for businesses in UAE will reduce. This will positively impact logistics, shipping and transport sector profitability and may motivate them to reduce their selling price hence impacting the cost-push inflation to certain extent.

Shift in Consumer Behaviour

Consumers in UAE are likely to switch to either public transport or more fuel-efficient and Electric/Hybrid car models. This will further aid the initiative of Dubai Government which is keen in promoting Hybrid Culture in the Emirates, as evidenced by the installation of 16 vehicle-charging stations in Dubai, with another 84 to open by the end of this year.

Emerging Opportunities in Automobile Sector

While there will be a slight impact on purchase of sedans and SUVS in UAE, the de-regulated oil prices will trigger new demand for Fuel-efficient, Electric, Hybrid and Diesel engine cars providing investors with the opportunity to aggressively invest in cost efficient car models to fill the gap generated by the changing consumer preferences.

Social/Environmental Benefits

Apart from the economic benefits that UAE will receive, there will be several social and environmental benefits as well of de-regularized fuel prices as it will help the government to rationalize the fuel consumption, protect depleting energy resources and conserve the environment by reducing the greenhouse emissions, of which transport sector contributes 22% in UAE. Moreover, a reduction in the road congestion is also anticipated, which will enhance the quality of life in UAE.

Economic Vision

The decision of de-regularizing fuel prices is in line with the strategic vision of UAE government which intends to diversify sources of income, making UAE economy more sustainable and less dependent on government subsidies. Even though, in shorter run, UAE’s GDP is likely to contract by near around 1% as per latest IMF projections (revised GDP growth rate projected at 3.5%), the long-term economic benefits of de-regularized fuel prices are significant as the reforms will ensure continuity of well-developed infrastructure, allowing investors to capitalize from a more sustainable and investment-friendly economy that distinguishes itself on the basis of strategic location, corporate facilities and tax-free income.

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