Energy reforms key to economic efficiency

Energy reforms key to economic efficiency
Updated 23 February 2016

Energy reforms key to economic efficiency

Energy reforms key to economic efficiency

JEDDAH: Energy reforms are a necessity for the economy to improve its efficiency and productivity equilibrium, a prominent economist says.

“Energy reforms are a must if the economy has to change its efficiency and equilibrium,” John Sfakianakis, the economist based in Riyadh, told Arab News on Tuesday.
He was commenting on reports that Saudi inflation accelerated the most in more than three years in January after government subsidy cuts drove up transportation and commodity prices.
The government raised the price of 95 octane gasoline to SR0.90 ($0.24) per liter from SR0.60 in late December as part of austerity measures in the 2016 state budget. Prices for utilities were also hiked.
Sfakianakis added: “It's no surprise that inflation spiked in January, given that energy price reforms were enacted in December. There is no perfect time and it’s better late than never to change the energy pricing cycle to a more realistic one. From a global perspective, there are global deflationary trends resulting in lower imported inflation,” he told Arab News.
As a result of higher fuel prices, transport costs surged 12.6 percent from a year earlier in January. Prices of housing and utilities climbed 8.3 percent while food and beverage prices rose 1.3 percent.
James Reeve, deputy chief economist and assistant general manager, Samba Financial Group, reacted thus: “Yes, we agree that there will be inflationary pressures as subsidies on gasoline are reduced over time. There will also be second round effects as producers and retailers pass on higher transport costs to consumers (assuming they choose to).”
However, he added: “The generally subdued growth and weak global commodity prices mean that inflationary pressures will remain fairly contained in historical terms. We see an average CPI inflation rate of around 3 percent over the next five years.”
Reeve said this rate would be unlikely to prompt the government to undertake any offsetting measures.
Commenting on the inflation report, a regional analyst said: “This is due to the subsidy modification. In Saudi Arabia, inflationary expectations are well anchored, in large part thanks to the dollar peg. I would expect the impact of inflation to be very temporary.”
Capital Economics, a leading independent macroeconomic research company, said: “The surge in Saudi inflation to 4.3 percent y/y in January was almost entirely due to the subsidy cuts that were announced alongside the budget. This goes to underline that the government has taken a bold approach to fiscal consolidation.”
The research company said this was the highest rate of inflation since late 2011. The breakdown of the data showed that food inflation, which accounts for 20 percent of the CPI basket, eased back from 1.4 percent y/y to 1.3 percent y/y.
Housing and utilities inflation, which accounts for a further 20 percent of the CPI basket, rose from 4.0 percent y/y in December to 8.3 percent y/y in January. Digging a little deeper, electricity and gas inflation came in at 12.3 percent y/y and water supply inflation jumped to a whopping 189.6 percent.
Meanwhile, transport inflation that accounts for around 10 percent of the CPI basket picked up from 1.3 percent y/y to 12.6 percent y/y after the government hiked fuel prices.
Capital Economics said having posted a budget deficit of 15 percent of GDP last year and with oil prices stuck at less than $35 a barrel, the government has shown its willingness to push ahead with painful fiscal measures, rather than resort to devaluation, in order to adjust the economy to low oil prices.
However, it said higher inflation will erode households’ real income and weigh on consumer spending.