Assessing Kuwaiti Energy Pricing Reforms

From mid-2014 Kuwait has experienced a substantial drop in its petroleum export price and, consequently, government revenue, causing a severe fiscal deficit and impaired economic performance. Cutting energy subsidies has become a policy priority. In the face of widespread opposition, the government raised gasoline prices in August 2016, proclaiming such reform the key to solving economic problems; yet recent policy discussions have not addressed the mechanism of pricing reforms. The paper offers a quantification and assessment of energy pricing reform in the current low petroleum price environment via a general equilibrium model of the Kuwaiti economy that embodies the structure of its economy and its labor market, its oligopolistic industries, and external flows associated with its sovereign wealth fund. Simulations clarify the required adjustments, including the seldom discussed expatriate labor exit and the decline in oligopoly rents. While necessary, subsidy reform implies tradeoffs, notably between fiscal stabilization and cost of living sustainability. The results confirm that successful implementation must be accompanied by carefully designed mitigation measures and associated microeconomic reforms.