Leading oil producer the United Arab Emirates will scrap subsidies on petrol and diesel from August to cut spending as low crude prices hit revenues, the energy ministry said Wednesday.

Pump prices for the two fuels will now be set on the basis of world prices and adjusted each month, the ministry said in a statement carried by the official WAM news agency.

The move is expected to save billions of dollars a year.

The International Monetary Fund said in a report released on Monday that the UAE has been spending $29 billion a year subsidising petroleum products and electricity.

"The decision to scrap subsidies was taken to support state finances, rationalise fuel consumption and protect natural resources and the environment," the ministry said.

Fuel prices in the UAE are already the highest of any of the six Gulf Arab states but still among the lowest in the world because of the heavy subsidy.

Petrol currently retails at 50 US cents a litre ($2.27 a gallon) and diesel at 64 cents ($2.91).

Energy Minister Suhail al-Mazrouei said the decision was is "in line with international economic trends to liberalise markets and boost competitiveness."

He said it would also cut fuel consumption and encourage greater use of environmentally friendly transport alternatives like electric cars.

He said that in 2013, the transport sector was responsible for 22 percent of harmful emissions in the UAE.

The UAE had already reduced the level of the fuel subsidy in recent years.

Like other Gulf states, its revenues have been hit hard by the sharp drop in world crude prices since last year.

The IMF has forecast that the UAE will post a budget deficit this year -- its first since 2009 -- of 2.3 percent of gross domestic product or around $9.0 billion.  

In January, Kuwait began selling diesel, kerosene and aviation fuel at market price but left heavy subsidies in place on petrol and electricity.

Bahrain and Oman, which are already posting budget shortfalls, have also said they plan to cut subsidies, especially on fuel.
Source: AFP