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Local Economist: GOB may soon be out of options to stabilize Diesel, Regular prices

The Government of Belize (GOB) has reduced the Excise Tax on Diesel and Regular by close to 100% and 77%, respectively, but as global oil-price uncertainties persist, Belmopan is slowly running out of fiscal levers to pull to keep prices stabilized, economists Dr. Phillip Castillo cautioned this week.

Speaking with The Reporter on Thursday, Castillo underscored that if international prices continue to climb, and with the excise on Diesel, for example, being practically already down to zero as the government seeks to keep the price locked in the $13.00 range, the government may soon have no choice but to let the price at the pump move with the market.

Castillo was speaking about the fact that Government has reduced its excise duty on Diesel fuel to $0.01, down from the original $3.57 per imperial gallon. Similarly, the excise on Regular is now at $0.90, down significantly from where it stood at $3.95 at the start of the year. As the government explained via various mediums, the reductions in the excise were designed to keep the two fuel products’ prices stable.

“As I see it, I accept the dilemma,” said Castillo. “I strongly support the mitigation measures. I realize that GOB has limited options. However, as those options are exhausted, they’ll have to allow prices for Diesel and Regular to rise if the upward price trend continues globally.”

Castillo, an economics lecturer at the University of Belize, indicated that government may be able to tinker with the General Sales Tax (GST) and Environmental Tax, but those are much smaller in terms of their impact. Additionally, the government, via a press release, has already told the public that it cannot “afford” an “actual subsidy of the pump prices,” meaning that GOB will not “underwrite any portion of the import acquisition cost.”

The Reporter also asked the minister of state in the Ministry of Finance Senator Christopher Coye if this possibility was a concern for the ministry. “Yes, the Ministry of Finance is concerned about the continuing rise in acquisition costs,” Coye replied, as he reiterated that the price is driven by external factors beyond local policymakers’ control.

Coye, however, expressed hope considering that certain economic factors in the developed markets have helped to soften international prices more recently. “That said, while the Ministry of Finance is hopeful that that scenario [global prices coming down] plays out, it is still possible that the prices could reverse and start going back up again.”

The International Outlook

Coye is not alone as it pertains to uncertainty regarding international prices. The US Energy Information Administration (EIA)’s recent price forecast cites “heightened levels of uncertainty resulting from a variety of factors, including Russia’s full-scale invasion of Ukraine.”

Source: EIA's WTI Crude oil price and NYMEX confidence intervals

Analysts are also highlighting that if the G7 countries implement the proposed cap on the price of Russian oil in an effort to limit Russia’s oil-export revenues, this too could backfire. As reported by Business Insider, RBC Commodities Strategist Helima Croft admonished that such a price cap on Russian oil could lead to Moscow retaliating “by taking more barrels off the market abruptly to drive prices higher.”

The Business Insider reports that, according to JPMorgan analysts, in that [reduced-Russian-oil] situation, oil could skyrocket to as high as US$380 a barrel, up from the EIA’s forecasted average for 2022 of US$107.3 per barrel.

As it stands, the EIA had already upped its average outlook for 2022, with forecast prices for quarters three and four placed originally at US$103.98 and US$101.66 per barrel, respectively. The US agency, however, as of last month, revised up its outlook for those latter quarters to US$111.3 and US$104.97, respectively.

Continued Policy Measures

Acknowledging the probability of a worst-case scenario, Coye told The Reporter that the government continues to discuss with key “players in the fuel supply chain, specifically, the importer and the gas stations.” According to Coye, the goal is to have these stakeholders share some of the burdens by easing some of their charges.

“If successful, this would allow Government a little additional ‘wiggle room’ to accommodate even further increases in acquisition costs with the intent of maintaining the current fixed prices on Diesel and regular gasoline,” Coye shared.

Other Policy Options

Recognizing the unsustainability of the current fiscal measures, both Castillo and Coye were asked if other options, such as prioritizing targeted policies aimed at augmenting the service capacity, reliability, and quality of the public transportation system would have been more ideal.

“Government would certainly be open to considering other alternative options,” Coye stated. “[As long as those options] do not further drain the already strained public purse, particularly, where they are targeted to those most adversely affected.”

Castillo, citing some of the longstanding structural constraints in the public transportation sector, was initially less optimistic that even with robust government support and financing, remedies emanating from that sector would be doable in the short term.

However, the economist did concede that there may be some “merit” to an approach that focuses on strengthening public transportation so as to reduce the opportunity cost of commuters choosing the bus over their private vehicles.

For his part, Castillo also underscored that if conditions internationally worsen in terms of international prices, the government would be left with limited options. “It either will have to cut expenditures or borrow or both.”

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