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Avoid hasty introduction of fuel subsidies when oil comes on stream – IDB warns
By Kiana Wilburg
The Inter-American Development Bank (IDB) is cautioning the Government of Guyana to be mindful of any introduction of fuel subsidies when oil production comes on stream.
According to this financial institution, such subsidies become burdensome on the economy and eventually create imbalances that prove difficult to correct.
To support its case, the IDB pointed to Trinidad and Tobago which paid dearly for introducing fuel subsidies.
The IDB noted that in 1974, the Government of Trinidad and Tobago introduced the Petroleum Production Levy and Subsidy Act (PPLSA) to provide the country with fuel subsidies on diesel, and kerosene at price levels below those prevailing in the international marketplace.
The subsidy was intended to help lower the impact of high oil prices on the consumers of these commodities in Trinidad and Tobago. The IDB said that initially, the PPLSA covered the entire subsidy. The subsidy was amended in 1992 to three percent of the producer’s gross income and in 2004 to four percent of the gross income of producers and remains the same to date.
The IDB noted; however, that the 2004 amendment shifted a significant part of the burden of the subsidy to the State as any shortfall from the petroleum production levy is met by the State.
A study that was subsequently done by the International Monetary Fund (IMF) on this subsidy found that in the last seven years, this averaged 71 percent. In the period 2004–2015, the fuel subsidy amounted to TT$30.7bn. By 2013, the fuel subsidy was 10 times that amount. The fuel subsidy, in the context of low rates of interest, also led to a surge in the number of vehicles on the roads in Trinidad and Tobago. In fact, new vehicles sold, for example, increased from 7,281 in 2001 to 19,118 in 2014 and 18,765 in 2015.
In addition to this, the IDB said that the fuel subsidy was in conflict Trinidad’s Natural Resource Fund in terms of fiscal discipline. The IDB said that Trinidad’s Natural Resource Fund intended to strengthen the economy’s fiscal posture but the subsidy was undermining the economy’s fiscal discipline. Furthermore, the IDB said that the fuel subsidy is regressive and favours the rich.
With the aforementioned in mind, the IDB said, “The Government of Guyana would want to avoid the hasty introduction of fuel subsidies and should consider instead, spending the same resources they may direct at fuel subsidies, to the build-up of a functional and relevant public transportation network.”
One of the most burdensome factors on the business sector in Guyana is the cost of electricity. Several organizations such as the Private Sector Commission (PSC), the Guyana Manufacturing and Services Association (GMSA) and the Georgetown Chamber of Commerce and Industry (GCCI) have all lobbied the government to ensure that the looming oil industry is used in a manner that eases the fuel costs sustained by the business sector. The government has signaled its intention to consider this request but no clear position on this matter has been released.
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