Are Things That Bad That We Have to Remove the Fuel Subsidy?

24 March 2016


Imagine removing the fuel subsidy on gas at the pump in Trinidad? Well, it may become reality as the Minister of Finance is inviting public feedback on this proposal come April, in just a couple days….It may seem warranted, given the current economic state in Trinidad and Tobago. For me, I think anything that results in less traffic on the road on the way to work is worth considering. Also, the removal of the fuel subsidy is actually a recommendation of the International Monetary Fund, which thinks that spending money on the subsidy is unsustainable. I guess that if we want a good evaluation from the IMF, we should comply. I think the removal of the subsidy can help T&T only if it is done gradually to limit inflationary pressures and only if the savings from the removal of the subsidy are spent to diversify the T&T economy away from oil and gas.

But are we that badly off to justify removing the fuel subsidy? The current repo rate of 4.75% acts as a signal for all other interest rates in Trinidad and is usually increased to contain inflation. The index of retail prices actually rose in February 2016 to 103.4 from 102.4 in January 2016 and many consumers are complaining that retailers are raising the price of food items from by more than the 12.5% Value added tax.

Also, food retailers are warning that US dollars are just not available to purchase goods abroad for resale locally. Yes, the current US to TT exchange rate rose to as much as $6.60 per US dollar and some anticipate that this could increase to US$6.62 before the end of March. The banks are settling USD credit card payments at $6.83 and merchants are buying at $7.00 over the counter. But it don’t think that the CBTT will raise the repo rate come March 24th…I’m looking into my crystal ball and I noticed that the US Fed did not raise rates in March so, CBTT may not follow by raising the repo rate. The recent US labour market report showed that jobs growth was stronger in February than expected and inflationary expectations rose, hinting that the Federal Reserve will continue to raise interest rates sometime by December 2016. Also, the T&T labour market has not been doing well so there is not the demand pull inflation there to justify raising rates.

Added to this, the removal of the fuel subsidy may result in price increases across the board, not only taxi fares, but every good and service consumed will register a mark up in price. Knowing Trinidadians, this price increase may take effect way before the actual removal.

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On March 4th, 2016, Moody’s, an international credit rating agency, placed the credit rating of Trinidad and Tobago of Baa2 on review or negative watch, citing the shock of depressed oil prices on the local economy. Additionally, Standard & Poor’s another credit rating agency has signalled that Trinidad and Tobago is a candidate for downgrade this year for similar reasons. While NGC’s A- rating was affirmed, Petrotrin was downgraded further by Moody’s to a lower level of junk or Ba3 this month.

 

In terms of the labour market, approximately 846 people, and possibly more have so far been retrenched from 27 private companies since September 2015. This figure could be larger as it does not include the recent 600 terminations at ArcelorMittal. Also, companies do not advise of worker terminations in official notices if the retrenchment applies to fewer than five persons. Following the announcement of the takeover of BG Group by Shell on February 15, 2016, Shell sent home 80 employees. Retrenchments were also announcement by BpTT and Repsol. The real estate market has been impacted as expatriates migrate back towards their homeland, resulting in an oversupply of high-end properties which catered for the US dollar property rental and lease market. The increase in the MMRR or mortgage market reference rate by 25 basis points to 3.00% has already made the cost of financing a variable rate mortgage more costly and could negatively impact the demand for high-end properties in the long run. So, yes the average Trinidadian is under pressure.

 

 

The removal of the fuel subsidy means that the price of gas will fall when the price of oil falls and vice versa. This may benefit us as consumers if the price of oil continues to fall in the long term, but can lower GOTT earnings. But shouldering the true cost of gas without the subsidy may cause even me to consider carpooling sometime in the very distant future. It is estimated that the price of gas may increase by as much as 40%-60% as a result. Frankly, I think this is not warranted, as I am a Trinidadian and because of this, there must be some benefit to working in an oil producing nation, such as subsidised gas. I mean why should I have to pay extra on all other purchases because gas prices have increased? I am OK with the fuel subsidy removal only if:

  1. The removal is gradual, such as 5% removal per year to limit inflationary pressures
  2. There is also a system to limit price gouging on consumer goods as a result of the increase in the price of gas.
  3. An analysis is done on a quarterly basis to determine the effects of the removal on the subsidy on inflation.
  4. Redirect savings from the removal of the fuel subsidy towards generating employment in the services sector which can earn foreign exchange.

 

The removal of the subsidy may cause cost-push inflation, which in turn may cause the repo rate to increase, further making everything more expensive. But if removing the subsidy will cause T&T to look better on the world stage, by the IMF, Moody’s and Standard and Poor’s, then I think in the long term we as a nation stand to benefit.

 

On March 7, 2016, the price of Brent crude rose above US$40 for the first time since December 2015 as major producers prepared to meet sometime between March 20 and April 1, 2016 to discuss a production freeze and as output in the United States shows signs of declining. Saudi Arabia, Russia, Qatar and Venezuela agreed in February to freeze output, if other producers followed suit. It is expected that there will be an upwards price correction by year end towards $45 as a result. Despite this, some economists predict years of low oil prices ahead. This means that T&T’s foreign exchange earnings may be flat in the coming years.

 

On the flip side, Jamaica, which is not an oil producer, for one is benefiting from lower oil prices. Jamaica’s real GDP expanded by 1% in 2015 and is expected to grow to 11/2% in 2016 and 1 ¾% in 2017 as the country benefits from reduced inflationary pressures due the decline in oil prices and as unemployment decreases. On February 11th, 2016, Fitch upgraded the country’s credit rating by 1 notch to “B” and assigned it a stable outlook. The country’s debt profile has improved as its debt to GDP ratio has declined from 145% of GDP in 2012 to projections of 115% of GDP in 2017.

 

Table 1, below, provides a summary of some of the key global economic indicators. It may seem that T&T is not doing so well, but when we consider the relatively low unemployment rate even with retrenchments and low inflation as compared to our neighbour, Jamaica we may now think that we are not that badly off. Also, thank God our policy rate is still positive, though low, unlike the Euro Area. So, what is your opinion on removing the fuel subsidy? Yea or Nay? Like me, do you think that a gradual removal is better than facing the music all at once?

 

TABLE 1 – SUMMARY OF GLOBAL ECONOMIC INDICATORS AS AT FEBRUARY 29, 2016

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One Response to “Are Things That Bad That We Have to Remove the Fuel Subsidy?”

  1. Daneydane says:

    Good Article, I agree with many of the points. I firmly believe that the fuel subsidy should remain as the country does not have the system to ensure economic benefit results from the same- Look at what has happened with the simple Value Added Tax Reduction and Expansion.

    Question – How does the government of Trinidad and Tobago apply the fuel subsidy- I would appreciate your explanation of this. Does it rise and fall proportionately and who do they (the government) pay these subsidies to..

    Regards