Last week Thursday, in the daily business pages, the T&T Guardian published an article about the fact that the United Arab Emirates had taken a decision to remove the subsidies on transport fuels, by pegging the prices of gasoline and diesel sold in the country to global benchmarks.
The AP report indicated that the price of a litre of premium unleaded gasoline was US$0.47, compared with the average price in the US of US$0.84 a litre, the price in Saudi Arabia of US$0.16 and the price in T&T of US$0.90 in T&T, (which would have been added into the story by the business news editor on duty.)
In the story, the UAE’s Ministry of Energy was reported as saying that the price changes would take effect from August 1 and that the prices of gasoline and diesel would be announced on the 28th day of each month.
On Tuesday July 28, the Guardian published the follow-up article, which reported that the cost of a litre of regular gasoline would increase by 24 per cent and that from Saturday, Emiratis would pay the equivalent of US$0.58 for a litre of premium unleaded gasoline at the pump, up from US$0.47.
That report, which was published in the Guardian yesterday, contextualised the decision by the UAE government as being part of a wider strategy to phase out subsidies and offset the effect of a drop in revenues. And it quoted the Moody’s rating agency as saying that it expects the UAE’s consolidated revenues to drop 27 percent this year due to lower global oil prices.
Now that reporting obviously led to questioning along the lines of if an energy-dominated economy as wealthy as the UAE could take the decision to cut fuel subsidies, is it inevitable that an energy-dominated but less wealthy country like T&T would have to do the same in the near future.
The UAE, of course, is a country located in the Arabian Peninsula and on the Persian Gulf, with a population estimated to total 9.2 million, of which 1.4 million are Emirati citizens and 7.8 million are expatriates.
Wikipedia states that the UAE has a gross domestic product of US$570 billion and a GDP per capita of US$63,181.
T&T’s gross domestic product is about US$28 billion and our GDP per capita is about US$21,000.
That means that UAE nationals are, on average three times wealthier than T&T. Wikipedia also indicates that 4 per cent of the T&T population lives below the internationally accepted poverty line of US$1.25 a day, while in the UAE that number is zero.
The consensus here is that the Minister of Finance who decides to remove fuel subsidies in T&T risks stoking social unrest and political disaster.
That is because, I think, that the politicians in this country—and that is all politicians—have completely bought into the myth that the majority of people living in this country believe that cheap fuel is part of the birthright of being a Trinbagonian or living here.
This must mean that politicians believe that the people they govern—or hope to govern—are unsophisticated economically and only think of their own interests and, perhaps, the interests of their families.
The fact is that T&T spends too much money on fuel subsidies.
The 2015 Estimates of Expenditure, which is part of the package of the budget documents, reveals that the shortfall in subsidy for petroleum products amounted to $4.45 billion in 2013, the revised estimate for 2014 was $7 billion and the preliminary estimate for 2015 is $6 billion—although this number is likely to be reduced because of lower global oil prices.
The fuel subsidy accounted for 8 per cent of total recurrent expenditure in 2013, 11.5 per cent in 2014 and 9.5 per cent in 2015.
The $17.5 billion that has been spent or allocated to be spent for the three years 2013 to 2015 money could be better directed in other areas, including in providing targetted fuel subsidies to families who are really needy—the estimated 4 per cent of the population who are living below the poverty line.
The International Monetary Fund (IMF), in a major study on energy subsidies published in May said that energy subsidies are projected at US$5.3 trillion in 2015, or 6.5 per cent of global GDP.
The study estimates that the total annual post-tax energy subsidy in T&T in 2013 was US$3.96 billion or 14.29 per cent of GDP.
According to the study: “Subsidies are intended to protect consumers by keeping prices low. But they come at a high cost. Subsidies are expensive for governments—and therefore taxpayers—to finance and can hinder governments’ efforts to reduce budget deficits, They also compete with other priority spending on roads, schools and healthcare.
“All consumers, both rich and poor, benefit from subsidies by paying lower prices. Governments could get more ‘bang for their buck’ by removing or reducing subsidies and targetting the money directly to programmes that help only the poor.”
In its staff report for the 2014 Article IV consultation with T&T, the IMF identified fuel subsidies as one of this country’s key issues and advised: “Fuel subsidies need to be curtailed…”
Under recent developments, the IMF staff said: “Although data limitations inhibit analysis, government subsidies and transfers appear to be supporting consumption while public development spending supported construction....
“Energy subsidies rose by 1.6 percentage points of GDP, which did not, however, prevent energy arrears from growing further.”
The institution noted that fuel subsidy arrears to the state-owned energy company Petrotrin were estimated at 3.0 percent of GDP by the end of FY 2012/13.
Additional cash has been appropriated for petroleum subsidies in FY 2013/14 (totaling some 3.75 per cent of GDP), both to finance ongoing subsidies and reducing arrears, which are expected to be eliminated by the fiscal year’s end.
What’s more, the IMF staff recommended “quickly moving to start ending fuel subsidies. Cheap fuels induce excessive reliance on automobiles, leading to efficiency-killing traffic jams and environmental costs, and disproportionately benefit the well-off.” The staff report noted that the Government prefers to first make compressed natural gas (CNG) widely available as a substitute for gasoline and diesel, while encouraging conversion of vehicles to CNG use, before removing fuel subsidies.
“Staff noted, however, that concurrent reduction of fuel subsidies would boost incentives to switch to CNG.”
In noting that the diversification of the T&T economy would require reorienting government expenditure towards supporting investment in the non-energy sector, the IMF stated: “To date, government spending has been concentrated on supporting current consumption through an excessively generous and poorly targeted set of subsidies and transfers, notably, regressive and expensive fuel subsidies. There is ample scope for revenue and expenditure reforms to move to structural fiscal surpluses and create the fiscal space for increasing public investment, while protecting the most vulnerable members of society.”
Even the IMF directors got involved in advising the T&T government on the appropriate course of action to take.
“Directors welcomed recent measures to improve the budget outturn for the current fiscal year. They underscored the importance of moving toward fiscal surpluses as soon as feasible, using more durable improvements in revenues and expenditures, in order to make better use of the country’s nonrenewable energy endowment. Spending should be reoriented away from current expenditure toward growth-enhancing capital projects, including by better targeting social benefits and reducing energy subsidies.”
In conclusion, the UAE’s Energy Minister Suhail al-Marzouei said it best in justifying his government’s decision to scrap the fuel subsidy.
“Everyone drives a car even if they cannot afford to drive a car. We cannot ask the government to subsidize those people when they shouldn’t drive cars,” al-Marzouei said.
