Fuel Prices and the Belizean Economy

Business Perspective

Fuel Prices and the Belizean Economy

It is clearly no secret: Belize is a net importer when it comes to fuel products, with gasoline being chief among them. As an imported commodity, Belize has to contend with the international prices and associated acquisition costs. That is an indisputable fact.

Also an unavoidable fact is the reality that oil price shocks have been known to drag on a country’s economic growth prospects. The higher energy costs, therefore, are often cited as a “downside” risk by economists. For instance, the recent International Monetary Fund (IMF)’s concluding statement states:

Now, knowing that high energy prices can weigh down on any net-oil-importing economy is one thing. 

The trick, however, is what to do about it? That is a question faced by oil-importing jurisdictions worldwide.

“Risks to [Belize’s] outlook are substantial and tilted to the downside. A key risk is an escalation of the pandemic. … Inflation could rise further because of second round effects and higher international energy and food prices.”

Figure 1 informs towards a similar point. There is an observable inverse pattern between international oil prices (specifically the West Texas Intermediaries, WTI benchmark) and Belize’s GDP growth rate. From a business perspective, this makes perfect sense when on recalls that energy cost is ultimately a part of an input cost for firms.

Of course, the firms—depending on the level of elasticity of their products—have the option of passing on some of those input costs to the final consumer, but the reality is that not every company has that luxury, especially during these COVID times. Besides, passing the increase through to the final consumer simply adds to the inflationary pressures, which itself is cited as a downside risk to economic growth.

                                                                                      A Rock and a Hard Place

Last June, for example, news consumers may recall Barbadian Prime Minister Mia Mottley virtually pleading with her citizens, saying, “I feel your pain. We will cap if oil prices continue to go up, but ah begging you to understand our [the government’s] position too.”

Mottley elaborated on that position:

“We ain’t got no money tree and the bottom line is we still paying for people to go to university. We still covering everybody’s education from pre-primary right to tertiary. We are covering all the access at the hospital and polyclinics and on top of that we covering everything with respect to COVID, as well as the testing.”

Here in Belize, the high debt-to-GDP ratio (more than 100%) and the budget deficit signals that we are likewise strapped for cash.

In that strapped-for-cash (limited fiscal-space) scenario, enter the call for GOB to “do something about fuel prices”. The go-to options are often within the family of subsidies—whether direct, indirect or “hidden”. “Hidden” is added to the list, because as Todd Litman of the Victoria Transport Policy Institute had put it, “Since most fuel taxes are per unit (per gallon or liter), they must be increased periodically to account for inflation or they lose their value. Failure to do this is a hidden form of subsidy.”

And that brings us to where we are today. On the one hand, the economy struggles with higher energy costs such as fuel. On the other hand, however, subsidies are not without their costs on the public purse. As a result, the hunt should be for a solution that counters the downward economic pressures, while simultaneously practicing prudent fiscal management at a time when debt levels are already elevated. That’s the epitome of being between a rock and a hard place.

Excise and Other Taxes

To date, the conversation in public sphere has seemingly picked a preferred policy response: Capping or cutting the taxes charged on the various fuel products (diesel, kerosene, premium gasoline, and regular gasoline). On the surface, this sounds like the panacea, because the suggestion is built on an idea that all GOB’s taxes automatically increased alongside the international price increases.

Unfortunately, that is only true of two of the three taxes: the General Sales Tax (GST) and the Environmental Tax (ET), which accounts for just about 8% of the final pump price. As Figure 2 informs, as far as taxes go, the Excise Tax is the heavy hitter, accounting for about 35% of the final price as of January 2022, down from its 49% position just one year ago.

Unlike the GST or ET, which are ad valorem taxes (charged as a percentage of the imported value of the fuel products), the Excise Tax is a per-unit tax and is thus charged per (imperial) gallons. Consequently, the increasing international prices, the climbing acquisition costs, and ultimately the final price changes have no impact on this particular tax, because it is applied strictly to the quantity of fuel products imported.

For illustrative purposes, assume that a commodity (Product X) is charged an excise duty of $2.00 per gallon. The price of Product X is $5.00 per gallon and someone purchases 100 gallons. The pre-tax value is $500 (=$5.00 x 100 gallons). The excise adds $200 (=$2.00 x 100 gallons) for a total of $700. At this point in time, the excise accounts—in this illustration—for about 29% of the total.

Months later, the price increases to $7.00. The individual purchases the same 100 gallons. The pre-tax value is now $700. However, the excise continues to be charged at $2.00 per gallon, and, therefore, still adds only $200, leading to a final value of $900. In this case, the excise only accounts for 22% of the total, down close to seven percentage points from where it originally stood.

In similar fashion, that is what explains the change in the percentage distribution between January 2021 and January 2022 as far as the excise tax is concerned (i.e. from 49% to about 35%). At this juncture, one could then appreciate why Todd Litman speaks of the “hidden subsidy.” From that Litman logic, it could be argued that the fact that the excise tax has not been “uprated” by GOB since 2017—despite the global price pressures—is a “de facto” subsidy.

The Need for Help

Of course, understanding the nature of the problem has never been sufficient enough of a cure. While the complex nature of the fuel price debacle is not lost on the private sector, businesses are simultaneously faced with yet another variable that is pushing down and against growth, as if COVID-19 was not already a challenge.

And while there are some who ostensibly enjoy demonizing—with a broad brush—the entire private sector, it is worth remembering that it is that private sector that serves as the engine of growth, without which there wouldn’t be much of a Belizean economy to speak of.

COVID-19, hopefully, showed everyone the fact that as businesses were shuttered or otherwise limited in their activities, it likewise impacted public-sector revenues. Conversely, as businesses start to regain (some of) their momentum, lo and behold the returning skip (however slightly) in the public purse’s steps to the point that even the salary cut of 2021 is promised to be reversed.

So, keeping with that motor vehicle motif, that engine (of growth) is squeaking and the dashboard warning light is on. We could keep driving the car, ignoring those signs, but every driver knows that the choice between addressing the squeak and the warning light immediately or later is equivalent to the choice between spending a little at the mechanic today or a lot tomorrow.