No cuts to fuel subsidy

Howai disclosed this in an interview with Sunday Newsday, 24 hours after he made a statement in the House of Representatives about how Government intends to deal with the implications that the continuing decline in world oil prices could have on our economy.

Howai outlined three possible scenarios for which the State was preparing and announced that ministries will be reviewing spending, “to determine areas where expenditure can be suppressed to make up the shortfall.”

These included oil at US$75, at US$60 and between US$65 to US$70 per barrel. The budget was based on an expected oil-price of US$80 per barrel and a natural gas-price of US$2.75 per mmbtu.

Of the scenario of oil falling to US$60 and gas staying at US$2.75, Howai said this would cut revenues by $2.4 billion per year. “This will be partially offset by savings on the fuel subsidy which will be reduced by $676 million,” he said. Asked to clarify whether these “savings” in the subsidy would involve cuts in the sums the State pays to cover fuel costs for motorists, Howai said, “No.”

“The subsidy comes down automatically as it is based on the international price of oil,” Howai said. “The subsidy depends on the price of oil. Petrotrin sells fuel to National Petroleum (NP) at the world market price and NP sells at the subsidised price and Government gives NP the funds to pay Petrotrin market price. So as the world market price comes down the subsidy that Government pays automatically comes down.”

We all know there have been calls from various quarters, particularly within the private sector, for the fuel subsidy to be cut or removed. However Howai is right to insist that the subsidy not be cut in any way. This is particularly important now, at a time when global oil prices are in the current state of flux.

One of the benefits of the subsidy is to shield citizens from hikes in the prices of goods and services, all of which have an energy component to them. Howai has laid out the possible scenarios which the country has to face regarding falling oil prices and Government must lead in terms of dictating where expenditure must be cut and processes made more efficient to reduce wastage.

Last Friday, Howai estimated that any changes in spending in ministries would, spread across the various departments, be marginal. He suggested this would result in a $45 million reduction in expenditure by all government ministries. One economist, Roger Hosein, suggested the reduction should be within the range of $75 to $100 million instead. Perhaps the $45 million figure mentioned by Howai could be a starting point, that could be reviewed as the situation changes.

While Howai did not envision any changes in the expenditure on social programmes, we would like to know how practical is this? As much as Government may not want to curb spending in these areas, it may become necessary to do so, if oil prices decline even lower than the scenarios Howai listed. Government has some very hard choices to make going into 2015 and we urge the People’s Partnership not to base those choices on improving their chances at the polls.