Economist: Remove fuel subsidy gradually, country cannot handle another shock

The content originally appeared on: Trinidad and Tobago Newsday

Dr Vaalmikki Arjoon –

ECONOMIST Dr Vaalmikki Arjoon saya Government should hold off on increasing fuel prices at the pump for a few months.

In an interview with Newsday on Thursday, he said while the Government would face higher expenditure from the fuel subsidy and it was a double whammy for the State, some of the subsidy could be offset by the increased revenues from the energy sector.

Arjoon explained, “They should spare the nation, at least for some months ahead, especially as they will be earning some more revenues in avenues like royalties, the supplemental petroleum tax, etc.

“While the subsidy is not sustainable, now will be the worst time to remove it as this will undo any progress we’ve made in recovering from the damage of the covid19 pandemic and have devastating consequences for overall prices, the cost of living and doing business locally.”

On Tuesday, at Conversations with the Prime Minister at the Bon Air West Community Centre, Dr Rowley said Trinidad and Tobago could not be insulated from a global increase in fuel prices brought on by Russia’s invasion of Ukraine. He said government was reviewing TT’s existing fuel subsidy as a result.

At the time, Rowley said local fuel prices would increase if the subsidy was completely removed – premium gasoline would go from $5.75 per litre to $7.58, super gasoline would go from $4.97 to $7.46 per litre, and diesel from $3.71 to $6.58 per litre.

“We will see how much funding we can find to take the pressure off the population, but they cannot be insulated completely. I don’t see the hike in oil prices as opening up volumes, because we are not producing the same levels as before.

“With the price at $100 per barrel, the fuel subsidy levy would be 509 million and the subsidy will be $2.9 billion. If it goes up to $125 per barrel, the estimated subsidy would be $4 billion and the fund would be $600 million. If it goes up to $150 a barrel, government liability would be $4.48 billion.” Rowley said.

On Thursday, Arjoon said if the State must remove the fuel subsidy, then it should be done gradually since the economy could not cope with another massive shock.

The question of liberalisation and competitiveness in the market needed to be properly addressed, he said, and state-owned Paria Fuel Trading Co Ltd should not be the only company allowed to import fuel.

Arjoon said, “They should allow other entities to import as well, so that the pricing mechanism is more competitive at the pump which will lead to cost savings for households and businesses alike.”

Arjoon pointed out that the subsidy removal would present an additional layer of cost to an already escalated cost of living environment.

TT, he said was highly dependent on imports and shipping cost had escalated by nearly 500 per cent from 2020 into 2022 and businesses would have no choice but increase prices to compensate for their higher costs.

Household purchasing power has diminished, Arjoon said, and with many people still living on 2013/2014 salaries, cost of living would further be affected by the global trends, making it more difficult to make ends meet.

He called for a critical and urgent mechanism to mitigate against rising food costs and development of a food security policy.

“While we import all our wheat from the US, countries have already restricted their imports from Russia in favour of the US and France, who have since increased their prices. On the global market, prices have already increased by 53 per cent since February 16.

“While local flour producers may have supplies of wheat in storage, in transit and contractual price arrangements, once the conflict prolongs and they have to place new orders, they will incur higher prices. This will translate into a higher cost of flour-based food items locally and naturally exacerbate the cost of living.”

Earlier this week state-owned company National Flour Mills (NFM) at it may be forced to increase the prices of flour again.

In December, flour price increase between 15 per cent and 22 per cent, with a suggested increase averaging 19 per cent on the retail prices.