Annex I: Country Groupings
The analysis in the paper makes use of a number of country groupings, each of which has more homogeneous policies regarding energy subsidies. Country groupings are defined according to specific characteristics, as described below:
Oil-richness and Institutions. Countries were divided according to whether they were oil producers or importers, and were ranked according to an index averaging countries’ positions in a number of measures of indicators and surveys of institutional quality and policies. These indicators include the Institutional Investor “Country Credit” survey for 2014, the World Bank’s “Doing Business” survey for 2014, the World Economic Forum’s “Global Competitiveness Report” for 2014, the International Budget Partnership “Open Budget” survey for 2012, Transparency International’s “Corruption perception” index for 2014, and the “Rule of Law” and “Government Effectiveness” dimensions from the World Bank’s “Worldwide Governance Indicators” for 2013. Countries were thus divided in four groups depending on whether a country was oil producer (or importer), or whether they ranked above (or below) the regional median in the average measure of institutional quality.
Oil producer countries that ranked lower in measures of institutional quality (LR-OIL) This group includes Argentina (ARG), Belize (BLZ), Bolivia (BOL), Ecuador (ECU), Suriname (SUR), and Venezuela (VEN).22
Oil producer countries that ranked higher in measures of institutional quality (HR-OIL). This group includes Brazil (BRA), Colombia (COL), Mexico (MEX), Peru (PER), and Trinidad and Tobago (TTO).
Oil importer countries that ranked lower in measures of institutional quality (LR-NOIL). This group includes Dominican Republic (DOM), El Salvador (SLV), Grenada (GRD), Guatemala (GTM), Guyana (GUY), Haiti (HTI), Honduras (HND), Jamaica (JAM), Nicaragua (NIC) and Paraguay (PRY).
Oil importer countries that ranked higher in measures of institutional quality (HR-NOIL). This group includes Antigua and Barbuda (ATG), Bahamas (BHS), Barbados (BRB), Chile (CHL), Costa Rica (CRI), Dominica (DMA), Panama (PAN), St. Kitts and Nevis (KNV), Saint Lucia (LCA), Saint Vincent and the Grenadines (VCT), and Uruguay (URY).
Low-income countries (LICs) are countries that are defined as IDA-eligible (including IDA-blend), excluding small island countries. The group includes Bolivia, Guyana, Haiti, Honduras, and Nicaragua.
Geography-based. Two groupings were defined according to their geographical position. These include
Caribbean countries (CAR) are those in the Caribbean region, excluding the Dominican Republic and Trinidad and Tobago (a net oil exporter). The group includes Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, Suriname, and St. Vincent and the Grenadines.
Central American countries (CADR) are those that are members in CAFTA-DR. The group includes Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Panama.
Annex II: Data Sources
Annex III: A Summary of Energy Policies in LAC countries
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The regional average decreases to 1 percent of GDP when excluding oil producer countries that ranked lower than the regional median in measures of institutional quality.
Data compiled for this paper focus largely on consumers, although data for some countries include subsidies provided to energy producers.
We are grateful to Adrienne Cheasty, David Coady, Przemek Gajdeczka, Luca Ricci, Baoping Shang, Alejandro Werner and participants at an internal IMF seminar in which a draft of the paper was presented, for useful comments and suggestions. We would also like to thank Daniela Cortez for outstanding research assistance and data management, and Danica Owczar and Alexandra Martinez for helping formatting a number of versions of the paper. The usual disclaimer applies.
The literature on energy subsidies is extensive and includes analyses on their economic impact (IMF, 2013a; Plante, 2013; Global Subsidies Initiative, 2009, 2010), their prevalence in a specific country or region (IMF, 2013b; IMF, 2014b), or their implementation following specific events (e.g., large oil price increases or strong price fluctuations; ECLAC, 2009). A number of studies analyze specific types of subsidies (e.g. for fuel or electricity), while others offer recommendations on subsidy reform, including appropriate pricing policies (Anand et al, 2013; World Bank, 2006, 2010; Morgan, 2007; IMF, 2013a, 2014a).
The lower number refers to “pre-tax” subsidies (that is, transfers to bridge the gap between domestic and international prices); the higher number also includes an estimate of forgone revenues and negative externalities (or “post-tax” subsidies). Measuring electricity subsidies also requires an evaluation of whether all costs and losses (including theft) are reflected in the tariffs set for the public. See Boxes 1 and 2.
Annexes define country groupings, provide data sources, and give country descriptions of fuel and electricity pricing policies and subsidies.
Data in this paper were compiled through surveys and from other sources including country authorities, international financial institutions, and national and international energy agencies (See Appendix II). To provide as comprehensive a picture as possible, estimates based on the price gap approach (as in IMF, 2013a; see Boxes 1 and 2) were complemented with information from national budgets and financial statements of energy sector companies. Estimates, however, are not available for all countries, years, and energy products, and may not be comparable across years and countries. Price-gap approach estimates are on a pre-tax basis, unless otherwise noted. Whenever price gap estimates were not available, the highest of available alternative estimates was used.
These groupings reflect economic size, measures of institutional quality, energy wealth and income per capita, among other (see Box 3 and Appendix I).
The size of energy subsidies in Venezuela is related to the exchange rate used, so figures reported in this paper need to be taken as approximations. Moreover, energy subsidies for Venezuela do not include concessional loans linked to oil exports in the context of the Petrocaribe initiative. In this regard, see Box 4.
The size of fuel subsidies is influenced by per-capita consumption of fuel products. This ratio is higher in countries with higher energy subsidies, and lower in those with pump prices reflecting opportunity costs. For instance, according to the World Bank’s World Development Indicators, per capita consumption of oil equivalents is about 2,500 kg per year in Venezuela versus 1,500 kg in Mexico and Brazil (countries with similar per capita income).
Price shocks can occur not only from oil market developments, but also, for instance, from exchange rate depreciations, as was the case in Argentina which began to provide subsidies in 2002. Subsidies for public transportation are included in the database when possible. Fuel at below cost for electricity generation (as in Argentina) is included within electricity subsidies.
The cost of forgone tax revenues is in addition to that reported in Tables 1 and 2 and can be estimated by applying uniform tax rates to reference prices (as explained in Box 1). Calculations using uniform tax rates (equivalent to the LAC average of 9.5 percent for gasoline, 9.3 percent for diesel and 7.9 percent for kerosene), result in estimated forgone tax revenues of about 0.7 percent of GDP for the average LAC country in 2011-13.
The percentage of households that are reached by electricity subsidies varies; for instance, in Colombia, almost 90 percent of households benefit from cross-subsidization, versus 60 percent in Peru (Vagliasindi 2013).
BNDES has increased loans to PETROBRAS also in the context of investment related to pre-salt discoveries. Lack of transparency not only complicates assessing the budgetary impact of energy subsidies but also raises governance issues, which may affect minority shareholders and bondholders.
The government holds the majority of votes in PETROBRAS’ board.
The bulk of these arrears are thought to have been ultimately cleared through budgetary cash payments in FY2014, among other.
Coady et al. (2010) find that the benefits of gasoline subsidies are the most regressively distributed, with over 80 percent of total benefits accruing to the richest 40 percent of households in a sample of OECD countries. IEA (2011) shows that the poorest 20 percent of households benefits only from about 10 percent of total subsidies on natural gas and 9 percent of total subsidies on electricity. Arze del Granado, et al (2010) show that on average, the top income quintile receives about 6 times more in energy subsidies than the bottom quintile.
High-income households usually have access to credit markets, and thus, the marginal improvement in welfare provided by price smoothing mechanisms is relatively minor. See Federico et al (2001).
For example, see IMF (2014a) and Morgan (2007). IEA (2011) estimated that if world fossil fuel subsidies were completely phased out by 2020, CO2 emission would be cut by about 6 percent. It is sometimes argued that removal of subsidies on kerosene could worsen environmental damage, as it could increase the use of charcoal and associated deforestation. However, Coady et al. (2010) find that low-income households in South and Central America consume less kerosene as they have greater access to LPG and electricity. Moreover, proper pricing would generate savings that could be better targeted to protect low-income kerosene users from switching to charcoal. Finally, there are leaks in in-kind kerosene subsidy schemes, as kerosene is often mixed with diesel used by the higher-income groups (Anand et al, 2013; Haiti Libre 2012)
Jordan began to gradually decrease fuel subsidies in 2005, culminating in a full price pass-through in 2008; the government simultaneously increased the minimum wage, maintained an electricity lifeline tariff, and provided cash transfers to low-income households. Mitigating measures were also implemented together with fuel price increases in 2008 in both Indonesia and Mozambique. IMF (2013a) refers to some successful historical reform episodes.
The size of the mitigating measures would be guided by a decision involving a trade-off between fiscal savings, administrative capacity, and the need to achieve public support for the reform.
Net oil exporters (OIL-NX) is a subset of oil exporters and includes those countries with a positive oil trade balance. It includes Bolivia, Colombia, Ecuador, Mexico, Trinidad and Tobago, and Venezuela.
Since 2006, about 20 percent of the country’s oil demand has been met under the Petrocaribe arrangement, at favorable financing terms. The country’s financing from Venezuela amounts to 1.6 percent of GDP per year.
The price of LPG or cooking gas continues to be directly subsidized by government as part of its social safety net policy. When international oil prices are high (or high imported oil price), the Government reduces consumption tax so as to maintain relative low retail prices. Such adjustment is done through the price setting-mechanism on ad hoc basis. While the office of the Prime Minister of the country’s energy policy, the government’s involvement in the price-setting mechanism is generally on tax adjustment.
The forgone tax is obtained by the gap between the new tax set by the government and a benchmark consumption tax. The benchmark consumption tax is set the average of consumption tax on fuel during 2002-06.
The Bahamas signed the first PetroCaribe agreement in 2005, but is not a signatory to the 2010 final agreement. The Bahamas imports fuel mostly from Barbados, and the country’s own production is 320 b/d.
It is also helped by the Bahamas Environment, Science & Technology Commission (BEST) which assesses the environmental impact of energy and electricity sector projects.
This post-tax subsidy is not included in the estimates because of the lack of basis to fully estimate the size of such waivers/concessions.
The consumer types include residential, small Commercial, large commercial, and temporary service. There are no social tariffs or cross subsidization in the tariff structure.
To the best of our knowledge, this pricing setting mechanism has been in place since the establishment of the Fair Trading Commission (FTC) in 2001.
The forgone tax is obtained by the gap between the new tax set by the government and the previous tax defined under the FCT’s responsibility.
This figure includes direct budgetary transfers to BLP through transfers under a subsidy program scheme (Fuel Clause Adjustment, FCA) which amounted about 0.9 percent of GDP in 2013.
The forgone tax is obtained by the gap between the new tax set (monthly review) by the government and a benchmark consumption tax. The benchmark consumption tax is defined as the previous three months average consumption tax (prior to current month during which the consumption tax is reviewed). The subsidy of 1.2 percent in 2008 is due to the decision by the government to remit 50 percent of petroleum tax to oil importers (to compensate high cost of incomplete pass through supported by importers).
WRB Enterprises (USA-based) owns 50 percent of its share, the Government of Grenada and the National Insurance Scheme together own 21 percent, employees 4.5 percent and the remaining 24.5 percent is owned by approximately 1600 Grenadian and Caribbean investors. http://grenlec.com/OurCompany/Profile.aspx
To the best of our knowledge, there is no other regulator beside GRENLEC’s responsibility. With technical assistance from the World Bank, the authorities plan to amend the Electricity Supply Act to establish an independent regulatory authority, which will set the price of electricity under a revised tariff-setting mechanism.
There are also cross-subsidies among statutory bodies. For example, CORPOLEC, which is one of the country’s largest domestic consumers of diesel and fuel, purchases it inputs from PDVSA at subsidized price to produce electricity.
The price-gap approach results in better subsidy estimates than government budget data, mainly because subsidies may be channeled off–budget (quasi-fiscal operations). While the price-gap approach is widely used, it has several limitations (Koplow (2009). By capturing only on the goods or services on which government intervenes, the approach misses other goods and services (i.e., research and development, subsidies on fuel production, etc.).
While τ is not directly estimated, T is used as a proxy for T* (generally an underestimation).
See Appendix II for data sources.
Guatemala left the arrangement in late 2013.
Import quotas are binding, as they are below importing needs by members.