A. Context

1. Recent adjustment to fixed petroleum prices has not entirely solved the issue of under-performance of tax revenues. In an environment of rising oil price, from 2016 until end-2022 pump prices were lower than what would have prevailed if the government had allowed a full pass-through of the changes in international prices. During this period, the retail price was stabilized through quasi-fiscal operations and discretionary changes in taxes which were used as instruments to stabilize fuel prices. This led to (implicit) subsidies compared to the maximum tax that was allowed under the law—as well as corporate losses and fuel shortages at times. The cost of combined impacts of rising petroleum prices and depreciation of the CFAF gradually eroded the government’s revenue base, making the 2022 price regime fiscally unsustainable. However, new higher domestic prices introduced in January 2023 created incentive for an expansion of the black market supplied through smuggling from Chad and Cameroon and a severe reduction of the demand in the formal market, reducing the taxable base, and therefore the tax revenue collection from sales of fuel products.

2. Under the CAR’s current macroeconomic and structural challenges, reforming the fuel market is an urgent priority. The reforms should lead to increased revenue collection, elimination of shortages, efficiency gains, reduced distortions, and more balanced domestic energy consumption. The remainder of the paper is organized as follows. We review the structure of the market for petroleum in the CAR in Section B. Section C undertakes analysis of the fiscal impacts of the petroleum pricing regime and presents a simulation on the expected revenues given the new fixed prices announced by the government in January 2023. In section D, we present the key elements that a fuel subsidy reform could consider, based on international experience. The study concludes with a discussion of the key issues and recommendations for fuel price deregulation in the CAR.

B. The Petroleum Sector in the Central African Republic until End-2022

3. The market for distribution of petroleum products in the CAR is shallow, reflecting the country’s limited infrastructure and fragility. As a landlocked country, imported petroleum products are transshipped from ports of neighboring countries on shallow rivers, some of which are navigable only a few months a year. In the absence of a domestic refinery, refined petroleum is initially imported into the Democratic Republic of Congo (DRC) or Cameroon and transported to the CAR through a combination of small boats and pipelines to Bangui. Supplies from Cameroon are also transported by road, mainly during the months of February and March, when transportation from DRC is not feasible because of seasonal river dryness. A government majority-owned company controls storage depots, from where importers organize transportation to distribution points. Two thirds of the stations are located in Bangui. For reasons of limited access and infrastructure, the northeastern part of the country is not served.

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Central African Republic: Cost Components and Implicit Subsidy of 1 Liter of Diesel in the Central African Republic

(Prices 2022)

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A003

Source: IMF Staff

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4. The retail prices of the four different types of petroleum products are subject to price regulation and fixed by the government. The difference between the administered pump price and the recovery price is incorporated into the budget either as additional revenue (when administered price is higher than recovery price due to falling or stable oil prices), or a subsidy/expense (when the administered price is lower than the recovery price due to rising oil prices). The final price at the pump is an aggregation of four main components: the import/border price; storage, distribution, and tax charges; exwarehouse charges; and other margins and levy.

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Central African Republic: Monthly Revenue from the Sale of Fuel Products, 2022

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A003

Source: IMF Staff

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5. A quarter of government tax revenue in the CAR comes from the import and sale of petroleum products, and both fuel subsidy and shortages contributed to a significant revenue shortfall in 2022. Between 2021 and the first half of 2022, the FOB price of gasoline increased by 64.3 percent. During the same period, the CFAF exchange rate depreciated by 17.6 percent against the US dollar. Since consumers pay the same price, regardless of changes in the parameters induced by global oil price or the exchange rate, the subsidy is wholly borne by adjustments to the VAT. As shown in Figure 1 the cost of delivering a liter of diesel in 2022 exceeded the administered retail price (CFAF 855) by around 80 percent, and the gap (CFAF 682) was the implicit fuel subsidy per liter. The subsidy reflects forgone revenue (CFAF 444 per liter), as well as payments owed to fuel importing companies (CFAF 238 per liter) to compensate for the difference between the cost recovery price and the government administered pump price.

6. Compounding the revenue problem is the emergence of fuel shortage since July 2022. Fuel shortage has caused not only a reduction of oil related revenues but also reduction in other taxes, given the contraction in the production of goods and services induced. Tax revenue from sales of fuel products fell from a monthly averaged of around CFAF 1.5 to 2 billion to about CFAF 0.1 billion at the end of 2022 (see Figure 2).

C. Fiscal Impact of Fuel Subsidies Since January 2023

7. Price increases and changes to the pricing structure have been introduced to align importer incentives, which is expected to reduce fuel shortages. In January 2023, to contain the fiscal cost of the subsidy and relieve pressures on importers’ balance sheets, several ad-hoc adjustments were made to the official fuel price structures, which reflected the arbitrary adjustments of tax rates and quasi-taxes. However, one of the main drivers of the high cost, the import cost paid to importers, whose setting is carried out in a non-transparent manner, and without following the rules established by law. This practice has important effects on the very high recover cost price in the CAR, as shown in Figure 3: in November 2022, the average import price in the CAR was 1.8 times the price paid in other countries in the region.

8. The new prices place the CAR among the five countries with the highest gasoline and diesel prices in the world. As treasury tensions intensified, the government raised pump prices for gasoline, diesel, and kerosene by 50, 70, and 78 percent, respectively, on January 3, 2023. The prices were set to ensure that when using the import prices and the price structure of the products imported in December by the land route, the fuel subsidy would be equal to zero. Therefore, the prices set by the government imply a surplus in the sale of products by importers by the river, at the expense of the consumers’ welfare.

9. The fuel subsidy policies of neighboring countries generate externalities that limit the capacity of the government to collect revenue, and this phenomenon is amplified when the price differential increases. Cameroon, Chad, and the DRC have much lower prices than those of the Central African Republic (Table 1), which creates incentives for illegal imports from these countries. While the black market has always existed in the CAR (it is estimated that historically about 20 percent of the fuel market has been served by the black market), the sustained fuel shortage in 2022, as well as the high prices set in January 2023, created the incentives for the expansion of the said market. Currently, the black market can meet all the demand that passes from formal to informal channels.

^{Table 1.}

Central African Republic: Fuel Prices for Imports from Neighboring Countries

Source: IMF Staff

^{Table 1.}

Central African Republic: Fuel Prices for Imports from Neighboring Countries

	Gasoline			Diesel
	Cameroon	DRC	Chad	Cameroon	DRC	Chad
Pump price (13/02/2023)	730	837	520	720	836	580
Transport and various fees	200	200	200	200	200	200
Customs value	930	1037	720	920	1036	780
Customs duty 10%	93	103.7	72	92	103.6	78
Community taxes (CEMAC et EEAC), 1,4%	13.02	14.518	10.08	12.88	14.504	10.92
VAT at customs	196.84	219.49	152.40	194.73	219.28	165.09
Tax and fees	302.86	337.71	234.48	299.61	337.38	254.01
Consumer price (including taxes)	1232.86	1374.71	954.48	1219.61	1373.38	1034.01
Pump price in CRA	1300	1300	1300	1450	1450	1450

Source: IMF Staff

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^{Table 1.}

Central African Republic: Fuel Prices for Imports from Neighboring Countries

	Gasoline			Diesel
	Cameroon	DRC	Chad	Cameroon	DRC	Chad
Pump price (13/02/2023)	730	837	520	720	836	580
Transport and various fees	200	200	200	200	200	200
Customs value	930	1037	720	920	1036	780
Customs duty 10%	93	103.7	72	92	103.6	78
Community taxes (CEMAC et EEAC), 1,4%	13.02	14.518	10.08	12.88	14.504	10.92
VAT at customs	196.84	219.49	152.40	194.73	219.28	165.09
Tax and fees	302.86	337.71	234.48	299.61	337.38	254.01
Consumer price (including taxes)	1232.86	1374.71	954.48	1219.61	1373.38	1034.01
Pump price in CRA	1300	1300	1300	1450	1450	1450

Source: IMF Staff

10. The government could expect to collect CFAF 18 billion (1.2 percent of GDP) in tax revenue from sales of fuel products in 2023, given the new price structure, and the new official price. In response to the sharp increase in pump prices in January 2023, demand in the official network experienced a reduction of 58 percent in January 2023 relative to January 2022 and similar figures in February 2023 relative to February 2022. Given the delay in carrying out the reform, and the significant reduction in imports during the rainy season, the fuel stock will not be enough to meet the demand in the coming months, therefore the imports by the route will be significantly larger than in previous years (increasing the import costs). Adding to the difficult situation the CAR may face, Cameroon periodically implements quotas on the export of fuels to the CAR, due to the scarcity they are experiencing and the prioritization of the domestic market, which could potentially lead to another episode of fuel shortage in the CAR.

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Central African Republic: Price Structure in Different African Countries

(USD per liter)

Citation: IMF Staff Country Reports 2023, 156; 10.5089/9798400239946.002.A003

Source: IMF staff

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D. Reforming Fuel Price: Considerations and Recommendations

11. The current price structure reward importers, to the detriment of consumer welfare and tax collection. Establishing a transparent methodology to determine efficient import costs is crucial. Under the current price structure import prices are determined in a non-transparent manner, and in such a way that importers’ requirements are fully satisfied, which represents a high cost for consumers and reduces tax-collection. Reducing the importers margin to 30 percent of the price of the FOB, will allow the government to reduce pump prices, without compromising revenue collection from sales of fuel products. Setting fuel prices to CFAF 1,100 and CFAF 1,350 per liter of gasoline and diesel respectively, while the tax rates and quasi-taxes contemplated in the Tax Code, the Financial Law and the CEMAC Directives are applied, will lead to an estimated additional collection of CFAF 11.7 billion in 2023.

12. The reform of the hydrocarbons sector should seek to stabilize the government’s finances while avoiding an economic, humanitarian, and security crisis. The success of the reform of the sector will lie in its correct implementation, which must be based on the application of the laws that govern the sector. A first step in the reform agenda would be the application of tax rates and quasi-taxes following the provisions of the tax code, the finance law, and CEMAC directives. When considering the price structure and price levels, the government needs to strike a balance between tax collection and incentives for informal market development. Fighting the informal market is key to stabilizing the tax base. The existing complex pricing structure seems to give rise to suboptimal practices, which could potentially lead to revenue losses. The reform should simplify the price structure formula, rationalizing all parafiscal and quasi-taxes, and ensuring the allocation of receipts to public entities based on an investment plan.

13. Fighting against the informal market and making the fuel market more transparent and competitive is paramount. The authorities should reduce any incentive to import outside the formal network, to this end the authorities can collect all taxes and quasi-taxes at customs, which will make the playing field level for all importers, regardless of whether the imports are made through the agreed importers or not. Due to the high import prices paid by the CAR to the agreed importers, the government must carry out an import cost audit (margins and tariffs) to ensure that the price paid is competitive. The country must go to a tender to import fuel, which will allow it to increase its bargaining power in the international market. The country can benefit from the existing legal framework for the application of said tender. Finally, to improve transparency in the sector and prepare consumers for the adoption of an automatic pricing mechanism, the authorities must make the price structure public, this will guarantee transparency to the public in the calculation of prices, and it will make it easier to understand the reasons behind the price movements at the pump. While the adoption of an automatic pricing mechanism should be the ultimate goal of the reform, in the meantime the authorities should review the sales prices periodically, to reduce the volatility of the revenue from sales of fuel products.

14. International experience shows that successful fuel subsidy reforms rely on five key components (Clements, et al., 2013):

• A comprehensive reform plan that considers setting clear long-term goals, assessing the impact of the reform, and consulting with stakeholders.

• A far-reaching communication strategy. International experience has shown that strong public support and proactive public communication triple the probability of success of a fuel subsidy reform (IMF, 2011).

• Appropriately phased price increases, sequenced differently across products. A sharp increase in fuel prices will increase the likelihood of a failed reform and will also increase the unintended macroeconomic consequences of removing fuel subsidies, such as inflation.

• Targeted mitigation measures. While unconditional or conditional cash transfers are the preferred approach, when this is not possible some other alternatives can be contemplated, e.g. expansion of school feeding programs, public works, reduction of education and health fees, among others.

• Depoliticization of fuel subsidies to avoid the recurrence of subsidies.