Back Matter

Appendix I. Retail Fuel Prices and Net Taxes Under Alternative Pricing Mechanisms

Figure 1.
Figure 1.

Retail Prices Under Alternative Pricing Mechanisms

(In local currency units per liter)

Citation: Technical Notes and Manuals 2012, 003; 10.5089/9781475566949.005.A999

Source: IMF staff estimates.Note: The price series presented are: FPT—Full pass-through; HIS—historical/actual retail price series; MA6—6 month moving average; PB3—3 percent price band.
Figure 2.
Figure 2.

Net Taxes Under Alternative Pricing Mechanisms

(In local currency units per liter)

Citation: Technical Notes and Manuals 2012, 003; 10.5089/9781475566949.005.A999

Source: IMF staff estimates.Note: The price series presented are: FPT—Full pass-through; HIS—historical/actual retail price series; MA6—6 month moving average; PB3—3 percent price band.
Figure 3.
Figure 3.

Convergence to Target Price Under Different Price Brands

(In cents per liter)

Citation: Technical Notes and Manuals 2012, 003; 10.5089/9781475566949.005.A999

Source: IMF staff estimates.Note: Assuming constant world oil price as of September 2012.

References

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1

Fuel products include gasoline, diesel, kerosene, fuel oil, and liquefied petroleum gas (or LPG). Many of the issues discussed in this note will, however, also apply to the controlled pricing of other energy prices (such as electricity and natural gas), which is also common in many countries.

2

For a discussion of the economic, political, and social barriers to passing-through international fuel price increases to domestic consumers, and to the adoption of automatic pricing mechanisms, see Gupta and others (2000) and Coady and others (2010).

3

This note is written from the perspective of a fuel product importer. However, the issue applies equally to fuel product exporters but using the export price instead of the import price. Note also that many crude oil producers are importers of fuel products.

4

Empirical evidence suggests that oil prices follow a random walk characterized by permanent shocks (Hausmann and others, 1993; Cashin and others, 1999; Mazaheri, 1999; Engel and Valdes, 2000; Hamilton, 2008). According to Hamilton (2008), “In terms of statistical regularities, changes in the real price of oil have historically tended to be: (1) permanent; (2) difficult to predict; and (3) governed by very different regimes at different points in time.” This suggests that governments and consumers should treat shocks as permanent and adjust accordingly.

5

See Federico and others (2001) for an analysis of similar smoothing regimes.

6

Governments can manage this tax volatility in a number of ways. The volatility can be directly reflected in budget balances. Alternatively, a “price stabilization fund” could be established with transfers to the budget when actual taxes fall below target tax levels and from the budget when actual taxes are below target levels so as to protect the budget from price smoothing policies. Federico and others (2001) provide more discussion of price stabilization funds as well as the possible use of various hedging instruments. However, experience with price stabilization funds in developing and emerging economies has been unsatisfactory with funds regularly being exhausted or redirected towards other public expenditure needs.

7

The formula should not include any refinery margins. If a refinery makes losses at world prices for crude oil and petroleum products, then this should preferably be financed directly (and transparently) from the budget, rather than, say, through earmarked taxes in the fuel pricing formula.

8

Note that public sector users of fuel products (such as the power and fertilizer sectors) should also pass on higher fuel product input costs to their product prices. Otherwise, subsidy reforms will simply re-label fuel subsidies (e.g., as electricity or fertilizer consumer subsidies).

9

In addition to the representatives from different government ministries, members could include representation from industry stakeholders, e.g., representatives of importers, distributors, transporters, retailers, and industry and consumer groups. Once the design of the mechanism and the components of the pricing formula are determined, the implementation of the mechanism could be delegated to the responsible body by allowing it to take the lead role in monitoring, announcing, and enforcing price changes. In addition, consideration should be given to eventually housing the committee, comprising the permanent staff responsible for implementing the mechanism, away from government buildings. It could eventually be financed from an associated charge explicitly included in the formula and its permanent staff should not be paid through the budget. In line with its increased independence, corresponding provisions to ensure accountability such as through ex-post transparency and audit requirements would be needed. Regular reporting to the public on the operations of the body and the implementation of the mechanism would also help strengthen its accountability.

Automatic Fuel Pricing Mechanisms with Price Smoothing: Design, Implementation, and Fiscal Implications
Author: Mr. David Coady, Mr. Javier Arze del Granado, Luc Eyraud, and Ms. Anita Tuladhar
  • View in gallery

    Retail Prices Under Alternative Pricing Mechanisms

    (In local currency units per liter)

  • View in gallery

    Net Taxes Under Alternative Pricing Mechanisms

    (In local currency units per liter)

  • View in gallery

    Convergence to Target Price Under Different Price Brands

    (In cents per liter)