07 Feb Who will bell… subsidies?
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Now, onto the topic at hand. Today, I want to share with you the issue of fuel subsidies. As usual, I’ll use an example to outline the current situation in Bolivia regarding this matter.
Perhaps, following a family tradition, you are a well-known baker in town. For some time now, you have delighted your customers with three types of products: Bread, delicious pastries, and cheese-filled croissants. Naturally, to produce these delights, you use: Ovens, flour, milk, eggs, bakers, etc.
Among all these inputs, flour is the most important since it is your primary raw material. The government, on its part, considers that the consumption of bread and croissants is a national priority. Therefore, it forces you to sell both products at a low price, far below what you would get if you sold them to neighboring countries. Additionally, the government sets a fixed price for the flour you buy, given that it is your main input. Finally, the government also establishes a 50% sales tax on flour production.
As time passes, the market starts reacting; flour producers reduce production because the fixed prices and such a high tax make it unprofitable to increase output. On the other hand, demand for bread and croissants is rising significantly. In this context, you begin working twice as hard (even asking your partner to lend a hand), but, of course, your processing capacity is limited. Meanwhile, the price of flour, bread, and croissants in neighboring countries begins to rise quickly—perhaps because friends in China now need to eat better as their economy grows at a staggering pace.
Since higher prices or shortages of bread and croissants could spark protests, the government decides to buy your bakery and take over flour production. However, that is not enough. Over time, it is forced to import bread and croissants from neighboring countries (at high prices) and sell them domestically at low prices. Unfortunately, the system starts spiraling out of control. Flour production plummets, while demand for bread and croissants keeps soaring (in fact, some opportunists buy these products locally and resell them abroad). The cost of importing bread and croissants to resell in the domestic market reaches unimaginable figures.
Facing this problem, the government decides it’s time for radical measures. It raises the price of bread and croissants—but instead of increasing the selling price of flour, it raises the sales tax on these products. After the adjustment, the price of bread and croissants jumps by more than 70%… The measure lasts just five days.
Now, dear reader, let’s switch things up: replace flour with oil, and bread and croissants with gasoline and diesel—and you’ll have a clear picture of the crisis currently keeping Bolivia’s hydrocarbon sector on edge. Well, there are more issues at play, but this is the most debated one.
At present, Bolivia imports large volumes of diesel and gasoline at high prices and then sells them domestically at low prices. This problem is growing like a snowball in winter. To illustrate, let’s look at the following figure, which shows how diesel subsidies have grown over time. In 2007, for example, subsidies reached $138 million, but as international prices and imported diesel volumes have increased, rough estimates for 2011 suggest an astonishing figure of $460 million.
Fiscal Cost of Diesel Subsidies in Bolivia (Million USD)
Is this amount of money high or not? The hydrocarbon sector is used to an endless dance of numbers, making it difficult to grasp the relative scale of these figures. To provide clarity, the next figure estimates the subsidy as a percentage of the total revenue received by the Treasury from the hydrocarbon sector’s upstream operations.
For example, in 2007, diesel subsidies represented approximately 36% of total government revenue from the sector. By 2011, this figure had risen to 82%. In other words, for every dollar from gas revenue entering the National Treasury (TGN), 82 cents go to cover the diesel subsidy—a true nightmare.
Fiscal Cost of Diesel Subsidies in Bolivia (%)
How did we end up in this situation? There are many answers, but one key factor is taxation. Do you remember the 50% sales tax on flour? That tax was originally designed for pastries, as they generate reasonable profits. Unfortunately, the tax was also applied to flour used for bread and croissants. (In this analogy, pastry production represents Bolivia’s natural gas exports to Brazil.)
To conclude, do you know what’s most curious—and perhaps ironic? Diesel subsidies (like all subsidies) are not paid by the President or any of his ministers—they are paid by you, through your taxes. As a good friend used to say, “In the end, the straps always come from the same leather.”
Now, I’m off to the bakery—some ham-and-cheese croissants are waiting for me.
S. Mauricio Medinaceli M.
La Paz
February 7 de 2011
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