Automatic Fuel Pricing Mechanisms David Coady Division Chief Fiscal Affairs Department International Monetary Fund IEA International Conference on Fossil Fuel Subsidy Reform Paris, October 13, 2016
Motivation Increasing volatility of international fuel prices Click Incomplete pass-through of international price changes to domestic consumers Click Ad hoc approach to pricing susceptible to recurring energy subsidies Typically advise adoption of AFPM to ensure full pass-through and protect fiscal Click Click to Slide 6 - Objectives of AFPMs 2
Jan-1990 Sep-1990 May-1991 Jan-1992 Sep-1992 May-1993 Jan-1994 Sep-1994 May-1995 Jan-1996 Sep-1996 May-1997 Jan-1998 Sep-1998 May-1999 Jan-2000 Sep-2000 May-2001 Jan-2002 Sep-2002 May-2003 Jan-2004 Sep-2004 May-2005 Jan-2006 Sep-2006 May-2007 Jan-2008 Sep-2008 May-2009 Jan-2010 Sep-2010 May-2011 Jan-2012 Sep-2012 May-2013 Jan-2014 Sep-2014 May-2015 Jan-2016 Sep-2016 Increasing volatility in international oil prices 160.00 140.00 120.00 Crude Oil Diesel International Oil Prices (US$/barrel) 100.00 80.00 60.00 40.00 20.00 0.00 Click back to Slide 2 3
Incomplete pass-through in many countries Table 1. Median Pass-Through Coefficients by Country Groups and Over Time Median Pass-Through Coefficients Jan 2005- Dec 2006 Jan 2007- Jun 2008 Jul 2008- Feb 2009 Mar 2009- Jun 2014 Jul 2014- Dec 2014 Average Diesel median pass-through Advanced Economies 143 184 164 164 106 152 Commonwealth of Independent States 221 54 31 48 26 76 Developing Asia 187 78 61 57 47 86 Emerging Europe 150 182 164 167 108 154 Latin America and the Caribbean 119 100 76 92 39 85 Middle East and North Africa 161 33 1 13 0 42 Sub-Saharan Africa 170 108 58 58 39 86 All countries 155 125 93 82 56 102 Click back to Slide 2 4
Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Fuel subsidy reform & adoption of AFPM Jordan Domestic and International Diesel Prices (In US cents per liter) 120 100 Stepped Price Adjustment AFPM adopted No pass through AFPM reinstated 80 International 60 40 Jordan 20 Feb-08 Dec-10 Aug-12 Aug-14 0 Source: Jordan Ministry of Energy and Mineral Resources, and the US Energy Information Administration. Click back to Slide 2 5
Objectives of AFPMs Avoid recurrence of energy subsidies by ensuring full Smoothing can be formally incorporated to reduce domestic fuel price volatility and avoid sharp price increases while ensuring full pass-through over medium term Transferring responsibility to independent pricing body can depoliticize pricing Can facilitate transition to liberalized pricing 6
Designing an AFPM Specify the pricing formula Adopt a timeline for updating the components of the pricing formula Establish a rule determining when and by how much retail prices are changed Consider a price smoothing mechanism to reduce short-term price volatility 7
Table 1. Fuel Price Structure LCU per liter Gasoline Kerosene Diesel CIF import price (1) 423 482 440 FOB price 388 447 405 Freight, insurance and fees 35 35 35 + Taxes (2) 234 18 147 Custom duty 54 6 33 Excise 75 4 40 VAT 81 8 49 + Other fee and charges 25 0 25 Domestic margins and transport (3) 92 65 78 Margins (distribution and retail) 55 26 40 Transport charges and fees 38 39 38 = Pump price (LCU per liter) [(1)+(2)+(3)] 750 565 665
Price bands Smoothed variable: retail prices Can be for instance 3, 5, or 10 percent Excise tax/subsidy component is the adjustor Moving averages Smoothed variable : import prices Can be for instance 2, 4, or 6 month moving averages Excise tax/subsidy component is the adjustor
Smoothing can reduce price volatility. 90 Retail Prices Under Alternative Pricing Mechanisms 80 70 60 50 40 30 20 10 0 FPT PB3 MA6 10
Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13..but translates into fiscal volatility 35 Net Taxes Under Alternative Pricing Mechanisms 30 25 20 15 10 5 0-5 -10-15 FPT PB3 MA6 11
Can be adopted as part of reform strategy or at end 78 76 74 72 70 68 66 64 62 Full pass-through Price band (3%) Price band (5%) Price band (10%) 60 Oct-13 Sep-13 Aug-13 Jul-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 12
Transition Strategy Outline a clear timeline for reaching targeted fuel tax levels Prepare in advance for the adoption of the pricing mechanism as soon as the targeted tax levels are reached Consider creating an autonomous committee responsible for implementing the new automatic mechanism Prepare a plan for liberalization of pricing over the medium term 13
Reform Experience Philippines (mid 1990s), South Africa (late 1970s) and Turkey (early 1990s) transferred implementation to independent body Philippines and Turkey implemented mechanisms as part of transition to liberalized pricing Many others have adopted AFPM more recently Jordan (2005); Mauritania (2012); Morocco (2013); Nepal (2014); Tunisia (2014); UAE (2015) Number of countries have adopted mechanisms with smoothing Cote d Ivoire; Chile, Colombia, Peru, Malawi, Mauritius, Namibia, Thailand, Vietnam India and Malaysia have liberalized fuel prices in 2014 14
IMF resources AFPM Paper: http://www.imf.org/external/pubs/ft/tnm/2012/tnm1203.pdf Various tools and resources available on website: http://www.imf.org/external/np/fad/subsidies/ IMF Working Paper: How Large Are Global Energy Subsidies? IMF Book: Getting Energy Prices Right: from Principle to Practice IMF Book: Energy Subsidy Reform: Lessons and Implications 15