oil industry

What government can do to ease oil woes, according to bank economists

Ralf Rivas
What government can do to ease oil woes, according to bank economists

FUEL. A pump attendant fills a fuel tank at a gas station in Delpan, Manila, on March 14, 2022.

Rappler

Will suspending oil taxes help? What about subsidies? Bank economists weigh in on some proposals.

MANILA, Philippines – From potential tax cuts to fuel subsidies, government officials are scrambling to address surging oil prices, mirroring proposals and moves seen worldwide as effects of the Russia-Ukraine crisis spill over to markets.

So far, the Duterte administration is set to give out fuel subsidies to jeepney drivers amounting to P2.5 billion. His economic team is proposing to double that amount, given that the end of the war is uncertain.

Meanwhile, lawmakers are pushing for the suspension of taxes on petroleum products.

For transport groups, a fare hike is badly needed.

Bangko Sentral ng Pilipinas Governor Benjamin Diokno said that if the average world price of oil is $95 per barrel, domestic inflation would be 4%; if $120 per barrel, it would be 4.4%; and if $140 per barrel, it would be 4.7%. The government’s inflation target is only between 2% and 4%.

Rappler reached out to bank economists for their views on various proposals and current government interventions.

Price triggers

Jun Neri, Bank of the Philippine Islands chief economist, said that if oil remains above $100 per barrel for a month, the government may have “little choice” but to come up with measures to either forego revenues or increase its outlays to ease prices of goods.

To address rising oil prices, Neri said the government must find a way to reduce taxes on petroleum products, depending on how high global prices go.

For instance, taxes may be reduced by a certain percentage should prices hit $85, $90, or over $100 per barrel. When prices stabilize, taxes can then be reinstated.

Neri said current government interventions, particularly the P2.5 billion in fuel subsidies for public utility vehicle drivers, may provide little support, as higher oil prices are compounded by rising prices of fertilizers, wheat, coal, and other products.

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Subsidies

Rizal Commercial Banking Corporation chief economist Michael Ricafort said increasing subsidies for transportation and agriculture is the “most acceptable” intervention to mitigate the inflationary effects of higher global oil prices.

Ricafort added that targeting sectors would also help the government manage both its fiscal position and consumers’ needs, as opposed to suspending taxes, which would erode government revenues.

However, ING Bank Manila senior economist Nicholas Mapa said that while subsidies may help, the upcoming price hikes will likely be larger.

The government intends to double the P2.5 billion in fuel vouchers that it approved for jeepney drivers. Tricycle drivers are not covered, as they have their own separate budget. But the allocation for tricycle drivers is facing a legal obstacle, as they are said to be under local government units and not the Department of Transportation.

For Union Bank of the Philippines chief economist Carlo Asuncion, the amount allocated for subsidies may not be enough.

“Full subsidy is out of the question and may be too expensive. It is a difficult balance, at this point. If we can still afford more targeted help, why not do it more?”

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Suspending taxes

Lawmakers are proposing the suspension of taxes on select petroleum products. The measure may cost the government close to P100 billion in revenues.

Asuncion said suspending oil taxes should be “last on the policy changes list.”

“Suspending oil taxes will not just subsidize the most vulnerable ones, but also the ones who can afford, which is inefficient,” he said.

Mapa said that while suspending taxes would be the easiest and most effective way to deliver immediate relief to consumers across the board, it would erode government revenues.

“[W]ith the government’s fiscal position in a very precarious state, we doubt authorities would consider this lest they run the risk of a credit rating downgrade,” Mapa said. 

“Any of these measures (suspending taxes and subsidies), however, will not be able to fully offset the impact of the crisis as a suspension of a few pesos would pale in comparison to the magnitude of fuel hikes on the way,” he added.

Working from home

Mapa said maintaining work-from-home arrangements may lower demand for fuel products.

But so far, the economic team has been cool to similar proposals.

For instance, business process outsourcing companies in economic zones called for an extension of work-from-home arrangements, but the government thumbed down the appeal, saying that returning to offices would help the economy.

“The [work-from-home] arrangement is only a time-bound, temporary measure adopted during the surge of the COVID-19 pandemic. Given the increasing vaccination rate of Filipinos nationwide, we can now undertake safe measures for physical reporting of employees, including those working in the IT-BPM (information technology-business process management) firms operating within ecozones and freeports,” said Finance Secretary Carlos Dominguez III. – Rappler.com

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author

Ralf Rivas

A sociologist by heart, a journalist by profession. Ralf is Rappler's business reporter, covering macroeconomy, government finance, companies, and agriculture.