Recent international developments and fuel price adjustments

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Prime Minister of Saint Lucia, Philip Pierre

The following is the text of the address by Prime Minister Philip Pierre, Minister for Finance Economic Development and the Youth Economy on Recent International Developments, delivered March 20, 2022.

My fellow citizens of Saint Lucia, on 26th July 2021 you the people handed us the mandate to manage the affairs of our country. You did so because you accepted our pledge to put you the people first so that together we would advance the development of our country by rescuing it from the mismanagement of the last administration. Our pledge to put you first also meant ensuring that you are informed of and understand the decisions that we as a government take on your behalf, and so this evening I am here to speak with you about some international developments which have serious consequences for all of us.

Over the last year, countries across the world have seen rising imported prices of goods, driven by rapidly recovering demand amidst global supply chain shortages associated with the ongoing COVID-19 pandemic. We, as small open economies, vulnerable to such negative external shocks have not been spared these inflationary pressures. Our consumers have thus faced much higher prices for various items purchased at the supermarkets with the exception of some fuel products.

Over the past 12 months, crude oil prices have been increasing due to a tight global oil market. While supply has been constrained by OPEC and other oil-producing countries (including Russia), there has been an increase in demand as economic activity expanded with more relaxed COVID-19 protocols and increased mobility.

More recently, as a result of mounting international political tensions and the Russian invasion of Ukraine on February 24, 2022, crude oil prices surged to US$123.70 per barrel, the highest since July 2008.

Since then, oil prices have remained above the US$100 per barrel mark. This has placed a strain on consumers in countries where global prices are automatically passed on to the retail market.  The government of Saint Lucia has been shielding these increases from the public by absorbing them itself. It has been doing so by lowering the excise tax on fuel.

Since June 2021, when domestic retail prices were last adjusted, global crude oil prices have risen by 56.8 percent from an average of US$62.36 per barrel to US$109.45 per barrel in March 2022. This has led to significant increases in the imported price (cost, insurance, and freight) for refined fuel products into Saint Lucia. However, as part of its initial response, the government of Saint Lucia decided to absorb these increases and maintained the retail prices for gasoline and diesel stable at the existing price of $13.95 per gallon since June 2021. In order to do so, the government considerably reduced the excise tax rate on these products.

From 2014, the government imposed an Excise Tax of $2.50 per gallon on the price of fuel. This tax was budgeted to generate revenue which was programmed to be utilized in the budget allocation. The revenue generated was used in paying government expenses like Wages and Salaries, Goods and Services, and Transfers.

In 2017, the Excise Tax was increased to $4.00 per gallon by the United Workers Party (UWP) government with the added $1.50 per gallon expected to generate an additional $20 million in revenue. The UWP government justified the increase by indicating that the additional amount was to be spent on the roads development programme.

The increase in the imported price of oil on the global market and the corresponding prices paid at the pump indicates that the government is currently earning less than $4.00 per gallon and in some cases less than $2.50 per gallon on projected Excise Tax revenue.

During the period June 2021 to present, the excise tax rates on gasoline dropped to an average of $2.26 per gallon and as low as $1.18 per gallon, significantly below the budgeted $4.00. Diesel excise tax rates dipped to an average of $3.96 and more recently to $1.84 per gallon. Subsidies on the 20 pound and 22-pound cylinders of cooking gas (LPG) averaged $13.08 and $14.38 per cylinder respectively, during the same period. As a result, Excise Tax revenue collected on gasoline and diesel minus the subsidy of $9.5million on cooking gas is expected to amount to $24million in the fiscal year 2021/22. This means that approximately $22 million less revenue was collected when compared to the $46million budgeted in the year 2021/2022.

Shortfalls in revenue will have serious implications for the government’s already strained cash flow and its ability to meet critical expenditures in areas such as healthcare, education, social assistance, wages and salaries, and debt payments.

Collections from the excise tax on gasoline and diesel are needed to finance government operations, including the provision of supplies to hospitals and health facilities, the management of COVID-19, and the provision of educational equipment and supplies.

If retail prices are kept unchanged, these critical government functions/services may be jeopardized to the extent that the government may have to (i) cut or defer expenditure on vital services, (ii) increase domestic payables which are already in excess of $150.0 million, at July 2021 or (iii) borrow more or increase income tax.

Given the increases in prices in the most recent shipments following the invasion of Ukraine, the government will not only collect zero excise tax revenue from fuel but it will incur a subsidy of $0.73 per gallon on gasoline and $0.81 per gallon on diesel if prices remain the same. This would amount to a subsidy of $1.1 million monthly compared to targeted positive excise tax revenue of $5.2 million. This subsidy will increase further, should international oil prices continue on its upward trend in the short term, if the Russia/Ukraine war escalates and disrupts the global economy even further.

We need revenue not only to provide the needed essential services to the people but to increase resources to the police in the fight against the disturbing crime wave. Only recently, we purchased eleven vehicles but the police are calling for increases in man-power and modern crime detection and enforcement equipment. We all agree that while we demand more from the police we need to provide the tools to enable them to carry out their duties.

I have already announced my intention to increase penalties for firearm offenses as part of a holistic strategy in the fight against crime.

If our government was to adopt the $4.00 per gallon excise taxes as budgeted by the UWP at current prices, the price of gasoline would be $18.68 and diesel $18.76 per gallon.

Government has decided to strike a balance between having to subsidize fuel and protecting the consumer from a very steep increase in prices at the pump.

Effective March 21, 2022, the price of gasoline and diesel will increase by $1.00 from $13.95 to $14.95 per gallon. The government will continue to subsidize the 20 and 22 lbs. cylinder of cooking gas.

We believe this to be the best compromise at this time, which leaves the government with excise tax revenue of only 27 cents per gallon on gas and 19 cents per gallon on diesel much less than the $4.00 excise tax budgeted by the former government.  In these unfortunate times inflicted on us by circumstances beyond our control, the government remains committed to the prudent management of its finances whilst endeavoring to mitigate the anticipated pressures of increases in imported goods. Consumers are therefore urged to adjust their consumption as much as possible to minimize the burden these prices increase will have on them.

My fellow citizens, I implore your cooperation and understanding of this important matter and greatly appreciate your patience and forbearance. We will continue to manage this extraordinary difficult situation, with you the people in mind. We are not alone in this, other countries across the world are grappling with the high prices of goods and services.

Let us all do our part to navigate these turbulent times ahead, together as a unified people with one mission to transform our economy for the benefit of all.

I thank you.

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