High fuel prices will still hobble the private sector notwithstanding last Friday's reduction in consumption tax on diesel - a move many would consider long overdue.
The government's claim that it would be forfeiting some G$500M every quarter is not telling the whole story. Actually it will likely bring in revenue over and above its budgeted target since the price for fuel is so much higher anyway. (Simple math would tell you that $30 a barrel at 35% is $10.5 while $55 a barrel at 10% is $11.00). It has also received by its own estimates over $200M in extra revenue per month under a fuel marking scheme intended to crack down on smuggling.
They have enjoyed windfall revenue for a number of months at the expense of consumers and especially the private sector and these high fuel prices may well have hurt growth prospects for this year. Every extra dollar the private sector spends on fuel is another it could spend on investment or paying workers or shareholders more.
On a macroeconomic level the fuel bill has been climbing alarmingly in recent years. Annual imports of fuel and lubricants have increased from US$72M in 1998 to US$147M in 2003. The category's percentage of total imports has increased from 11.9% in 1998 to $25% in 2003. This year the bill will undoubtedly be sharply higher reflecting a crude oil price that has gone from under $30 a barrel in January to comfortably over $50 in recent days.
What has Guyana done to mitigate these rising prices? Not much. And a key failure has been its inability to sign a purchase agreement with Venezuela, a saga that has been going on since October 2000.
Under the Caracas Energy Accord, which many Caribbean countries have signed onto, portions of bills for imports are offset as long-term loans. This ranges from five per cent of a bill when the price is no more than US$15 a barrel to 25 per cent when the price is over US$30. The loans are offered at around two per cent per annum with a one-year moratorium. This does not mean lower prices for fuel and Prime Minister Hinds was right in saying recently that the bill would have to be paid later so consumers should not expect savings.
It must also be said that it is not all Guyana's fault that the accord is not yet in place: when the offer was first made to all the Caribbean countries, Venezuela initially appeared ambiguous on whether Guyana was included, setting off a diplomatic spat.
Then Foreign Minister Jose Vicente Rangel had mentioned that Guyana would not be part of the agreement because "we have talks of a different nature." Rangel also referred to the historical use of oil as a weapon.
But by December 29 of that year, Guyana had formally applied to join the agreement and received a copy of the draft pact. And then the matter disappeared for almost a year until on November 30 2001 when Venezuela signalled its willingness to grant Guyana beneficiary status under the accord. President Bharrat Jagdeo signed a framework agreement with President Hugo Chavez during the summit of the Association of Caribbean States on December 12.
On April 1 2002 Chief Executive Officer of the Guyana Energy Agency, Joseph O'Lall said the arrangements for Guyana to access its supplies were now in their final stages.
On November 30 2002, a release from the Foreign Trade Ministry yesterday said that the agreement signed by Jagdeo came into operation "earlier this week when the contract for Purchase (fob) was signed by PDVSA Petroleos, S.A. and the Guyana Embassy in Venezuela."
But the oil strike in Venezuela cut off supplies and on February 23 2003 we were told that it would be months before Guyana could access the oil under the agreement. By August 2003 Prime Minister Sam Hinds said every effort was being made to re-establish supplies. Then in January of this year he said Guyana was trying to negotiate for lower concessionary rates at which Venezuelan oil supplies can be accessed under the accord, explaining the current rates on offer were judged to be too high based on the guidelines of the World Bank and the International Monetary Fund (IMF) which restrict Guyana from entering certain loan and credit agreements.
"We will be bringing this to the attention of the Venezuelans through diplomatic lines to see if some adjustments can be made to value it sufficiently concessional."
He noted on October 9 that at the time the Accord was offered, the arrangements met the World Bank and the International Monetary Fund (IMF) criteria but as interest rates fell, the arrangement lost its concessionary criteria.
If that is the case then at what point did the IMF criteria change and why did Guyana miss out on this opportunity? Judging by the press reports there does not appear to have been a focused and persistent effort to clinch this deal. Now with the fuel bill climbing, how valuable would it have been to offset 25% of that every year and, just like the private sector, use the funds to finance projects that could create valuable jobs.
Stabroek Business understands Mr O'Lall was in Caracas this week to discuss the very issue. It would be a much-needed cushion because there is little doubt that higher oil prices are here to stay.