Belize's Gas Crisis Explained

Gas prices in Belize are high due to a combination of factors, including the country's reliance on fuel imports, the associated international acquisition costs, and the impact of oil price shocks on economic growth. As a net importer of fuel products, Belize is vulnerable to fluctuations in global oil prices, which can have a detrimental effect on its economy. The government has implemented measures such as reducing levies and taxes on fuel to mitigate the impact on consumers, but the high prices remain a challenge for the country. Additionally, the recent invasion of Ukraine by Russia has contributed to fuel price surges globally, affecting Belize as well.

Belize is a net importer of fuel products

The challenge for Belize is how to mitigate the impact of high fuel prices without exacerbating the country's already strained fiscal position. The government has considered various options, including fuel subsidies, which can provide temporary relief but also come with financial costs. Another option is to adjust the taxes charged on fuel products, such as the General Sales Tax (GST) and the Environmental Tax (ET). However, these taxes account for only a small portion of the final pump price, approximately 8%.

The Excise Tax, on the other hand, is a significant factor, making up about 35% of the final price as of January 2022. Unlike the GST and ET, the Excise Tax is a per-unit tax, charged per imperial gallon, and is therefore not influenced by fluctuations in international prices or acquisition costs. This has led to a "hidden subsidy" effect, where the government's decision not to increase the Excise Tax since 2017 has effectively subsidised fuel prices.

The fuel price situation in Belize is further complicated by external factors such as the recent invasion of Ukraine by Russia, which has caused fuel price surges globally. The government is exploring various policy options to minimise the fuel price shock while maintaining budgetary stability. However, the challenge of balancing affordable pump prices with economic growth and fiscal management remains a difficult one.

The impact of high fuel prices is not limited to Belize's economy but also affects its citizens, particularly those who rely on vehicles for transportation. The prices of gasoline and diesel fuel are controlled by the government and tend to be higher compared to neighbouring countries like the United States. This can lead to concerns about the affordability of fuel for both locals and tourists, especially when prices fluctuate or increase.

International prices and acquisition costs

Belize is a net importer of fuel products, with gasoline being the most prominent. As an imported commodity, Belize is subject to international prices and the associated acquisition costs. This dynamic is an indisputable fact and significantly shapes the country's economic landscape.

The reality is that oil price shocks have been known to hinder a country's economic growth prospects. Higher energy costs are often cited as a "downside" risk by economists, and Belize is no exception to this rule. The recent International Monetary Fund (IMF) statement underscores this challenge:

> "Risks to [Belize’s] outlook are substantial and tilted to the downside. A key risk is an escalation of the pandemic. … Inflation could rise further because of second-round effects and higher international energy and food prices."

There is a noticeable inverse correlation between international oil prices (the West Texas Intermediaries, WTI benchmark) and Belize's GDP growth rate. This relationship underscores the delicate balance between international oil prices and the economic health of Belize.

The impact of higher international fuel prices extends beyond the direct costs of acquisition. Energy costs are a significant input cost for firms, and they may pass these increased expenses on to the final consumer. However, this approach is not feasible for all companies, particularly during challenging economic periods such as the COVID-19 pandemic. Moreover, passing on these costs to consumers contributes to inflationary pressures, which, in turn, pose a downside risk to economic growth.

The situation is further complicated by the Belizean government's limited financial flexibility due to a high debt-to-GDP ratio and budget deficit. This fiscal constraint limits the government's ability to intervene directly in fuel pricing.

In conclusion, Belize's reliance on fuel imports exposes it to international price fluctuations and the associated acquisition costs. This dynamic has significant economic implications and presents a complex challenge for the country's policymakers and businesses alike.

Oil price shocks and economic growth

Belize is a net importer of fuel products, with gasoline being the chief among them. As an imported commodity, Belize has to contend with international prices and associated acquisition costs. Oil price shocks have been known to drag on a country’s economic growth prospects. The higher energy costs are often cited as a “downside” risk by economists.

A study on China's economy found that oil price shocks and global economic policy uncertainty (GEPU) have a significant Granger-causing effect on industrial economic growth. The study also found that there is a mutually inhibiting relationship between international oil prices and GEPU, with both responding negatively to each other’s shock. The increase in economic policy uncertainty will suppress Chinese industrial economic policy uncertainty, while oil price shocks promote it.

Another study, which examined the impact of government size on how output and government expenditure respond to oil price shocks in 28 oil-exporting countries between 1990 and 2016, found that if the size of the government is larger, non-oil output growth, in response to a positive oil price shock, tends to be greater, and output volatility higher. This study provides empirical evidence for a direct correlation between government size and macroeconomic stability in oil-exporting countries. The findings imply that fiscal consolidation and economic diversification help to narrow down economic exposure to exogenous oil price shocks and reduce volatility in non-oil output.

A separate paper shows that oil shocks primarily impact economic growth through the conditional variance of growth. The paper compares a range of dynamic models, oil shock measures, and data, finding a robust link between oil shocks and the volatility of economic growth. A new measure of oil shocks is developed and shown to be superior to existing measures, indicating that the conditional variance of growth increases in response to an indicator of local maximum oil price exceedance. The empirical results uncover a large, pronounced asymmetric response of growth volatility to oil price changes. Uncertainty about future growth is considerably lower compared to a benchmark AR(1) model when no oil shocks are present.

Government taxes on fuel products

Belize is a net importer of fuel products, with gasoline being the most prominent. As such, the country is subject to international prices and associated acquisition costs. The government of Belize levies various taxes on fuel products, which can impact the final pump price. These include the General Sales Tax (GST), the Environmental Tax (ET), and the Excise Tax.

The GST and ET are ad valorem taxes, charged as a percentage of the imported value of fuel products. The GST is applied at a flat rate of 12.5%, while the ET is charged at a rate of 3% on all imports, with some exceptions for medicines, food items, and certain types of vehicles.

The Excise Tax, on the other hand, is a per-unit tax charged per imperial gallon of fuel imported. It is the heaviest tax on fuel products, accounting for about 35% of the final pump price as of January 2022. Unlike the GST and ET, the Excise Tax is not directly tied to the fluctuating international prices of fuel, but rather to the quantity of fuel imported. This means that even if fuel prices decrease, the government's revenue from the Excise Tax remains the same, resulting in a higher effective tax rate.

In addition to these taxes, Belize also imposes import duties and revenue replacement duties on certain goods, including some fuel products. These duties can range from 0 to 45%, with an average rate of 20% for commodities.

While the government of Belize has taken steps to reduce the tax burden on fuel products, such as lowering levies on regular fuel and diesel, the complex interplay between fuel prices, taxes, and economic growth presents a challenging situation. The government must balance the need for fiscal prudence with the goal of providing affordable pump prices for its citizens.

Fuel price surges due to the Russia-Ukraine conflict

Belize is a net importer of fuel products, with gasoline being the most prominent. As a result, Belize is vulnerable to fluctuations in international prices and acquisition costs. The conflict between Russia and Ukraine has significantly impacted fuel prices globally, and Belize is no exception.

The invasion of Ukraine by Russia has resulted in a substantial increase in gasoline prices worldwide. Prior to the conflict, gasoline prices were already on the rise, but the situation has exacerbated the issue. As a net importer, Belize is directly affected by these price hikes, which have contributed to the high fuel prices in the country.

Russia is a major exporter of oil, and the conflict has disrupted the global supply of crude oil, which is the main component of gasoline. The reduction in supply, coupled with increased demand, has driven up prices. As of March 2022, the average price of regular gas in the United States had increased by 17% since the Russian invasion, and the trend is similar or even more pronounced in other parts of the world.

In Belize, the impact of the Russia-Ukraine conflict on fuel prices has been significant. The Ministry of Finance announced an increase in the regulated pump price of regular gasoline to $13.50, representing a 66-cent increase compared to the previous shipment. To mitigate the impact on consumers, the Belizean government reduced all levies on regular fuel by 29 cents. Additionally, the government is working on establishing a Fuel Stabilization Mechanism to provide price predictability and protect fiscal targets in the national budget.

The conflict has also affected other sectors, such as food and electronics. Russia is a significant producer of wheat, barley, sunflower seed oil, corn, and palladium, a metal used in semiconductor chip manufacturing. Disruptions in the supply of these commodities have led to increased prices and potential shortages, further contributing to economic challenges globally and in Belize.

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