Wed | Jan 23, 2019

IMF official examines drop in oil price on PetroCaribe members

Published:Friday | March 20, 2015 | 12:00 AM

A SENIOR official of the International Monetary Fund (IMF) says the impact of the drop in oil prices globally will affect recipient countries under the PetroCaribe facility differently, but indicated that Haiti may be the most vulnerable.

"Governments receiving large flows and without alternative financing sources, like in Nicaragua and Haiti, would be most affected, although less so than they would have been in a world of higher oil prices," said Adrienne Cheasty, the deputy director in the Western Hemisphere Department of the IMF.

Cheasty said governments that have built buffers, like Guyana, or that have alternative financing sources, like the Dominican Republic and Jamaica, should be affected less.

"Belize would be particularly affected as the lower oil prices negatively impact the value of its exports of crude oil," she said.

PetroCaribe is an oil alliance of many Caribbean states with Venezuela to purchase oil on conditions of preferential payment. Caracas has assured PetroCaribe members that the aid will continue.

The system allows for the purchase of oil at market value, a portion of which is paid upfront based on a scale linked to the price of the oil, while the rest is converted to a long-term loan repayable in 17-25 years.

Cheasty, whose publications focus on fiscal deficit measurement, fiscal-financial issues, and natural resource management, said the lost income from the oil price drop for Venezuela has caused analysts to question whether PetroCaribe support will continue.

Oil prices have dropped to below US$50 a barrel from a high of over US$100 a barrel in June last year.

"The private sector should see disposable income and profits increase: application of countries' current pricing mechanisms would lead to full or near-full pass-through to consumer prices in about two-thirds of the region by end-2015," said the IMF official.

Regarding the impact on the public sector, however, she said the reduction or discontinuation of PetroCaribe financing would leave some governments cash-strapped.

"If resources are not recycled from the private to the public sector in the form of financing or reductions in energy subsidies, some governments could be forced to discontinue social or investment programmes," Cheasty said, adding that nearly all countries would face some additional fiscal pressures.

"Some public spending programmes may be particularly affected. Even if PetroCaribe continues, the decline in financing will require new financing or adjustment of around 0.8 per cent of GDP on average. Nicaragua and Haiti, lacking market access, ample reserves, or deep domestic financial markets, may need to adjust the most. Guyana and St Kitts and, to a lesser extent, Jamaica have built buffers to offset the impact."

She said that were the PetroCaribe arrangement to end, deficits are projected to increase in Antigua, Dominica, Grenada, Haiti, Jamaica, and Nicaragua to the extent that governments take over unfunded social programmes or infrastructure projects.

"A couple of countries with energy subsidies, notably Haiti, plan to offset the additional cost by recovering foregone revenue on the taxation of fuel products. In sum, the drop in oil prices is more complex for members of PetroCaribe than for other oil importers. Like others, their countries will gain," said Cheasty.

"But their governments may nonetheless lose. Mainly sweet, but a little sour," she added.