Deficit and inflation, the effects of raising gasoline prices

Deficit and inflation, the effects of raising gasoline prices

As previously announced, the government will increase the price of gasoline. The Minister of Finance, José Antonio Ocampo, reported that from October they will begin to make gradual increases of $200 each month. In other words, a total of three increases would be made during this year for $600 in total. Likewise, the minister maintained that the increases will not include diesel.

(Why there is a deficit in the fund that stabilizes the price of gasoline).

This decision seeks to close the gap between the local price and the international parity price. According to information from the Ministry of Mines and Energy, during August, in the case of gasoline, this ranged between $5,500 and $5,900, although other calculations indicate that it could be $8,000. In the case of diesel, to reach the international price, the gap is between $9,000 and $12,000.

José Ignacio López, director of Economic Research at Corficolombiana, pointed out that the hike for the remainder of the year corrects 10% of the gap in the gasoline deficit.

“We would be closing 10% of half the gap, that is, only 5% of the total deficit”, Lopez noted. This means that if the Fuel Price Stabilization Fund (Fepc) did not exist, the values ​​of gasoline and diesel would be in those higher proportions. However, in the midst of the high volatility scenario that has led oil to be above US$100 per barrel, this fund has covered these differences, so that the State has acquired a debt, mainly with Ecopetrol.

(ABC of the increase in gasoline: reasons why the adjustment is necessary).

Taking into account that this year three increases could be made (October, November and December), the price would reach more than $10,000 in 11 cities, as evidenced in the graph. This is based on the prices published for the 15 main cities in July by the Ministry of Mines and Energy, when the last increase was made..

Likewise, the national average could reach $9,750 at the end of the year.


With this measure, a gradual path of increases would begin, which are intended to prevent the debt by the Fepc from continuing to expand. Calculations by the Autonomous Committee of the Fiscal Rule (Carf) indicate that this year a $38 billion deficit could be caused and the next year the figure would be similar.

The government is considering another factor in making a decision regarding fuels: inflation. The Ministry of Finance estimated that for every $1,000 that the price of the two energy sources rose, inflation would climb 0.65%. If it is taken into account that in August it stood at 10.84% ​​in its annual data, the government’s decision becomes more relevant. López explained that this year’s increases could lead to an additional 40 basis points in inflation associated with these increases.

Andrés Velasco, technical director of Carf, pointed out that the adjustments are necessary to ease the government’s finances. However, for the debt generated this year, the correction would be marginal, of $600,000 million, compared to the deficit, which exceeds the extra collection sought by the Tax Reform. In other words, each $200 increase would generate a decrease in the deficit of approximately $200,000 million.

An estimate by the Committee indicates that if this increase in gasoline alone continues in a sustained manner each month and is made to the same magnitude next year, that is, 15 months of increase, the deficit would be reduced by $9 billion, which would reach $29.5 billion. And although it is an important reduction, the fact is that the debt is still very high, given that the Budget contemplates $19 billion to cover this debt, so the additional $10 billion will have to come from other sources.

(Price of gasoline: the increase in October will be 200 pesos).

However, the leader of the Treasury stated that it is likely that the next year, the increases will be stronger, depending on how inflation evolves.

“I think that the next month we will start with small increases initially, so as not to affect inflation, which is very high, and the next year, when other items of inflation begin to drop, make the adjustment a little faster,” Ocampo stated.


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