## _wp0771

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---

### Introduction and scope
- Large increase in international fuel prices during 2003–06 posed challenges for developing and emerging market economies where governments significantly influence domestic fuel prices and social safety nets tend to be poorly developed.
- Paper reviews responses to international fuel price increases in terms of:
  - pass-through to domestic fuel prices,
  - adjustments to fuel price and taxation regimes,
  - changes in fuel price subsidies.
- Key finding: only half of the developing and emerging market countries in the sample appear to have fully passed-through the increase in international fuel prices over the past three years.

### Change in international fuel prices (Table 1)
- Crude oil prices: US$0.41 per liter; Percent change 128.0
- Gasoline: US$0.61 per liter; Percent change 140.7
- Kerosene: US$0.61 per liter; Percent change 126.7
- Diesel: US$0.61 per liter; Percent change 142.1
- Note: Increase during end-2003 to June 2006. The crude oil price is the average spot prices for Dated Brent, WTI, and the Dubai Fateh. The prices for the other fuels are the average fob prices for Rotterdam, New York, Gulf Coast, Los Angeles and Singapore.

### Pass-through: methodology and caveats
- Pass-through definition and measurement:
  - For net oil importers: pass-through calculated with respect to relevant regional fob prices (Rotterdam, Singapore, U.S.).
  - For net oil exporters: pass-through calculated with respect to the world price of crude oil proxied by average spot prices for Dated Brent, WTI, and Dubai Fateh.
  - Pass-through defined as ratio of absolute changes since December 2003 in the retail price of fuel and the local currency price of the relevant fuel import product; formula uses end-2003 to mid-2006 observations and captures exchange rate and price changes.
- Caveats:
  - No allowance made for transport, distribution and marketing costs (typically 1–2 percent).
  - Exchange rate movements can distort pass-through.
  - Contract pricing (versus spot) may make calculated pass-through somewhat overstated.

### Empirical findings on pass-through (Table 2, Figures 1–2)
- Gasoline:
  - About 26 out of 44 countries fully or more than fully passed-on the increase in import prices for gasoline.
  - Average pass-through ratio for sample: 0.96.
  - Pass-through averaged 0.46 in net oil exporting countries and 1.09 in net oil importing countries.
  - Smallest pass-through countries (retail prices decreased or only slightly increased): Lebanon, Bangladesh, Argentina, Egypt, Azerbaijan.
  - G7 average pass-through during 2003–06: 1.05; USA: 0.89 (IEA data). Note: other U.S. sources suggest pass-through closer to one.
- Diesel and Kerosene:
  - Sample sizes: diesel 39 countries; kerosene 29 countries.
  - About half of countries fully passed on diesel and kerosene price increases.
  - Average kerosene pass-through: 0.83 (mid-2006).
  - India and Republic of Congo had kerosene prices frozen since 2003 as of mid-2006.
- Table 2 averages (post-tax retail prices; latest observation first half 2006):
  - Gasoline: Average 0.96
  - Kerosene: Average 0.83
  - Diesel: Average 1.07
  - Net oil importers: Gasoline 1.09; Kerosene 0.91; Diesel 1.15
  - Net oil exporters: Gasoline 0.46; Kerosene 0.43; Diesel 0.70
  - Regional averages (selected):
    - AFR Gasoline 1.06 Kerosene 1.07 Diesel 1.11
    - APD Gasoline 1.05 Kerosene 0.37 Diesel 0.83
    - EUR Gasoline 1.25 Diesel 1.54
    - MCD Gasoline 0.56 Kerosene 0.78 Diesel 0.78
    - WHD Gasoline 1.00 Kerosene 0.92 Diesel 1.30
  - G-7 countries average: 1.11; USA: 0.89
  - Countries in sample (excluding G7): number of observations—Gasoline 44; Kerosene 29; Diesel 39.
- Pre-tax pass-through generally lower than post-tax, implying tax changes:
  - Example: full pre-tax pass-through for gasoline occurred in 16 out of 35 countries with data.

### Cross-country price dispersion and levels
- Retail gasoline prices (first half 2006) ranged from US$0.22 a liter in Egypt to US$1.96 a liter in Turkey.
- Dispersion (standard deviation) doubled from 0.26 to 0.5 between 2003 and 2006.
- Retail prices in many countries remain well below international levels despite large ad hoc increases (examples: Yemen, Indonesia).
- Retail fuel prices generally much lower in oil producing countries than in net oil importers.

### Pricing mechanisms and associations (Table 3, Figure 3)
- Pricing mechanism categories and sample averages:
  - Ad hoc: 21 countries; Average price 0.61 US$ per liter (2003), 0.98 US$ per liter (2006); Price pass-through 0.83
  - Automatic: 8 countries; Average price 0.56 US$ per liter (2003), 0.84 US$ per liter (2006); Price pass-through 1.00
  - Liberalized: 15 countries; Average price 0.70 US$ per liter (2003), 1.03 US$ per liter (2006); Price pass-through 1.13
- Findings:
  - Ad hoc regimes, especially where automatic formulas were suspended, are prone to prices that imply subsidization.
  - Liberalized regimes associated with highest retail fuel prices and highest pass-through.
  - In 2006, average retail prices in liberalized countries were about 20 percent higher than in countries with automatic mechanisms.
  - Examples of prolonged price freezes in ad hoc regimes: Indonesia (end-2002 to March 2005), Egypt (until April 2006), Ecuador (frozen since mid-2003).
  - Automatic mechanisms were suspended in seven countries to limit retail price increases.
  - Ghana moved from ad hoc to automatic; Turkey from automatic to fully liberalized.
  - No examples of countries suspending liberalized regimes in favor of ad hoc adjustments.

### Domestic petroleum product subsidies — measurement and magnitudes (Table 4)
- Subsidy types:
  - Explicit subsidies: direct fiscal transfers/compensations.
  - Implicit subsidies: absorbed by national oil companies or quasi-fiscal costs.
- Examples of explicit subsidies (Est. 2003, 2005, Proj. 2006; percent of GDP):
  - Argentina: 0.0, 0.2, 0.2
  - Azerbaijan: 5.1, 2.8, 1.9
  - Bolivia: 0.6, 0.8, 1.3
  - Cameroon: 0.0, 0.2, 0.3
  - Congo, Republic of: 0.8, 1.0, 1.0
  - Dominican Republic: ..., 0.5, 0.4
  - Ghana: 0.2, 0.9, 0.7
  - Honduras: ..., ..., 0.6
  - Indonesia: 1.5, 4.2, 2.0
  - Jordan: 0.0, 5.8, 1.2
  - Lebanon: ..., 0.1, 0.1
  - Nigeria: 0.0, 0.0, 1.0
  - Pakistan: 0.1, 0.2, ...
  - Senegal: ..., 0.6, 0.8
  - Sri Lanka: ..., 0.8, ...
  - Yemen, Republic of: 5.0, 9.2, 8.5
- Examples of implicit subsidies (Est./Proj.; percent of GDP):
  - Armenia: 0.0, 0.0, 1.0
  - Azerbaijan: 10.0, 13.9, 10.4
  - Bangladesh: ..., 1.0, ...
  - Bolivia: 1.7, 5.2, 6.6
  - Cameroon: 0.1, 0.0, ...
  - Colombia: 1.2, 1.6, ...
  - Dominican Republic: ..., 0.2, 0.3
  - Ecuador: 1.4, 3.6, ...
  - Egypt: 3.9, 4.1, 6.2
  - Ethiopia: ..., 0.7, ...
  - Gabon: 0.4, 1.6, 2.8
  - Nigeria: 1.6, 2.2, ...
  - Sri Lanka: ..., 1.0, ...
- Fiscal cost and incidence (2006):
  - Explicit fuel subsidies ranged from 0.1 percent (Lebanon) to 8.5 percent (Yemen) of GDP in 2006, and averaged 1.5 percent of GDP (smaller than the 2 percent registered in 2005).
  - Implicit subsidies (measured for six countries in 2006) ranged from 0.3 percent (the Dominican Republic) to 10.4 percent of GDP (Azerbaijan), and averaged 3.9 percent of GDP (higher than the 3 percent observed in 2005).
  - Combined explicit and implicit subsidies examples:
    - Azerbaijan: combined subsidies projected to reach 12.3 percent of GDP in 2006.
    - Bolivia: combined subsidies were 7.9 percent of GDP; implicit subsidies in Bolivia increased threefold in the period considered.
- Distributional incidence:
  - The top 20 percent of households received, on average, about 42 percent of the total subsidy.
  - The bottom 20 percent received less than 10 percent.
  - Kerosene subsidies: the top 60 percent of households received more than 57 percent of kerosene subsidies.
- Observations:
  - Implicit subsidies often borne initially by national oil companies without explicit budget compensation; sizes often not well known.
  - Subsidies are poorly targeted and regressive; example cited: richest 20 percent received six times more in fuel subsidy per person than poorest third (World Bank 2006 estimate for Venezuela).
  - Subsidies distort price signals, resource allocation, and can encourage rent-seeking and smuggling.

### Country examples and notable outcomes
- Jordan:
  - Oil subsidies were twice as large as budgeted in 2005 despite two retail price increases in 2005.
  - Jordan previously received oil from Iraq at below world market prices but now imports at the world price.
- Yemen:
  - Reduction in fuel subsidies is part of the government’s economic strategy, but price increases in 2005 were scaled back following violent public protests.
  - The level of fuel subsidies projected for 2006 is greater than Yemen’s budgeted health expenditures.
- Indonesia:
  - Low initial retail fuel prices meant the share of government subsidies doubled from 2003 to 2005, despite a doubling of average fuel prices in 2005.
  - Estimated subsidy of 3.4 percent of GDP in 2005 was higher than budgeted expenditures for health and education.
  - For 2006, fuel subsidies were lowered to 2 percent of GDP, while electricity subsidies doubled as tariffs were not adjusted in line with the fuel price increase.
- Azerbaijan:
  - Estimated lower budgeted subsidies in 2006 achieved by restricting budgeted transfers to the national oil company; with retail fuel prices frozen, subsidies were moved off-budget to be borne by the national oil company.

### Strategies to reduce petroleum product subsidies — recommended combination
- A strategy is most likely to succeed if it combines:
  - Liberalizing domestic petroleum product prices, or instituting a robust automatic adjustment formula.
  - Combining price increases with a well-publicized package of targeted measures to mitigate the impact on the poor, with at least some measures having immediate impact.
  - Making transparent and publicizing the costs and beneficiaries of the present system of subsidies.
  - Identifying priority public expenditures better targeted to poor and middle class constituencies that could be financed with budgetary savings from reducing fuel subsidies.
  - Getting the timing and size of price increases right.

### Setting prices — mechanisms and practical considerations
- Preferred approach:
  - Keep prices liberalized or make suppliers compete for the market in a context of supporting institutional arrangements.
  - Moving to price liberalization often requires substantial preparation (e.g., expiration of refinery concession conventions, privatization or commercialization of suppliers, liberalization of import and distribution).
  - Strengthen regulatory framework and capacity to detect and discourage anti-competitive behavior.
- Administrative pricing:
  - If political difficulties preclude liberalization, set prices administratively using an appropriate benchmark and degree of smoothing.
  - For importers, domestic prices should generally be based on the cost, insurance and freight import market price plus local taxes, fees, and margins.
  - For exporters, domestic prices should generally be based on the market export price.

### Price adjustment rules and international practices (selected)
- Most effective smoothing rules balance retail price smoothing and fiscal risk: short moving-average rules (three-month, or possibly six), and/or a max-min rule with automatic updating of the max-min price band.
- Country-practice examples:
  - Dominica: reviews retail price every month on the basis of a four-week moving average of import market prices.
  - Sri Lanka: pricing adjustment formula adopted in 2003; suspended in early 2004, capping price increases and decreases at SLRS2 per month.
  - Gabon (suspended) trigger: change prices when administered import price deviated by more than 4 percent.
  - Bolivia: asymmetric trigger of 5 percent for upward adjustments and 20 percent for downward adjustments.
  - Turkey (1998–2004): frequent adjustments with a 3 percent band (1.5 percent above or below the existing price) and averaging.

### Protecting the poor — impacts and mitigation
- Identification of real income effects:
  - Direct effect: higher prices paid by households for petroleum consumption (e.g., kerosene, gasoline).
  - Indirect effect: higher prices of other goods and services as producers pass on fuel input cost increases.
- Empirical PSIA results (Coady and others 2006):
  - Total (direct plus indirect) impact of increasing prices to levels implied by automatic formulae on household real incomes ranged from 1–9 percent for average price increases of 31–68 percent.
  - On average, a 50 percent increase in domestic prices resulted in a 5 percent decrease in household real incomes.
  - The indirect effect is typically larger than the direct effect, with most indirect impact arising from pass-through to food and transportation costs.
  - Distributional pattern:
    - Overall effect tends to be slightly regressive.
    - Direct effect tends to be neutral or regressive (kerosene price increases affect lower income households relatively more).
    - Indirect effect varies from slightly regressive to slightly progressive.
  - Existing relative price levels in studied countries:
    - Gasoline prices were already 28–60 percent above international parity.
    - Diesel prices were 60–87 percent of international parity.
    - Kerosene prices were 53-88 percent of international parity.
- Mitigating measures and targeting:
  - Eliminating or substantially reducing subsidies can free budgetary savings to finance better targeted programs for the poorest households and still leave funds available for other priorities.
  - Simple geographic targeting can concentrate extra social expenditures on households in the poorest areas but risks excluding poor households in other areas; reducing undercoverage without leakage requires finer targeting methods, such as means-based approaches.

### Box 2 — Mitigating measures: country experience and program design
- Ghana:
  - Eliminated fees for attending primary and junior-secondary school.
  - Expanded primary health care programs concentrated in the poorest areas through Community Health Compound Scheme.
  - Expanded and expedited investment in mass urban transport.
  - Expanded a rural electrification scheme.
- Indonesia:
  - Cash transfer program to 16 million poor families: each family receives Rp.300,000 (about US$30) every three months; full annual cost estimated at nearly 0.7 percent of GDP.
  - Identification of poor households uses a “proxy-means score” by the Central Statistics Bureau.
  - Beneficiary cards and receipt coupons delivered by post office; remote areas receive cash in village.
  - Some budgetary savings from reducing subsidies reallocated to education, health and infrastructure programs.
  - Initially kerosene subsidy remained at two-thirds of the world price; subsequent reduction followed transfer program implementation.
- Jordan:
  - Increased minimum wage and salaries of low-paid government employees.
  - One-time bonus to low-income government employees and pensioners.
  - Maintained an electricity lifeline tariff at current low levels.
  - Cash transfers provided to other low income households.
  - Announced plan to increase funding to the National Aid Fund with World Bank assistance.
- Immediate mitigation program design options:
  - Reduce or eliminate user charges for education and health services in poorest areas.
  - Temporarily expand public works programs.
  - Provide extra funds for informal social assistance through community, religious, or NGO networks.
  - Targeting approaches: means-testing; community targeting.
  - Trade-offs between cash transfers and in-kind fuel transfers: cash gives flexibility; in-kind preferred politically but has higher administrative costs.

### Gradual subsidy removal, use of savings, and political economy
- Gradual elimination while enhancing targeting capacity may be best where immediate political constraints exist, acknowledging trade-off of lower immediate budgetary savings.
- Phasing down subsidies unevenly across products can reduce trade-off in the short run (example: maintain kerosene subsidies temporarily) but should not be maintained over medium term as products are substitutes.
- Budgetary savings can be used to:
  - Expand access to education and health services.
  - Expand rural road network and mass urban transport.
  - Expand access to electricity in rural areas.
- Building political support:
  - Transparency: identify explicit and implicit subsidies; bring subsidies on budget.
  - Public awareness: explain costs and benefits of reform and compensation programs.
  - Use savings well and publicize uses.
  - Depoliticize pricing via liberalization or transparent automatic formulas.
  - Timing: windows include post-election periods or times of economic strength.
  - Regional buy-in: consider revenue-sharing implications in oil-exporting countries.

### Selected key country data highlights (Attachment 1 — post-tax retail prices and pass-through; last observation Quarter 2 of 2006 unless noted)
- Cameroon: Gasoline 1.07; Kerosene 0.68; Diesel 1.00; Gasoline pass-through 0.83
- Congo, D.R. of: Gasoline 1.05; Kerosene 1.04; Diesel 1.04; Gasoline pass-through 1.34; Kerosene pass-through 1.57; Diesel pass-through 1.35; Price pass-through 14.9
- Ghana: Gasoline 0.92; Kerosene 0.69; Diesel 0.83; Gasoline pass-through 1.45; Kerosene pass-through 0.90; Diesel pass-through 1.35; Price pass-through 47.5
- India: Gasoline 1.04; Kerosene 0.20; Diesel 0.71; Gasoline pass-through 1.08; Kerosene pass-through 0.00; Diesel pass-through 0.72; Price pass-through 55.1
- Indonesia: Gasoline 0.48; Kerosene 0.21; Diesel 0.46; Gasoline pass-through 0.95; Kerosene pass-through 0.42; Diesel pass-through 0.82; Price pass-through 15.0
- Lebanon: Gasoline 0.71; Kerosene 0.36; Kerosene pass-through -0.17
- Turkey: Gasoline 1.96; Kerosene pass-through 1.55; Diesel 2.30; Diesel pass-through 2.78; Price pass-through 67.6
- Yemen, Republic of: Gasoline 0.30; Kerosene 0.17; Diesel 0.17; Gasoline pass-through 0.47; Kerosene pass-through 0.36; Diesel pass-through 0.34; Price pass-through 3.6
- Brazil: Gasoline 1.27; Diesel 0.92; Gasoline pass-through 1.14; Diesel pass-through 2.92

### Findings and policy recommendations (summary)
- Only half the sample countries managed to implement a full domestic pass-through of international price changes through the middle of 2006, underscoring implementation difficulties.
- Recommended pragmatic approach in times of international price increases:
  - Liberalize domestic petroleum product price setting or institute a robust automatic adjustment formula.
  - Combine price increases with a well-publicized package of targeted mitigation measures for the poor, of which at least some have immediate impact.
  - Implement a transparent pricing framework, publicize costs and beneficiaries of the present system, use savings well, and explain their use to the public.
- Additional policy question for future research:
  - Whether the degree of pass-through depends on the level of international prices and their speed of increase, noting that declining world prices in late 2006 and early 2007 created situations where fuel-related taxes and levies (if kept unchanged) led to a revenue windfall or substantially reduced subsidies.

*Source: _wp0771 - References (IMF staff analysis).*

### References..............................................................................................................

### _wp0771 - References

### Introduction
- Large increase in international fuel prices during 2003–06 (Table 1) posed challenges for developing and emerging market economies where governments significantly influence domestic fuel prices and social safety nets tend to be poorly developed.
- Paper reviews responses to international fuel price increases in terms of:
  - pass-through to domestic fuel prices,
  - adjustments to fuel price and taxation regimes,
  - changes in fuel price subsidies.
- Key finding: only half of the developing and emerging market countries in the sample appear to have fully passed-through the increase in international fuel prices over the past three years.

### Change in international fuel prices (Table 1)
- Crude oil prices: US$0.41 per liter; Percent change 128.0
- Gasoline: US$0.61 per liter; Percent change 140.7
- Kerosene: US$0.61 per liter; Percent change 126.7
- Diesel: US$0.61 per liter; Percent change 142.1
- Note: Increase during end-2003 to June 2006. The crude oil price is the average spot prices for Dated Brent, WTI, and the Dubai Fateh. The prices for the other fuels are the average fob prices for Rotterdam, New York, Gulf Coast, Los Angeles and Singapore.

### Pass-through of international to domestic retail prices
- Methodology:
  - For net oil importers: pass-through calculated with respect to relevant regional fob prices (Rotterdam, Singapore, U.S.).
  - For net oil exporters: pass-through calculated with respect to the world price of crude oil proxied by average spot prices for Dated Brent, WTI, and Dubai Fateh.
  - Pass-through defined as ratio of absolute changes since December 2003 in the retail price of fuel and the local currency price of the relevant fuel import product; formula uses end-2003 to mid-2006 observations and captures exchange rate and price changes.
- Caveats:
  - No allowance made for transport, distribution and marketing costs (typically 1–2 percent).
  - Exchange rate movements can distort pass-through.
  - Contract pricing (versus spot) may make calculated pass-through somewhat overstated.

### Empirical findings on pass-through (Table 2, Figures 1–2)
- Gasoline:
  - About 26 out of 44 countries fully or more than fully passed-on the increase in import prices for gasoline.
  - Average pass-through ratio for sample: 0.96.
  - Pass-through averaged 0.46 in net oil exporting countries and 1.09 in net oil importing countries.
  - Smallest pass-through countries (retail prices decreased or only slightly increased): Lebanon, Bangladesh, Argentina, Egypt, Azerbaijan.
  - G7 average pass-through during 2003–06: 1.05; USA: 0.89 (IEA data). Note: other U.S. sources suggest pass-through closer to one.
- Diesel and Kerosene:
  - Sample sizes: diesel 39 countries; kerosene 29 countries.
  - About half of countries fully passed on diesel and kerosene price increases.
  - Average kerosene pass-through: 0.83 (mid-2006).
  - India and Republic of Congo had kerosene prices frozen since 2003 as of mid-2006.
- Table 2 averages (post-tax retail prices; latest observation first half 2006):
  - Gasoline: Average 0.96
  - Kerosene: Average 0.83
  - Diesel: Average 1.07
  - Net oil importers: Gasoline 1.09; Kerosene 0.91; Diesel 1.15
  - Net oil exporters: Gasoline 0.46; Kerosene 0.43; Diesel 0.70
  - Regional averages (selected): AFR Gasoline 1.06 Kerosene 1.07 Diesel 1.11; APD Gasoline 1.05 Kerosene 0.37 Diesel 0.83; EUR Gasoline 1.25 Diesel 1.54; MCD Gasoline 0.56 Kerosene 0.78 Diesel 0.78; WHD Gasoline 1.00 Kerosene 0.92 Diesel 1.30
  - G-7 countries average: 1.11; USA: 0.89
  - Countries in sample (excluding G7): number of observations—Gasoline 44; Kerosene 29; Diesel 39.
- Pre-tax pass-through generally lower than post-tax, implying tax changes:
  - Example: full pre-tax pass-through for gasoline occurred in 16 out of 35 countries with data.

### Cross-country price dispersion and levels
- Retail gasoline prices (first half 2006) ranged from US$0.22 a liter in Egypt to US$1.96 a liter in Turkey.
- Dispersion (standard deviation) doubled from 0.26 to 0.5 between 2003 and 2006.
- Retail prices in many countries remain well below international levels despite large ad hoc increases (examples cited: Yemen, Indonesia).
- Retail fuel prices generally much lower in oil producing countries than in net oil importers.

### Pricing mechanisms and associations (Table 3, Figure 3)
- Pricing mechanism categories and sample averages:
  - Ad hoc: 21 countries; Average price 0.61 US$ per liter (2003), 0.98 US$ per liter (2006); Price pass-through 0.83
  - Automatic: 8 countries; Average price 0.56 US$ per liter (2003), 0.84 US$ per liter (2006); Price pass-through 1.00
  - Liberalized: 15 countries; Average price 0.70 US$ per liter (2003), 1.03 US$ per liter (2006); Price pass-through 1.13
- Findings:
  - Ad hoc regimes, especially where automatic formulas were suspended, are prone to prices that imply subsidization.
  - Liberalized regimes associated with highest retail fuel prices and highest pass-through.
  - In 2006, average retail prices in liberalized countries were about 20 percent higher than in countries with automatic mechanisms.
  - Examples of prolonged price freezes in ad hoc regimes: Indonesia (end-2002 to March 2005), Egypt (until April 2006), Ecuador (frozen since mid-2003).
  - Automatic mechanisms were suspended in seven countries to limit retail price increases.
  - Ghana moved from ad hoc to automatic; Turkey from automatic to fully liberalized.
  - No examples of countries suspending liberalized regimes in favor of ad hoc adjustments.

### Domestic petroleum product subsidies (Table 4)
- Subsidies types:
  - Explicit subsidies: direct fiscal transfers/compensations.
  - Implicit subsidies: absorbed by national oil companies or quasi-fiscal costs.
- Examples of explicit subsidies (Est. 2003, 2005, Proj. 2006; percent of GDP):
  - Argentina: 0.0, 0.2, 0.2
  - Azerbaijan: 5.1, 2.8, 1.9
  - Bolivia: 0.6, 0.8, 1.3
  - Cameroon: 0.0, 0.2, 0.3
  - Congo, Republic of: 0.8, 1.0, 1.0
  - Dominican Republic: ..., 0.5, 0.4
  - Ghana: 0.2, 0.9, 0.7
  - Honduras: ..., ..., 0.6
  - Indonesia: 1.5, 4.2, 2.0
  - Jordan: 0.0, 5.8, 1.2
  - Lebanon: ..., 0.1, 0.1
  - Nigeria: 0.0, 0.0, 1.0
  - Pakistan: 0.1, 0.2, ...
  - Senegal: ..., 0.6, 0.8
  - Sri Lanka: ..., 0.8, ...
  - Yemen, Republic of: 5.0, 9.2, 8.5
- Examples of implicit subsidies (Est./Proj.; percent of GDP):
  - Armenia: 0.0, 0.0, 1.0
  - Azerbaijan: 10.0, 13.9, 10.4
  - Bangladesh: ..., 1.0, ...
  - Bolivia: 1.7, 5.2, 6.6
  - Cameroon: 0.1, 0.0, ...
  - Colombia: 1.2, 1.6, ...
  - Dominican Republic: ..., 0.2, 0.3
  - Ecuador: 1.4, 3.6, ...
  - Egypt: 3.9, 4.1, 6.2
  - Ethiopia: ..., 0.7, ...
  - Gabon: 0.4, 1.6, 2.8
  - Nigeria: 1.6, 2.2, ...
  - Sri Lanka: ..., 1.0, ...
- Sources: IMF staff estimates using authorities' data.
- Observations and implications:
  - Implicit subsidies often borne initially by national oil companies without explicit budget compensation; sizes often not well known.
  - Example cited from literature: average domestic fuel subsidy in major oil-exporting countries in 1999 was 3½ percent of GDP (Gupta and others, 2003).
  - Subsidies are poorly targeted and regressive: higher-income households receive more subsidy per person because they consume more fuel (World Bank 2006 estimate for Venezuela: richest 20 percent received six times more in fuel subsidy per person than poorest third).
  - Subsidies distort price signals, resource allocation, and can encourage rent-seeking and smuggling.

### Policy implications and reform considerations
- Mixed international experience suggests a pragmatic approach to domestic fuel price reform:
  - Incorporate phased increases in domestic prices to bring them to international levels.
  - At minimum, ensure a robust retail fuel pricing mechanism is in place (automatic or liberalized) to reduce ad hoc freezes and hidden subsidies.
  - Implement reforms aimed at protecting the poorest in the community when removing or reducing subsidies.
- Mechanisms used to limit retail price increases include:
  - Controls on retail prices,
  - Reductions in fuel taxes,
  - Regulations reducing profit margins or transport costs,
  - Informal price agreements backed by export taxes (example: Argentina).
- Risks of maintaining subsidies:
  - Fiscal strain,
  - Poor targeting favoring richer households,
  - Resource misallocation,
  - Smuggling and rent-seeking.

*Source: _wp0771 - References (IMF staff analysis).*

### 0.1 percent (Lebanon) to 8.5 percent

### _wp0771 - 0.1 percent (Lebanon) to 8.5 percent

### Fiscal cost and incidence of fuel subsidies
- Explicit fuel subsidies ranged from 0.1 percent (Lebanon) to 8.5 percent (Yemen) of GDP in 2006, and averaged 1.5 percent of GDP (smaller than the 2 percent registered in 2005).  
- Implicit subsidies (measured for six countries in 2006) ranged from 0.3 percent (the Dominican Republic) to 10.4 percent of GDP (Azerbaijan), and averaged 3.9 percent of GDP (higher than the 3 percent observed in 2005).  
- Combined explicit and implicit subsidies examples:
  - Azerbaijan: combined subsidies projected to reach 12.3 percent of GDP in 2006.  
  - Bolivia: combined subsidies were 7.9 percent of GDP; implicit subsidies in Bolivia increased threefold in the period considered.  
- Distributional incidence:
  - The top 20 percent of households received, on average, about 42 percent of the total subsidy.  
  - The bottom 20 percent received less than 10 percent.  
  - Kerosene subsidies: the top 60 percent of households received more than 57 percent of kerosene subsidies.

### Country examples and notable outcomes
- Jordan:
  - Oil subsidies were twice as large as budgeted in 2005 despite two retail price increases in 2005.  
  - Jordan previously received oil from Iraq at below world market prices but now imports at the world price.  
- Yemen:
  - Reduction in fuel subsidies is part of the government’s economic strategy, but price increases in 2005 were scaled back following violent public protests.  
  - The level of fuel subsidies projected for 2006 is greater than Yemen’s budgeted health expenditures.  
- Indonesia:
  - Low initial retail fuel prices meant the share of government subsidies doubled from 2003 to 2005, despite a doubling of average fuel prices in 2005.  
  - Estimated subsidy of 3.4 percent of GDP in 2005 was higher than budgeted expenditures for health and education.  
  - For 2006, fuel subsidies were lowered to 2 percent of GDP, while electricity subsidies doubled as tariffs were not adjusted in line with the fuel price increase.  
- Azerbaijan:
  - One exception to the lack of subsidy reductions: estimated lower budgeted subsidies in 2006 achieved by restricting budgeted transfers to the national oil company; with retail fuel prices frozen, subsidies were moved off-budget to be borne by the national oil company.

### Explicit versus implicit subsidies — measurement and implications
- Implicit subsidies are harder to measure and often not reported; they include:
  - Costs borne by public entities such as oil producing companies not typically reported in the budget.  
  - Tax expenditures, such as tax exemptions for oil products.  
  - The difference between retail prices and import parity prices.  
- The low oil price pass-through for oil producers in the sample indicates many producers provide implicit price subsidies, though data are incomplete across the survey.

### Strategies to reduce petroleum product subsidies (summary of recommended combination)
- Review finding: a strategy is most likely to succeed if it combines:
  - Liberalizing domestic petroleum product prices, or instituting a robust automatic adjustment formula.  
  - Combining price increases with a well-publicized package of targeted measures to mitigate the impact on the poor, with at least some measures having immediate impact.  
  - Making transparent and publicizing the costs and beneficiaries of the present system of subsidies.  
  - Identifying priority public expenditures better targeted to poor and middle class constituencies that could be financed with budgetary savings from reducing fuel subsidies.  
  - Getting the timing and size of price increases right.

### Setting prices — mechanisms and practical considerations
- Preferred approach:
  - Keep prices liberalized or make suppliers compete for the market in a context of supporting institutional arrangements.  
  - Moving to price liberalization often requires substantial preparation (e.g., expiration of refinery concession conventions, privatization or commercialization of suppliers, liberalization of import and distribution).  
  - Strengthen regulatory framework and capacity to detect and discourage anti-competitive behavior.  
- Administrative pricing:
  - If political difficulties preclude liberalization, set prices administratively using an appropriate benchmark and degree of smoothing.  
  - For importers, domestic prices should generally be based on the cost, insurance and freight import market price plus local taxes, fees, and margins.  
  - For exporters, domestic prices should generally be based on the market export price.

### Price adjustment rules and international practices (Box 1 and smoothing)
- Bingham, Daniel and Federico (2001) conclusion:
  - Most effective smoothing rules balance retail price smoothing and fiscal risk: short moving-average rules (three-month, or possibly six), and/or a max-min rule with automatic updating of the max-min price band.  
- Country-practice examples:
  - Moving average: Dominica reviews retail price every month on the basis of a four-week moving average of import market prices.  
  - Caps: Sri Lanka adopted a pricing adjustment formula in 2003; the mechanism was suspended in early 2004, capping price increases and decreases at SLRS2 (about 2 U.S. cents) per month.  
  - Triggers: Gabon’s (suspended) mechanism would change prices when administered import price deviated from import market price by more than 4 percent. Bolivia used an asymmetric trigger of 5 percent for upward adjustments and 20 percent for downward adjustments.  
  - Price bands / max-min rules: Chile and Peru have price stabilization schemes updating ex-refinery prices regularly; Turkey (1998–2004) used frequent adjustments with a 3 percent band (1.5 percent above or below the existing price) and averaging.

### Protecting the poor — impacts and mitigation
- Identification of real income effects:
  - Higher domestic petroleum prices affect household real incomes via:
    - Direct effect: higher prices paid by households for petroleum consumption (e.g., kerosene, gasoline).  
    - Indirect effect: higher prices of other goods and services as producers pass on fuel input cost increases.  
- Empirical PSIA results (Coady and others 2006):
  - Total (direct plus indirect) impact of increasing prices to levels implied by automatic formulae on household real incomes ranged from 1–9 percent for average price increases of 31–68 percent.  
  - On average, a 50 percent increase in domestic prices resulted in a 5 percent decrease in household real incomes.  
  - The indirect effect is typically larger than the direct effect, with most indirect impact arising from pass-through to food and transportation costs.  
  - Distributional pattern:
    - Overall effect tends to be slightly regressive (percentage decrease in real income higher for lower income households).  
    - Direct effect tends to be neutral or regressive (kerosene price increases affect lower income households relatively more).  
    - Indirect effect varies from slightly regressive to slightly progressive.  
  - Existing relative price levels:
    - Gasoline prices were already 28–60 percent above international parity in most countries studied.  
    - Diesel prices were 60–87 percent of international parity.  
    - Kerosene prices were 53-88 percent of international parity.
- Mitigating measures and targeting:
  - Much of the fuel subsidies accrue to higher income households, so eliminating or substantially reducing subsidies can free budgetary savings to finance better targeted programs for the poorest households and still leave funds available for other priorities.  
  - Simple geographic targeting can concentrate extra social expenditures on households in the poorest areas but risks excluding poor households in other areas; reducing undercoverage without leakage requires finer targeting methods, such as means-based approaches.

*Source: _wp0771 - 0.1 percent (Lebanon) to 8.5 percent*

### Box 2. Mitigating Measures—Country Experience

### Box 2. Mitigating Measures—Country Experience

### Country experiences: Ghana, Indonesia, Jordan
- Ghana
  - Fees for attending primary and junior-secondary school were eliminated.
  - Extra funds were made available for primary health care programs concentrated in the poorest areas through the existing Community Health Compound Scheme.
  - Investment in the provision of mass urban transport was expanded and expedited.
  - Extra funds were made available to expand a rural electrification scheme.
- Indonesia
  - An unprecedented cash transfer program to 16 million poor families was implemented. Under the program, each family receives Rp.300,000 (about US$30) every three months. The full annual cost of the program is estimated at nearly 0.7 percent of GDP.
  - Identification of poor households is based on an existing approach used by the Central Statistics Bureau, which calculates a “proxy-means score” for potentially poor households based on observable household socio-economic characteristics.
  - Beneficiary cards and receipt coupons are printed and delivered by the post office. Eligible households with access to a post office collect their cash quarterly on designated days. Those in remote areas without such access receive cash in their village.
  - Some budgetary savings from reducing subsidies were reallocated to existing education, health and infrastructure programs that disproportionately benefit low- and middle-income households.
  - Initially, the subsidy on kerosene was not substantially reduced, and its price remained at two-thirds of the world price. However, subsequent to the implementation of the transfer program, the kerosene subsidy has been substantially reduced.
- Jordan
  - The minimum wage was increased, as were the salaries of low-paid government employees.
  - A one-time bonus was given to low-income government employees and pensioners.
  - An electricity lifeline tariff was maintained at current low levels—electricity access is almost universal.
  - Cash transfers were provided to other low income households.
  - The government announced a plan to increase funding to the National Aid Fund as part of a program to improve the design and implementation of this national safety net program with World Bank assistance.

### Immediate mitigation measures and program design
- Rapid actions that can protect the poorest while longer-term systems are developed:
  - Reduce or eliminate user charges for education and health services in the poorest rural and urban areas.
  - Temporarily expand public works programs to protect household real incomes and expand social and physical asset bases of poor households.
  - Provide extra funds (in cash or kind) for informal social assistance programs delivered through existing networks of community, religious, or NGO bodies.
- Targeting approaches described:
  - Means-testing (eligibility based on income or on a predicted income based on household socio-economic characteristics).
  - Community targeting (eligibility determined by community actors, such as teachers or community leaders).
- When a social safety net exists, budgetary savings can expand programs (e.g., expanding eligibility for cash or ration card transfers and increasing their value).
- Choice between cash transfers and in-kind fuel transfers:
  - Cash transfers give households more flexibility.
  - Governments often prefer in-kind fuel transfers for political reasons.
  - Administrative costs of in-kind transfers are probably relatively high due to logistical requirements.

### Electricity lifeline tariffs and access considerations
- Reforming electricity price levels and structure can mitigate higher average tariffs for poorer households with access to electricity.
- Many countries charge or mandate a lower residential “lifeline tariff” for electricity consumption below a certain “lifeline limit.”
- Potential for such reforms to benefit the poor is limited when the poor lack access to electricity; the middle class can benefit substantially.

### Gradual subsidy removal and sequencing
- Without better targeted expenditures, a gradual elimination of subsidies while enhancing targeting capacity may be the best strategy, acknowledging a trade-off in lower immediate budgetary savings.
- Trade-off can be reduced by phasing down subsidies unevenly across products (example: maintain kerosene subsidies for a year or two while reducing others), but:
  - Such price differentials between petroleum products should not be maintained over the medium term as the products are substitutes and even kerosene is mainly consumed by the better off.
  - Removing subsidies on kerosene could help end rationing and supply shortages.

### Using budgetary savings for services and infrastructure
- Budgetary savings from subsidy reduction can be used to expand access to and quality of social and infrastructure services:
  - Expand access to education and health services.
  - Expand the rural road network and mass urban transport.
  - Expand access to electricity in rural areas.
- Investments that improve quality can benefit middle class as well as poor households, helping generate political support for reforms.
- Investments in transport and energy sectors can contribute to improving energy efficiency and reduce vulnerability to oil price shocks.

### Building political support for subsidy reform
- Key elements of a comprehensive package to garner political support:
  - Transparency.
  - Educating and consulting the public (especially the often vocal middle class).
  - Using the savings well.
  - Depoliticizing petroleum prices.
  - Getting the timing right.
  - Obtaining regional buy-in, when revenues are shared.
- Transparency
  - Identify explicit and implicit subsidies through sound public financial management practices.
  - Bring subsidies on budget and make them complete for funding, like other government expenditures.
  - Transparency is especially important for oil exporters where the subsidy is typically implicit (revenue forgone by not charging international prices domestically).
  - Example practices: Pakistan transparently reported transfers to oil marketing companies in budget reports; Nigeria is considering incorporating estimates of the implicit subsidy in its budget reports.
- Public awareness
  - Make the public aware of costs and implications of the current system and benefits of reform.
  - Highlight that subsidized prices promote smuggling, shortages, black market activity, and corruption.
  - Convince the public that compensation programs will remain in place for an extended period, regardless of government.
- Use of savings
  - Assure the public that savings will be used well and embed subsidy reform within a broad reform package.
  - Example: Indonesian campaign linking savings from petroleum price increases to a cash compensation program for the poor.
- Depoliticizing petroleum prices
  - Liberalization is the cleanest method; transparent and automatic price setting mechanisms can substantially depoliticize domestic price setting.
  - Example: South Africa publishes the product pricing formula and time series of prices and quantities online.
  - Example: Ghana established the National Petroleum Authority in May 2005 to monitor pricing mechanism implementation.
- Timing
  - Gradual, pre-determined phasing out can allow time to build support and design protective measures, but implies higher fiscal costs and risk of reversal.
  - Post-election periods or times of economic strength can offer windows for reform (example: Ghana’s early 2005 experience).
- Regional buy-in
  - In oil-exporting countries with revenue-sharing, removing implicit subsidies could increase resources transferred to some regions and change regional incentives (example: Nigeria).

### Findings and policy recommendations
- Only half the sample countries managed to implement a full domestic pass-through of international price changes through the middle of 2006, underscoring implementation difficulties.
- Recommended pragmatic approach in times of international price increases:
  - Liberalize domestic petroleum product price setting or institute a robust automatic adjustment formula.
  - Combine price increases with a well-publicized package of targeted mitigation measures for the poor, of which at least some have immediate impact.
  - Implement a transparent pricing framework, publicize costs and beneficiaries of the present system, use savings well, and explain their use to the public.
- Additional policy question for future research:
  - Whether the degree of pass-through depends on the level of international prices and their speed of increase, noting that declining world prices in late 2006 and early 2007 created situations where fuel-related taxes and levies (if kept unchanged) led to a revenue windfall or substantially reduced subsidies.

*Source: Box 2. Mitigating Measures—Country Experience (excerpt).*

### REFERENCES

### _wp0771 - REFERENCES

### References
- Bingham, Benedict, James Daniel, and Giulio Federico, 2001, “Domestic Petroleum Price Smoothing in Developing and Transition Countries,” IMF Working Paper 01/75 (Washington: International Monetary Fund).
- Coady, David, Moataz El-Said, Robert Gillingham, Kangni Kpodar, Paulo Medas, and David Newhouse, 2006, “The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka,” IMF Working Paper 06/247 (Washington: International Monetary Fund).
- ____, Margaret Grosh, and John Hoddinott, 2004, Targeting of Transfers in Developing Countries: Review of Lessons and Experience, The World Bank and the International Food Policy Research Institute.
- Esfahani, Hadi, 2002, “A Political Economy Model of Resource Pricing with Evidence from the Fuel Market,” Department of Economics, University of Illinois at Urbana-Champaign, Mimeograph.
- Gupta, Sanjeev, Benedict Clements, Kevin Fletcher and Gabriela Inchauste, 2003, “Issues in Domestic Petroleum Pricing in Oil-Producing Countries,” in Fiscal Policy Formulation and Implementation in Oil-Producing Countries, editors Jeffrey M. Davis, Rolando Ossowski, and Annalisa Fedelino (Washington: International Monetary Fund).
- ____, Marijn Verhoeven, Robert Gillingham, Christian Schiller, Ali Mansoor, Juan Pablo Cordoba, 2000, “Equity and Efficiency in the Reform of Price Subsidies: A Guide for Policymakers,” IMF Pamphlet. Published: August 21, 2003 IMF Working Paper 02/140.
- World Bank, 2006, Coping with Higher Fuel Prices, Energy Sector Management Assistance Program Report No. 323/06 (Washington).

### Attachment 1: Key Data — Post-tax retail fuel price (US$ per liter) and Price pass-through (selected country entries)
- Note: Source: FAD economists and India desk. 1/ Latest information available in Quarter 2 of 2006.
- 1 Cameroon M Ad hoc — Gasoline 1.07; Kerosene 0.68; Diesel 1.00; Gasoline pass-through 0.83
- 2 Congo, D.R. of X Ad hoc — Gasoline 1.05; Kerosene 1.04; Diesel 1.04; Gasoline pass-through 1.34; Kerosene pass-through 1.57; Diesel pass-through 1.35; Price pass-through (last column) 14.9
- 3 Congo, Republic of X Ad hoc — Gasoline 0.90; Kerosene 0.50; Diesel 0.64; Gasoline pass-through 0.43; Kerosene pass-through 0.00; Diesel pass-through 0.39; Price pass-through 20.4
- 4 Ethiopia M Ad hoc — Gasoline 0.74; Kerosene 0.39; Diesel 0.54; Gasoline pass-through 0.77; Kerosene pass-through 0.53; Diesel pass-through 0.75; Price pass-through 35.0
- 5 Gabon X Ad hoc — Gasoline 0.91; Kerosene 0.48; Diesel 0.71; Gasoline pass-through 0.21; Kerosene pass-through 0.20; Diesel pass-through 0.21; Price pass-through 43.2
- 6 Ghana M Automatic — Gasoline 0.92; Kerosene 0.69; Diesel 0.83; Gasoline pass-through 1.45; Kerosene pass-through 0.90; Diesel pass-through 1.35; Price pass-through 47.5
- 7 Kenya M Liberalized — Gasoline 1.04; Kerosene 0.74; Diesel 0.90; Gasoline pass-through 1.03; Kerosene pass-through 1.20; Diesel pass-through 1.06; Price pass-through 26.6
- 8 Malawi M Ad hoc — Gasoline 1.13; Kerosene 0.92; Diesel 1.14; Gasoline pass-through 1.26; Kerosene pass-through 1.19; Diesel pass-through 1.53; Price pass-through 56.8
- 9 Nigeria X Ad hoc — Gasoline 0.51; Gasoline pass-through 0.84; Price pass-through 0.0
- 10 Senegal M Automatic — Gasoline 1.10; Kerosene 0.75; Diesel 1.00; Gasoline pass-through 0.98; Kerosene pass-through 1.53; Diesel pass-through 1.53
- 11 South Africa M Automatic — Gasoline 1.00; Kerosene 0.71; Diesel 0.94; Gasoline pass-through 1.58; Kerosene pass-through 1.34; Diesel pass-through 1.65; Price pass-through 28.0
- 12 Tanzania M Liberalized — Gasoline 1.01; Kerosene 0.88; Diesel 0.96; Gasoline pass-through 1.23; Kerosene pass-through 1.49; Diesel pass-through 1.10; Price pass-through 38.0
- 13 Uganda M Liberalized — Gasoline 1.19; Kerosene 0.92; Diesel 1.03; Gasoline pass-through 1.41; Kerosene pass-through 1.13; Diesel pass-through 1.05; Price pass-through 33.1
- 14 Zambia M Ad hoc — Gasoline 1.52; Kerosene 1.12; Diesel 1.31; Gasoline pass-through 1.53; Kerosene pass-through 1.79; Diesel pass-through 1.30; Price pass-through 41.0
- 15 Bangladesh M Ad hoc — Gasoline 0.91; Kerosene 0.65; Diesel 0.65; Gasoline pass-through 0.09; Kerosene pass-through -0.93; Diesel pass-through 0.43
- 16 Cambodia M Liberalized — Gasoline 0.96; Kerosene 0.68; Diesel 0.75; Gasoline pass-through 1.36; Kerosene pass-through 0.98; Diesel pass-through 1.08; Price pass-through 24.9
- 17 China M Ad hoc — (price cells blank in table)
- 18 India M Ad hoc — Gasoline 1.04; Kerosene 0.20; Diesel 0.71; Gasoline pass-through 1.08; Kerosene pass-through 0.00; Diesel pass-through 0.72; Price pass-through 55.1
- 19 Indonesia M Ad hoc — Gasoline 0.48; Kerosene 0.21; Diesel 0.46; Gasoline pass-through 0.95; Kerosene pass-through 0.42; Diesel pass-through 0.82; Price pass-through 15.0
- 20 Lao PDR M Automatic — Gasoline 0.78; Diesel 0.68; Gasoline pass-through 1.41; Price pass-through 33.3
- 21 Philippines M Liberalized — Gasoline 0.73; Kerosene 0.70; Diesel 0.66; Gasoline pass-through 1.32; Kerosene pass-through 1.33; Diesel pass-through 1.16; Price pass-through 25.9
- 22 Sri Lanka M Ad hoc — Gasoline 0.85; Kerosene 0.37; Diesel 0.49; Gasoline pass-through 1.17; Kerosene pass-through 0.39; Diesel pass-through 0.52
- 23 Timor Leste X Liberalized — Gasoline 0.80
- 24 Albania M Liberalized — Gasoline 1.24; Gasoline pass-through 1.28; Price pass-through 50.4
- 25 Bosnia & Herz. M Liberalized — Gasoline 1.28; Gasoline pass-through 1.29
- 26 Hungary M Liberalized — Gasoline 0.82; Gasoline pass-through 0.78
- 27 Kosovo M Liberalized — Gasoline 1.39; Gasoline pass-through 1.39; Kerosene pass-through 0.90; Diesel pass-through 0.93
- 28 Russia X Liberalized — Gasoline 0.62; Gasoline pass-through 0.60; Kerosene pass-through 0.89; Diesel pass-through 1.17; Price pass-through 30.8
- 29 Serbia M Ad hoc — Gasoline 1.69; Kerosene pass-through 1.44; Diesel pass-through 1.41; Gasoline pass-through 1.45; Price pass-through 50.5
- 30 Turkey M Liberalized — Gasoline 1.96; Kerosene pass-through 1.55; Diesel 2.30; Diesel pass-through 2.78; Price pass-through 67.6
- 31 Ukraine M Ad hoc — Gasoline 0.78; Gasoline pass-through 0.72; Kerosene pass-through 0.74; Diesel pass-through 1.37; Price pass-through 31.3
- 32 Afghanistan M Ad hoc — Gasoline 0.56; Gasoline pass-through 0.54; Kerosene pass-through 0.23; Diesel pass-through 0.82
- 33 Armenia M Liberalized — Gasoline 0.83; Kerosene 0.83; Diesel 0.70; Gasoline pass-through 0.88; Kerosene pass-through 0.77; Diesel pass-through 1.09; Price pass-through 34.8
- 34 Azerbaijan X Ad hoc — Gasoline 0.41; Kerosene 0.41; Diesel 0.41; Gasoline pass-through 0.20; Kerosene pass-through 1.11; Diesel pass-through 1.01; Price pass-through 49.6
- 35 Egypt M Ad hoc — Gasoline 0.22; Kerosene 0.13; Diesel 0.13; Gasoline pass-through 0.17; Kerosene pass-through 0.21; Diesel pass-through 0.21
- 36 Georgia M Liberalized — Gasoline 0.87; Kerosene 0.93; Diesel 0.83; Gasoline pass-through 1.05; Kerosene pass-through 1.54; Diesel pass-through 1.28
- 37 Jordan M Ad hoc — Gasoline 0.85; Kerosene 0.44; Diesel 0.44; Gasoline pass-through 1.03; Kerosene pass-through 0.76; Diesel pass-through 0.79
- 38 Kyrgyz Republic M Liberalized — Gasoline 0.58; Diesel 0.48; Gasoline pass-through 0.48; Diesel pass-through 0.69; Price pass-through 30.8
- 39 Lebanon M Automatic — Gasoline 0.71; Kerosene 0.36; Kerosene pass-through -0.17
- 40 Pakistan M Ad hoc — Gasoline 0.96; Kerosene 0.59; Diesel 0.54; Gasoline pass-through 1.24; Kerosene pass-through 0.69; Diesel pass-through 0.75; Price pass-through 36.6
- 41 Yemen, Republic of X Ad hoc — Gasoline 0.30; Kerosene 0.17; Diesel 0.17; Gasoline pass-through 0.47; Kerosene pass-through 0.36; Diesel pass-through 0.34; Price pass-through 3.6
- 42 Argentina X Liberalized — Gasoline 0.65; Kerosene 0.47; Diesel 0.64; Gasoline pass-through 0.09; Kerosene pass-through 0.08; Diesel pass-through 0.83; Price pass-through 46.4
- 43 Bolivia X Ad hoc — Gasoline 0.46; Kerosene 0.34; Diesel 0.21; Price pass-through 36.4
- 44 Brazil M Liberalized — Gasoline 1.27; Diesel 0.92; Gasoline pass-through 1.14; Diesel pass-through 2.92
- 45 Colombia X Automatic — Gasoline 0.64; Kerosene 0.47; Diesel 0.74; Gasoline pass-through 0.65; Price pass-through 38.4
- 46 Dominica M Automatic — (price cells blank)
- 47 Dominican Republic M Liberalized — Gasoline 1.03; Kerosene 0.83; Diesel 0.79; Gasoline pass-through 1.78; Kerosene pass-through 1.49; Diesel pass-through 1.29; Price pass-through 33.4
- 48 Ecuador X Ad hoc — (price cells blank)
- 49 Honduras M Ad hoc — Gasoline 3.33; Kerosene 2.27
- 50 Peru M Liberalized — Gasoline 1.25; Kerosene 0.91; Diesel 0.85; Gasoline pass-through 1.64; Kerosene pass-through 1.28; Diesel pass-through 0.99; Price pass-through 42.0
- 51 Uruguay M Ad hoc — Gasoline 1.45; Kerosene 0.89; Diesel 0.95; Gasoline pass-through 1.40; Kerosene pass-through 0.84; Diesel pass-through 1.14; Price pass-through 43.9

- Tax as a percent of gasoline retail prices (2006) — table header present; detailed tax shares listed in source table (2006 and 1/2003 - mid2006 columns).

### Attachment II. Domestic Petroleum Pricing Practices, 2005–May 2006 — Selected country notes on pricing mechanism and recent changes
- Cameroon — Ad hoc. Automatic mechanism suspended. Formula not used systematically.
- Congo, D.R. of — Ad hoc. Formula not used systematically. Adjusted by 10 percent in 8 increments in 2005.
- Congo, Republic of — Ad hoc. A June 2005 decree increased jet fuel prices.
- Ethiopia — Ad hoc. After suspending the automatic pricing mechanism in December 2004, prices were adjusted in May 2006, with further adjustments expected to bring domestic prices in line with international prices.
- Gabon — Ad hoc. Automatic adjustment mechanism suspended since 2002.
- Ghana — Automatic. February 2005: Introduction of a petroleum price adjustment mechanism, resulting in price increases in February, August and October.
- Kenya — Liberalized. No changes in pricing mechanism.
- Malawi — Ad hoc. No, with price increases in June and August 2005.
- Nigeria — Ad hoc. August 2005: increased retail prices by 25 percent.
- Senegal — Automatic. Every thirty days. The automatic price adjustment mechanism was suspended for fuel oil used by the main public electricity company during July-October 2005.
- South Africa — Automatic Monthly. No changes in pricing mechanism.
- Tanzania — Liberalized. No changes in pricing mechanism.
- Uganda — Liberalized. No changes in pricing mechanism.
- Zambia — Ad hoc. No changes in pricing mechanism.
- Bangladesh — Ad hoc. No changes in pricing mechanism.
- Cambodia — Liberalized. No changes in pricing mechanism.
- China — Ad hoc. Prices set by NDRC with a lag based on average spot prices (NY, Rotterdam and Singapore); reluctant to adjust prices. This squeezes margins for refiners.
- India — Ad hoc. Gasoline and diesel prices have increased by a cumulative 16 percent in 2005.
- Indonesia — Ad hoc. Retail fuel prices were increased by over 100 percent during 2005. There has been no change in domestic retail prices for subsidized petroleum products in 2006.
- Lao People's Dem. Rep. — Automatic Monthly. No changes in pricing mechanism.
- Philippines — Liberalized. No changes in pricing mechanism.
- Sri Lanka — Ad hoc. A monthly pricing formula, with a cap of Rs 2 per month for each product, was suspended in early 2004.
- Timor Leste — Liberalized. No changes in pricing mechanism.
- Albania, Bosnia & Herzegovina, Hungary, Kosovo — Liberalized. No changes in pricing mechanism.
- Russia — Liberalized. No changes in the price mechanism, although pressures for establishing a mechanism to control prices has been reported in the press.
- Serbia — Ad hoc. Prices increased in July and September 2005.
- Turkey — Liberalized. The price mechanism was changed from automatic price adjustment mechanism to liberalized price mechanism in 2005 – The new legislation liberalizes the oil market by allowing licensed refineries and retailers to determine their ceiling prices that are based on the actual costs and profit margins under the liberated market conditions. The pump prices, then are reached by inclusion of Special Consumption Tax, freight, profit margins of retailers and Value Added Tax.
- Ukraine — Ad hoc. No changes in pricing mechanism.
- Afghanistan — Automatic Monthly. Mechanism varies according to geographical area.
- Armenia — Liberalized. No changes in pricing mechanism.
- Azerbaijan — Ad hoc. No changes since November 2004.
- Egypt — Ad hoc. No changes in pricing mechanism.
- Georgia — Liberalized. No changes in pricing mechanism.
- Jordan — Ad hoc. Increases in July 2005; September 2005 and April 2006.
- Kyrgyz Republic — Liberalized. No changes in pricing mechanism.
- Lebanon — Ad hoc. No changes in pricing mechanism.
- Pakistan — Ad hoc. Automatic formula frozen in May 2004. Ad-hoc changes since then include an increase in gasoline prices by 24 percent, and diesel and kerosene increased by 17 percent since May 2005.
- Yemen, Republic of — Ad hoc. Diesel, gasoline, and kerosene prices were raised by an average 144 percent in July 2005. Increase rolled back to 99 percent following civil unrest.
- Argentina — Liberalized. No changes in pricing mechanism. (Footnote 1/: The government pursues price agreements with private companies, imposes export taxes to divert supplies to the domestic market and has threatened to increase export taxes if domestic prices are raised.)
- Bolivia — Ad hoc. Automatic formula tried and abandoned during 2004. Main domestic fuel prices frozen since end-2004 after 10 percent increase for gasoline and diesel. Prices of crude oil frozen at US$ 27 a barrel in late 2004.
- Brazil — Liberalized. No changes in pricing mechanism.
- Colombia — Automatic Monthly. Medium term reference oil price for formula was increased.
- Dominica — Automatic Every two months. Social pressures are building for increasing targeting subsidies. No Change.
- Dominican Republic — Automatic Weekly. No changes in pricing mechanism.
- Ecuador — Ad hoc. No changes since 2004.
- Honduras — Ad hoc. Formula suspended and reintroduced several times during 2006.
- Peru — Liberalized. No changes in pricing mechanism.
- Uruguay — Ad hoc. Adjustment twice a year if inflation higher than 10 percent, once otherwise.

*Source: _wp0771 - REFERENCES (Attachment 1 and Attachment II, data as provided in the source content).*

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