To Pass (or Not to Pass) Through International Fuel Price Changes to Domestic Fuel Prices in Developing Countries: What Are the Drivers?

IMF Working Papers, September 25, 2020

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Canonical URL: To Pass (or Not to Pass) Through International Fuel Price Changes to Domestic Fuel Prices in Developing Countries: What Are the Drivers?

Authors: Kangni R Kpodar, Patrick A. Imam
Date: September 25, 2020
Research focus: Determinants of whether governments in developing countries allow international fuel price changes to be passed through to domestic fuel prices.
Dataset scope: 109 developing countries from 2000 to 2014.

Pass-through responsiveness:
- The pass-through is higher when changes in international prices are moderate and less volatile.
- Pricing mechanism flexibility allows for higher pass-through.
- Exchange rate depreciation inhibits pass-through.
- Lower retail fuel prices in neighboring countries inhibit pass-through.
Macroeconomic conditions:
- Countries with inflation tend to experience lower pass-through.
- Countries with high public debt exhibit larger pass-through.
Political and environmental factors:
- No evidence that political variables matter with regard to fuel price dynamics in the short-term.
- No evidence that environmental policies matter with regard to fuel price dynamics in the short-term.
Product consistency:
- Findings are consistent across fuel products: gasoline, diesel and kerosene.

Fuel subsidy reform design should account for:
- The degree of international price volatility—moderate, less volatile changes facilitate pass-through.
- The flexibility of domestic pricing mechanisms—greater flexibility supports pass-through.
- Exchange rate trajectories—depreciation can reduce pass-through effectiveness.
- Regional price differentials—lower neighboring retail prices can constrain domestic pass-through.
- Domestic macroeconomic conditions—inflationary environments are likely to dampen pass-through, while high public debt may lead to larger pass-through.
Short-term political or environmental measures are unlikely to materially affect fuel price pass-through according to the econometric evidence.