Thursday, 1 January 2009

Colombia and the Fuel Stabilisation Fund ... Is Uribe Lying to Colombians Again?

The Colombian government this week announced the creation of a stabilisation fund to help cushion the country's finances against violent fluctuations in the prices of oil and fuels. Well ... it sounds OK until we face the reality: prices of gasoline and other fuels in Colombia are just too high.

Domestic fuel prices partly reflect the surge in oil experienced along 2008 (yes .. what a bad year, I know!) and a long-term programme aimed at the dismantling of subsidies. Last month, the central bank said fuel price cuts would reverse years of progress in that area, and recommended staying in course (translation: keeping fuels at current prices.)But those might not be enough and convincing as reasons to keep a gallon close to $3.5 a barrel. Yesterday, one lawyer in Bogota was ranting about the initiative, saying fuels should fall as they did across the globe. We had a couple more beers discussing the issue. I first defended the creation of the fund, saying the fiscal cost of those subsidies are huge and that the fund should help funnel fuel taxes towards other importat things (infrastructure plans, or social spending.) But, after thinking about it more deeply, I must conceed defeat to the lawyer's position.

In a recent posting, I said the measure was prudent. But Javier, as the lawyer is named, is one of many Colombians who fear the money will be used to ramp up fiscal expenditures in the wake of declining tax revenues. Well, we can't give this administration the benfit of the doubt when President Uribe hasn't still openly siad whether he wants to seek a second re-election. Again, the money might be used for electoral reasons, not to help tame fluctuating fuel costs. Looking into the decision more closely, I found out that some derivatives of oil such as asphalt, will fall 35 percent, so, why gasoline has to stay this high? I told the lawyer one of the possible reasons behind the creation of the fund was that Colombia lacks of the necessary refining capacity and that the weakening peso would still make importing oil too costly for Colombians. He laughed (''Are you defending Uribe?,'' he said. I laughed too.) This time, he got me.

The spending record of the Uribe administration isn't the best. I say it because public spending has been outpacing economic growth in real terms in the past three years. And there's no indication he will pare expenditures in 2009. In addition, Congress should have discussed the idea first, instead of the government creating the fund by decree. The lesson here is, beware of the announcements that try to disguise one objective with other. Fuel prices should fall sooner than later, to ease the beleaguered household finances of Colombians -- not the swollen coffers of this administration.