Fuel Subsidies Are Modified

The finance ministry published its Agreement 150/22, which modifies the methodology for determining the fiscal stimuli regarding the special tax on production and services (IEPS) applicable to fuels like gasoline or diesel. Fuel subsidies have been an important tool for the government to tackle inflationary pressures, though some analysts worry about the measure’s sustainability.

According to the statement, the National Institute of Statistics and Geography (INEGI), reported a variation of 8.7 percent in the National Consumer Price Index (INPC) of September 2022. The modification is made on the update of the base price for the formula to calculate the fiscal stimuli for fuels. The Ministry of Finance stated that the subsidy’s objective is to mitigate the volatility in prices caused by an unstable international political climate, the reactivation of the economy after COVID-19 and the war in Ukraine. According to the ministry, these subsidies have mitigated inflation and price volatility caused by the changing oil costs.

The Ministry of Finance also recognized that Mexico has been affected by international market trends, hence the INPC’s variation. The increase in prices has a particularly negative impact on the spending power of Mexican households, especially those with lower incomes.

According to INEGI, food costs pressure commodity prices since they are considered for two indexes that calculate inflation. Regarding the Underlying Index, food, beverage and tobacco prices increased by 10.84 percent and service prices increased by 5.35 percent.

This month, the Ministry of Finance reported that Mexico has the third-lowest energy inflation for gasoline, gas and electricity among the OECD members. However, the IMF has stated that the government’s subsidy measure may be both costly and ineffective, and that governments should be more cautious regarding how they grant support to their population to soften the blow of rising food and energy prices. Paolo Mauro, the Director of Fiscal Affairs, IMF, said that keeping the cost of gasoline artificially low is an inefficient way to help people with scarce resources and deprives other sectors affected by the pandemic of much-needed support. 

The finance ministry said that “There is a possibility that a similar scenario [of rising inflation] will occur in 2023, so the update factor for calculating base prices is modified to strengthen actions to protect the purchasing power of the population.” This month, Deputy Minister of Finance Gabriel Yorio discussed the risk of falling oil prices in 2023, but highlighted oil hedges that will shield the 2023 budget. “There may be a global slowdown and then the price may fall, but we have an oil hedge that allows us to shield the budget. Cuts in our spending may not be necessary; we can shield the budget and isolate the impact of the drop in oil prices,” Yorio said at the Finance Commission meeting.