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IMF official examines drop in oil price on PetroCaribe and the Caribbean

IMF official examines drop in oil price on PetroCaribe and the Caribbean

Posted by Jose Traboulsi on March 19, 2015

 A senior official of the International Monetary Fund (IMF) says the impact of the drop in oil prices globally will affect member countries of the PetroCaribe grouping differently, even though Haiti could be among those most affected.

Adrienne Cheasty, the Deputy Director in the Western Hemisphere Department of the IMF, said if PetroCaribe were to cease, the impact would differ across member countries.

“Governments receiving large flows and without alternative financing sources, like in Nicaragua and Haiti, would be most affected, although less so than they would have been in a world of higher oil prices.”

She said governments that have built buffers, like Guyana, or that have alternative financing sources, like the Dominican Republic and Jamaica should be affected less.

“Belize would be particularly affected as the lower oil prices negatively impact the value of its exports of crude oil,” Cheasty said, noting that so far, Venezuela has assured PetroCaribe members that the aid will continue.

PetroCaribe is an oil alliance of many Caribbean states with Venezuela to purchase oil on conditions of preferential payment. The payment system allows for the purchase of oil at market value for five to 50 per cent up front with a grace period of one or two years with the remainder being paid through a 17-25 year financing agreement.

Cheasty, whose publications focus on fiscal deficit measurement, fiscal-financial issues, and natural resource management, said the lost income from the oil price drop for Venezuela has caused analysts to question whether PetroCaribe support will continue.

She said the oil price drop will impact the public and private sectors differently.  Oil prices have dropped to below US$50 a barrel from a high of over US$100 a barrel in June last year.

“The private sector should see disposable income and profits increase: application of countries’ current pricing mechanisms would lead to full or near full pass-through to consumer prices in about two thirds of the region by end-2015.”

But she said that the reduction or stop of PetroCaribe financing will leave some governments cash-strapped.

“If resources are not recycled from the private to the public sector in the form of financing or reductions in energy subsidies, some governments could be forced to discontinue social or investment programmes,” she said, adding nearly all countries would face some additional fiscal pressures.

“Some public spending programmes may be particularly affected. Even if PetroCaribe continues, the decline in financing will require new financing or adjustment of around 0.8 per cent of GDP (gross domestic product) on average.

“Nicaragua and Haiti, lacking market access, ample reserves, or deep domestic financial markets, may need to adjust the most. Guyana and St Kitts and to a lesser extent Jamaica have built buffers to offset the impact.”

She said in the case of a stop, deficits are projected to increase in Antigua, Dominica, Grenada, Haiti, Jamaica, and Nicaragua to the extent that governments take over unfunded social programmes or infrastructure projects.

“A couple of countries with energy subsidies, notably Haiti, plan to offset the additional cost by recovering foregone revenue on the taxation of fuel products.

“In sum, the drop in oil prices is more complex for members of PetroCaribe than for other oil importers. Like others, their countries will gain. But their governments may nonetheless lose. Mainly sweet, but a little sour,” Cheasty added.

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