HAITI: SUBSIDIZING OIL

C O N F I D E N T I A L SECTION 01 OF 02 PORT AU PRINCE 000874 SIPDIS STATE FOR WHA/CAR, DRL, S/CRS, INR/IAA SOUTHCOM ALSO FOR POLAD STATE PASS AID FOR LAC/CAR TREASURY FOR MAUREEN WAFER E.O. 12958: DECL: 06/12/2018 TAGS: PGOV PREL ECON ENRG HA SUBJECT: HAITI: SUBSIDIZING OIL REF: PORT-AU-PRINCE 00801 Classified By: Ambassador Janet A. Sanderson, reason 1.4 (b) and (d) ¶1. (SBU) Summary: It became public June 7 that the Government of Haiti (GoH) has subsidized fuel through tax relief for oil importers, and has also set price ceilings at the pump, since the end of March. Government economists and the local IMF Resident Representative worry that this policy is unsustainable and flies in the face of sound fiscal management. Government officials worry about Haiti's special vulnerability to energy price inflation. They fear that drastic increases in fuel prices could spark a public outcry and possibly rekindle the kind of social unrest this country experienced in April. However, President Preval has reached out to the one fuel-consuming sector of Haitian society that could threaten the government with strikes: the drivers of group taxis that are the only means of public transportation in the country. End summary. GOH Subsidizing Fuel -------------- ¶2. (SBU) A press article June 10 revealed that the government has subsidized oil products, especially gasoline, to the tune of over 500 million gourdes (USD 13 million) since March 30. The articles in ''Le Nouvelliste'' newspaper indicated that the both the government and oil importers are absorbing these costs. TheQper criticized the current lame duck administration of caretaker Prime Minister Alexis for not being open with the public about these subsidies, which it called ''illegal.'' The country is ''sitting on a bomb that becomes more dangerous each day as oil prices rise on the world market,'' the paper reported. ¶3. (SBU) Ministry of Economy and Finance (MEF) Chief of Staff Jacques Nelson confiQ to econoff June 10 that the government decided late February to subsidize petroleum products due to escalating global oil prices. Nelson emphasized the detrimental impact energy inflation has on Haiti due to its dependence on imported petrol-related products for transport, household use, and utilities. ¶4. (SBU) Nelson stated that the current GOH budget anticipated the rise in oil prices and was not taken by surprise. (Note: This implies that the government already anticipated late last year that it might subsidize oil. End note.) He asserted that the amounts allocated to subsidize petroleum products are "not too important," but did not provide figures on subsidy levels or a clear indication of how the subsidies were implemented -- except to say that the MEF fixed the final price to customers by taking into account ''very complicated'' parameters. ¶5. (SBU) Nelson said that while the petrol subsidies commenced in March, the GOH concluded after the April food riots that it could not afford to ''cope with other riots'' -- alluding to possible unrest if the cost of petroleum-based products rose uncontrollably. ¶6. (SBU) Nelson placed these fuel subsidies in the context of Haiti,s food crisis, stressing the direct impact of fuel prices on food prices, and the importance of fuel to increasing domestic agricultural production - a core component of the GOH policy response to the April riots. Nelson said the government had not subsidized petroleum for a decade, but felt it critical to respond to the impact of rising oil prices on every aspect of Hatian society. ¶7. (SBU) Nelson placed this issue in the context of Hiti,s lack of a legitimate overnment after the April 12 removal of Prime Miister Jacques Edouard Alexis. He admitted that he government is finding it difficult to expedit current affairs in the absence of a Prime Minister Without a Prime Minister, an amended budget canot be presented to Parliament foraction. (Note: We expect that the amended budget will contain additional allocations for oil subsidies. End note) GOH-Imposed Gas Price Ceiling Part of the Policy -------------- --- ¶8. (SBU) Comptroller General Michel Guerrier of DYNASA, one PORT AU PR 00000874 002 OF 002 of four oil importers, complained to econoff June 11 that oil importers are absorbing part of the cost of the GOH subsidy program by dint of GOH-imposed gas price ceilings. He said the tax breaks the GoH has provided over the past two and a half months have not helped to ease the negative cash flow importers are incurring as a result of the daily price fluctuations in the price of oil and the GoH-imposed limitation on what can be charged at the pump. He advocated that the GoH compensate importers who have been suffering losses, even if this necessitated cash payments. Otherwise, Haiti risks limiting the supply of oil. ¶9. (C) Guerrier added that oil importers suffer under the added uncertainty caused by unpredictable shipments from Venezuela under the Petrocaribe Agreement. Guerrier laid these delays at the door of ''inferior production facilities'' in that country. He said unpredictable supplies contributed to the problems of fuel pricing and fuel availability in Haiti. IMF Aware - and Worried ---5T"v=QmzQG provided out of the budget to oil importers over the past few months. Fasano said the government should not have pursued this tack as it will now be required to forego other essential expenditures (e.g., infrastructure projects) and could put the next government in a ''fiscal strai79QigNoG?elTG=d@}>r {]Q ¶12. (SBU) Recent GoH fuel subsidy efforts through tax breaks and financial transfers have been partially opaque even to IFIs that closely track fiscal policy. The IMF, in particular, is concerned about the negative economic impact if subsidy transfers continue. ¶13. (SBU) Government economists are reluctant to explain the exact nature and quantity of the subsidies, although some contacts quietly acknowledge that, if continued, the fiscal impact could be major and detrimental. They also complain that the absence of a government makes it more difficult to walk back petrol subsidies, which are motivated by the political imperative to address the rapidly rising cost of living in this impoverished country. One economist noted he was satisfQQ8b8@)mNQQ!&]QQ>Q-Q(}QJMEF, in consultation with the IMF, would adjust prices in a way that minimized the social impact. He concluded that ''no one wants another riot.' ¶14. (SBU) Most automobile owners in Haiti are part of the numerically small middle and upper class, who can better absorb gas price increases and are not organized enough to put together street protests. Drivers of privately-owned group taxis (''tap-taps''),the only form of ground-based public transport available to poor Haitians, are another matter. They went on strike during the April food riots and brought much traffic in the capital to a halt. ¶15. (C) President Preval told the Ambassador and visiting AID/LAC Acting Assistant Administrator Jose Cardenas May 31 that he had met with "tap-tap" drivers, union officials and political party members to convince them the GoH could no longer afford to subsidize fuel (ref A). Preval said he believes he has the transport sector on board for an announcement that fuel prices will increase. (Note: Press reports June 14 confirmed those meetings had taken place. End note) SANDERSON