CAN THE BURDEN OF RISING FUEL PRICES BE REDUCED?
The recent global fuel price hike is likely to have driven up consumer prices worldwide. Some governments have implemented various programs to help cushion the impacts of rising fuel prices for their residents. As for Vietnam, besides tapping the national fuel price stabilization fund, the country is also taking into account other solutions. So, which solution is appropriate at this time and in the long run?
Several solutions
It is generally acknowledged that fuel is a crucial proportion in calculating transport and production costs, but such costs account for a significant amount in product and service prices. The most visible impact of rising fuel prices is felt by the energy, transportation and fisheries sectors.
To support people amid the fuel price hike, the governments of some countries have adopted different policies based on their socioeconomic and political status. Tax reductions and offering direct or indirect money assistance by supporting fuel distributors are among the measures being introduced.
There is a common characteristic that the composition of retailed fuel prices, taxes and fees account for a large portion, at 50% or higher. The common taxes and fees comprise consumption tax, value-added tax and environmental protection tax, among others. In Vietnam, the percentage of taxes in the base price of RON95 petrol is 43.2% and that of diesel oil is 26.1%. These taxes include import tax, excise tax, value-added tax and environmental protection tax.
Accordingly, a value added tax cut is usually adopted to offer direct support to consumers. However, the tax cut will affect budget collection, especially when countries are in need of financial resources to restore their pandemic-battered economies.
Thus, some countries have made efforts to offer strategic assistance designated for low-income people only by offering fixed monthly financial aid during a specific period to partly mitigate the impact of rising fuel and energy prices on them. In addition, some countries have developed policies to support sectors whose input costs include rising fuel prices such as transportation and fisheries. Some sectors that need to frequently use private vehicles to promote products and offer home repair services will also receive the government’s support in terms of fuel costs.
Which solutions are needed for Vietnam?
A lot of ongoing discussion about lowering fuel prices has centered around tax reductions. However, if this measure is applied on a large scale, all parties feeling the impact of rising fuel costs will be beneficiaries, leading to the ineffectiveness of the
policy. For instance, if policymakers lower taxes to reduce prices of products and services but businesses do not offer equivalent reductions, a number of businesses will emerge as beneficiaries of the tax cut, instead of consumers.
Moreover, Vietnam has slashed value added tax from 10% to 8% for some sectors to facilitate economic recovery, so the room for the State budget will no longer be ample if fuel tax cuts are applied on a large scale. From the currently-adopted experience of some countries, the relevant ministries in Vietnam could weigh the measure of only providing support for sectors with a high portion of fuel costs in input costs, and for low-income laborers who have to often use private vehicles for work. The impact of the fuel price hike on each person and each household is different. Some would be severely impacted as the percentage of fuel costs in their total monthly expenses is high. One thing to keep in mind is that adopting this solution will have certain downsides in accurately identifying those eligible for the support and whether the fuel costs they have to cover are logical and appropriate. In developed countries, this would not be a matter of concern as they manage information linked to tax dossiers, incomes and the current occupations of their people. And more importantly, all costs are clearly shown in invoices that can be easily double-checked.
Another solution that has been frequently mentioned but has yet to receive much approval is that fuel trading firms and those using a large volume of fuel in operations should proactively use derivative products in the fuel market, such as a standard forward contract, as an anti-risk measure to cope with further large fluctuations in fuel prices, especially amid an upward trend in price.
This product has been available on the Mercantile Exchange of Vietnam (MXV). Although its trading value is on the rise on MXV, at a record high of VND10 trillion on February 24 this year, there remains much room for using derivative products.
Accordingly, the immediate solution for Vietnam to reduce the burden of rising fuel costs is to directly support badly-affected sectors and individuals instead of imposing tax cuts for all. The priority sectors could be transport service operators and low-income laborers that have to commute to work with a high frequency.
In the long term, the market of fuel-related derivative products should be developed strongly. To do so, it is necessary to create a freely competitive and fair fuel trading market. State management agencies only need to determine ceiling prices, and each fuel firm’s business performance results will depend on their own ability, including the effective use of anti-risk measures such as a standard forward contract.
The immediate solution for Vietnam to reduce the burden of rising fuel costs is to directly support badlyaffected sectors and individuals instead of imposing tax cuts for all. The priority sectors could be transport service operators and low-income laborers that have to commute to work with a high frequency.