Mexico City — In the midst of the highest inflation in Mexico in 20 years, the government is maintaining President Andrés Manuel López Obrador’s commitment to keeping gasoline prices stable, even if that means losing revenue.
The regular (magna) and high-octane (premium) gasoline on sale in the country will continue to be exempt from the so-called special tax on production and services (IEPS), but will also be given a complementary fiscal subsidy, activated by the government in the face of high oil prices as a result of Russia’s invasion of Ukraine.
For the week of June 11-17, the government will apply a subsidy of 100% of the IEPS quota to magna and premium gasoline, as has been the case for 14 consecutive weeks due to high oil prices, the Ministry of Finance published on June 10 in the country’s Official Gazette.
This means that consumers will not pay the IEPS fee of 5.49 pesos ($0.26) per liter for magna gasoline, the most consumed in Mexico, nor the 4.63 pesos ($0.22) per liter for the premium fuel.
In addition to these incentives, ‘green’ and ‘red’ gasoline, as magna and premium are known respectively, will be awarded the highest subsidy since March 5, when the support came into effect.
When the government activated the complementary subsidy, the support for the regular gasoline price was 0.87 pesos ($0.04) per liter and there was no subsidy for premium gasoline. Three months later, the complementary subsidy has skyrocketed.
The governmental support for magna is 6.90 pesos ($0.33) per liter, and for premium 7.02 pesos ($0.34) per liter.
This implies that the complementary quotas for both gasoline varieties increased so much that this week their value surpassed the IEPS quota.
The complementary subsidy is granted through income tax and VAT, and is additional to the IEPS. It is aimed at taxpayers who produce and import fuels when they sell first-hand in Mexico, and such incentive will have an impact on all subsequent operations, therefore benefiting the end consumer.
What would the price of gasoline be without the subsidy?
Fiscal stimuli have been successful in curbing the effect of international oil prices on gasoline prices in Mexico. As a result, it has prevented a further escalation in inflation, which in May was 7.65%.
According to government estimates, if the gasoline stimulus were not applied, inflation would be around 10%.
The retail price of magna gasoline was 21.73 pesos ($1.06) per liter as of Sunday, June 12, according to PETROIntelligence data. In the absence of the IEPS and complementary fiscal stimulus, the price of regular gasoline in Mexico would be $34.12 pesos ($1.66) per liter.
The subsidy strategy obliges the government to absorb 12.39 pesos ($0.60) per liter, which represents 36% of what would be the real price of a liter of gasoline in the absence of any stimulus or subsidy.
The case of higher octane, or premium gasoline is similar. The retail price is 23.77 pesos ($1.16) per liter. Without the tax incentives, the price would rise to 35.43 pesos ($1.72) per liter. In this case, the government is granting a subsidy of 11.66 pesos ($0.56) per liter, equivalent to 33% of the actual price without the subsidy.
Keeping gasoline prices at these levels has cost the government revenue losses.
Fiscal stimuli were insufficient in April, so the Ministry of Finance was forced to subsidize fuels, which had not happened for almost eight years.
According to the Treasury’s public finance report, the IEPS levied on gasoline and diesel registered a negative balance of 542.5 million pesos ($26.4 million) in April, which implied that the tax, instead of being a budgetary revenue, became a subsidy.
Translated from the Spanish by Adam Critchley