Caribbean & Central America - April 2022

Rising oil prices due to Russia’s invasion of Ukraine are causing problems throughout Central America, and most governments have taken action to take some of the financial hit.

In Guatemala, for example, drivers took to the streets in protest after the prices of diesel and gasoline were respectively 33% and 30% above the averages of the last five years in January 2022, according to Famine Early Warning Systems Network (Fews Net). In response, on 15 March the 160-member unicameral congress approved subsidies of Q5 (US$0.65) per gallon of diesel and Q2.50 per gallon of regular gasoline for two months. The subsidy is in effect from 5 April and run for 60 days, according to a statement published on 4 April by the energy & mining ministry.

In El Salvador, President Nayib Bukele announced 11 measures aimed at reducing the impact of the increase in energy prices at the beginning of March. These include the suspension of two fuel-related taxes – the Fondo de Estabilización para el Fomento Económico (FEFE) and the Contribución al Transporte (CONTRANS) – initially for three months, which he said would cost the state US$11.52m and US$13.04m respectively.

Then on 22 March the legislative assembly suspended value added tax (VAT) of 13% on petrol and diesel for 15 days to try and mitigate the impact of higher fuel prices, which are driving up inflation and reducing the purchasing power of the poor. The reduction approved is partial - meaning that the temporary rates will oscillate between 1.75% and 5% depending on the fuel. VAT on premium gasoline will be cut to 4.75%, while for regular gasoline and diesel it will be reduced to 5% and 1.75% respectively.

In Panama, the government committed US$6m to subsidise fuel costs for public transport in order to head off increases in ticket prices, according to an announcement from transport authorities published on 25 March. The move follows a US$3m subsidy agreed in December 2021. In Honduras, President Xiomara Castro introduced fuel subsidies at the start of February, announcing a L10 (US$0.4) per gallon subsidy at the pumps for the rest of the year. From 15 March the government will also cover 50% of price increases to diesel. In Nicaragua, the government announced two measures on 25 March - a price freeze for liquified petroleum gas (LPG), which is used for cooking, and a commitment to absorb 70% of price increases for petrol and diesel. This follows two weeks of price freezes for all fuels.

In Costa Rica, however, measures to combat price rises are still being debated. On 30 March the legislative assembly approved a proposal that would freeze price rises for one year, cut current prices by ₡100 (US$0.15) per litre and cut taxes on buses and taxis, but the bill needs to be examined by the executive branch and other official bodies. The situation is complicated by the presidential election of 3 April, won by Rodrigo Chaves, who will take office on 8 May.

Economies in the region are still attempting to recover from the impacts of the coronavirus (Covid-19) pandemic, and high fuel prices are making that an even more difficult task than before. However, groups most affected by fuel prices, such as taxi drivers and hauliers, are able to carry out disruptive protests if they feel their needs aren’t being met. Confronted with continued high prices, governments face a delicate balancing act in attempting to head off social unrest due to increased living costs without spending too much shielding consumers.

• Fuel price freeze in El Salvador

On 5 April El Salvador’s legislative assembly approved an initiative proposed by the Bukele executive which freezes fuel prices for April and May. Citing the local think tank Centro de Investigaciones, Estudios Sociales y Económicos de Centroamérica (CIESCA), President Bukele boasted that El Salvador has the lowest hydrocarbons prices in Central America with regular gasoline costing US$4.15 per gallon compared with US$5.20 per gallon in Costa Rica, US$5.21 in Nicaragua, US$5.23 in Honduras, and US$5.25 in Guatemala.