Subsidies in 2022 and tariff adjustment
by Gabriel Rubinstein
Director de GRA Consultora
One of the main topics to be discussed with the IMF, if an arrangement is to be signed, will be the magnitude of a fiscal adjustment. Within this adjustment, we estimate that one of the most conflictive issues will be the level of energy subsidies.
To contextualize, Minister Guzmán tried this year to maintain the level of subsidies at 1.7% GDP (2020's level). He announced that goal in an interview with CNN.
If he had wanted subsidies to remain at 1.7% GDP, in 2021 he would have had to spend ARS 360 billion less than the ARS 1.1 trillion that the item will end up costing. To put things differently, subsidies spending should have increased 52% YoY and not 132% YoY, as we estimate will happen.
To save those ARS 360 billion in subsidies spending, Guzmán should have increased energy rates by 78% throughout the year. With such an increase, subsidies spending would have remained at 1.7% GDP and demand would have paid an average of 58% of the energy price, instead of the 36% that it will end up paying in 2021 (against 54% paid in 2020 and 64 % in 2019).
These numbers are a clear example of the imbalance that the "tariff freeze" is generating. Its consequences spill over onto the fiscal deficit and its financing; the monetary printing and the FX premium; and the widening energy trade deficit and its effect on the foreign currency shortage.
On the other hand, the decision to freeze tariffs "helped" reduce inflation figures. A 78% increase of energy tariffs in 2021 would have directly added 4 percentage points to this year's inflation rate. Furthermore, consumption of other goods and services would have suffered and, consequently, GDP growth would have been lower.
Beyond these observations, discussions with the IMF involving a fiscal adjustment will likely center on the magnitude of reduction in subsidies spending. Even more so considering that practically the entire primary deficit could be explained by economic subsidies: in 2021, this item will represent more than 90% of the primary deficit.
If Guzmán's plan for 2022 is to maintain unchanged (compared to 2021) the spending on energy subsidies relative to GDP (2.5%, higher than the Minister's previous target), we should expect:
- a) A 50% YoY increase of spending on energy subsidies in 2021.
- b) Demand paying 32% of the energy price.
- c) An end-of-period tariff increase of 50% YoY.
Higher adjustments on subsidies spending would require steeper tariff increases, as shown in the chart below:
