MANILA BULLETIN - January 9, 2008

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Oil tariff ordered reduced

President bares move to stem rising fuel prices
Tariff on oil imports cut by one to two percent

President Arroyo yesterday approved an automatic tariff reduction mechanism on imported petroleum products to soften the impact of soaring world oil prices on the economy, saying the "revenue neutral" scheme is a better option than a suspension of sales tax on oil products.

The President also announced programs to increase food production and make food more accessible.

"Upang aksyunan ang pagmahal ng langis sa buong mundo, iniatas natin sa Kabinete na agad ipatupad ang mga kagyat na tulong sa masa," Mrs. Arroyo said in a press conference.

The President said the current three-percent import duty on oil products would be reduced to two percent or one percent depending on the level of world crude prices.

Mrs. Arroyo said she will issue an Executive Order today, instituting the tariff cut mechanism which seeks to reduce prices of diesel and prevent a possible "inflation spiral."

The EO expected to take effect two weeks after publication.

Aside from the cuts on tariff on oil imports, Mrs. Arroyo directed the Cabinet to speed up infrastructure programs on irrigation and farm-to-market roads to increase food production and make food cheaper.

Mrs. Arroyo also ordered the filing of a petition before the Energy Regulatory Commission (ERC) to effect bigger discounts on the electricity rates of the poorest of households which consume the least electricity, or the so-called "lifeline rates."

Other directives include improved technical and vocational courses offered by the Technical Education and Skills Development Authority (TESDA), the increased funds for the government "micro-finance program to encourage entrepreneurship, and the establishment of more "Botika ng Barangay" and "Botika ng Bayan" which sell cheaper medicines.

The oil tariff reduction scheme is part of the government's seven-point action plan to protect consumers from the surge of world oil prices discussed during a National Economic and Development Authority board and National Anti-Poverty Commission cabinet group meeting in Malacañang.

"To address the rising price of oil in the world market we will implement immediate assistance to the masses. We will bring down the tariff on all petroleum products. We ask the oil companies to use this to bring down diesel prices," the President said. "This is a quick response of the government to help our fellowmen and the Filipino family," she added.

Mrs. Arroyo said the tariff cut would not affect the government's fiscal position unlike a moratorium on the 12 percent value added tax (VAT) on petroleum products.

She said government needs the VAT from oil products to sustain revenues required to bankroll vital infrastructure projects and other social services this year.

Waiving the VAT on oil goods would also be "counterproductive" because it would result in a larger budget deficit, high interest rates, a weakening of the peso, and an increase in prices of basic commodities, she said.

Finance Secretary Margarito Teves said the tariff rate of 3 percent on imported fuel products could be reduced to 2 percent if the Dubai benchmark crude price hits an estimate of $ 80.94 per barrel and diesel price goes up to $ 110 per barrel.

For a reduction to one percent tariff, the trigger point will be $ 92.41 per barrel for crude and $ 115.65 for diesel.

The oil tariff rate could be further trimmed down to zero percent if the petroleum prices reach $ 106.25 per barrel, according to the finance chief. The tariffs will be automatically restored as world oil prices move down based on the same trigger prices.

Teves said the tariff cut will be revenue neutral since a 3-percent tariff would have given the government a revenue windfall of P11 billion.

He said the government decided to channel this large government windfall to lessen the prices of diesel, the fuel used by public utility vehicles in the country.

He said the tariff cut would encourage oil companies to reduce petroleum prices by between 23 centavos and 25 centavos per liter and diesel prices by between 46 centavos and 50 centavos.

President Arroyo acknowledged that the runaway oil prices could lead to an increase in inflation rates if the government does not act immediately.

"If we don't do anything and the price of diesel goes up, then we will have a demand from the transport sector to increase the fare. And if we cannot forestall an increase in fare, there will be a demand to increase wages. And if we cannot forestall that demand to increase wages, then you will have a spiraling of all the other prices. So what we are doing here is to forestall an inflationary spiral," she said.