Petrol prices pressure inflation

Drivers who have to fill up regularly are notcing the speed in which petrol prices are being hiked up, Photo: Dung Miinh

According to the General Statistics Office, the consumer price index (CPI) in February increased by 1 per cent compared to January, and 1.42 per cent over the corresponding period in 2021. Core inflation in February also increased 0.49 per cent compared to January, up 0.68 per cent over the same period in 2021. In February, petrol prices increased by 47.07 per cent.

At the end of last year when preparing the economic recovery plan for 2022, the Ministry of Industry and Trade (MoIT) considered that the domestic petrol supply would meet about 70-80 per cent of the demand, leaving only 20 per cent to be imported, which was hoped to stabilise the macroeconomy, keeping inflation at 4 per cent by the end of the year.

However, the sharp drop in domestic supply ruined all plans. Vietnam’s local supply mainly comes from two refineries – Nghi Son, accounting for 35-40 per cent of the market, and Binh Son, making up about 35 per cent.

Domestic supply plummeted

Do Thang Hai, Deputy Minister of Industry and Trade at a press conference on March 3 explained, “Financial difficulties and several internal reasons rendered the Nghi Son inefficient, which led to it only reaching 55 per cent of production capacity, heavily influencing the price of petrol for the end consumer.”

Nghi Son’s main investment purpose is to ensure energy security for Vietnam, but its operation remains inefficient. Data provided by the deputy minister also showed that Nghi Son has no way of delivering the petrol as planned,

The Nghi Son oil refinery in the north-central province of Thanh Hoa has a design capacity of 10 million tonnes of crude oil per year, but the facility is in a state of financial imbalance and cannot operate as planned. The project’s investment capital was around $9 billion. Vietnam Oil and Gas Group holds only 25.1 per cent of the shares, with the rest held by overseas partners from Kuwait and Japan.

Nghi Son’s statements for the first nine months of last year showed that revenue remains low, meaning a reduction of Nghi Son’s equity and a loss of around $955 million.

Meanwhile, petrol has become somewhat scarce in some southern border provinces and Ho Chi Minh City. Binh Son refinery increased its capacity within the allowable range from 100 to 103 per cent, and since February 7 even to 105 per cent. However, Binh Son’s increase is only equivalent to 28,000cu.m of final petrol, not enough to make up for Nghi Son’s shortfall.

The MoIT is trying to ensure a stable petrol supply for March, expecting that Nghi Son will recover to full capacity in April. Nevertheless, the ministry organised additional import quotas for 10 petrol wholesalers to compensate for the shortfall from domestic production.

However, inflation control is likely to weaken if this solution remains the only one amid current geopolitical tensions further west. The domestic policies seem to not cover the increased CPI in the first two months of this year from petrol prices.

Tax reduction as stabiliser

On the one hand, the state budget increased revenues from crude oil exports, and the profits of petrol exploitation and trade improved. But on the other hand, the economy suffers from petrol imports. Domestic analysts predicted that global oil prices will continue to fluctuate following the military conflict, which caused the crude oil price to rise to around $130 per barrel.

Assoc. Prof. Dr. Ngo Tri Long, former deputy director of the Institute for Research on Market Prices under the Ministry of Finance (MoF), said that taxes could be reduced to also lower petrol prices. Reducing taxes and fees could achieve two goals at the same time – stimulating production and consumption and reducing inflationary pressure, which has lasted for nearly two years.

“The optimal option is to reduce the environmental protection tax,” Long said. He cited that during the two previous years, when the aviation industry was bogged down, the MoF initiated two reductions of the environmental protection tax on jet fuel to help the industry.

However, the MoF does not seem to be interested in reducing petrol tax at the moment, as the state budget last year was less than 4 per cent of GDP. In a written response to the petition to voters in Hanoi at the end of February, the ministry said that the tax proportion in the sales price of petrol is currently lower than the general average in many countries in the world, where taxes can range between 45-60 per cent.

According to the MoF, petrol is not eligible for tax reductions from 10 to 8 per cent. Petrol is subject to several types of tax, such as 10 per cent VAT, 10 per cent import tax (if applicable), and 10 per cent special consumption tax.

However, after the prime minister sent an official letter to the MoF, the ministry on March 3 proposed to reduce the environmental tax for petrol by a mere VND2,000 (9 US cents) per litre.

Nguyen Tien Thoa, former director of the Price Management Department under the MoF, estimated that a 10-per-cent increase in prices could equate to a 0.5-per-cent reduction of GDP and an increase of 06-0.7 per cent in the CPI.

Consumers are not only affected by the increase in petrol prices but also by the increased commodity prices that follows. For example, companies in industries that use a lot of petrol would increase their rates.

“Petrol prices will decrease if the state applies policies to stabilise them, focusing on reducing taxes and even supporting capital loans,” Thoa said.