The Government will have to ensure that there is a complementary public transportation system in place before it removes the fuel subsides, according to UWI economist Roger Hosein.
In an interview with the Business Guardian on Tuesday, Hosein said he was in favour of the removal of the fuel subsidy, arguing that in a recession "there is a need for economic adjustment" and that the country cannot afford to continuing supporting gas and diesel prices.
But, at the same time, Hosein warned that in an effort to reduce the inflationary pressure caused by higher fuel costs, the Government will have to ensure there is a proper public transportation system.
"I think the removal of the subsidy can act as a good signaling effect to the population that we are in a new normal but, to ease any associated inflationary outcomes, it is important the State manages the transitionary period. In parallel, improve the complementary modes of public transportation.
"During a recession and overall period of stagnation, there is a need for economic adjustment and–this becomes a necessity– there are clear losers and clear winners. The challenge is to minimise the extent of loss of those on the receiving end."
On Monday, Finance Minister Colm Imbert told a news conference he intended to remove the fuel subsidy and will send a clear signal when he presents his mid-year budget review to the Parliament.
"I intend to start the discussion with the statement I will be making to Parliament on April 8. I intend to start the ball rolling in terms of telling the country what the Government has in mind in terms of the way we are going to be dealing with the fuel subsidy and the timing of the phasing out of the fuel subsidy. I did say on October 5 that is the plan but we have to talk to the population first," Imbert told the news conference.
The minister added, "I am going to start the ball rolling by asking the country to consider if this is the way we want to go: continue or let the price go up and down like virtually every other country."
T&T has been spending billions every year to keep the price of fuel low and, for some time, successive governments have raised issues about whether the subsidy was the best way to spend the country's resources.
Imbert said the timing was good now since crude prices were low. When the subsidies are removed, people will be paying market price at the pump for their fuel.
"Obviously, if it's done now, the effect will be much less that if you do it when oil is US$100."
Hosein said fuel subsidy, in its current format, was counterproductive and–with low interest rates in the bank–may have spurred an increase in the purchase of vehicles which has led to a rapid increase in traffic, carbon dioxide and a reduction in worker productivity.
The university lecturer said as economic rents fall there is now need to rebalance the situation and that the Government needed to either increase the cost of using roads with a toll or increase the cost of fuel by the removal of fuel subsidy.
"Removal of the fuel subsidy will lead to a reduction in government's fiscal outlays, increase the cost of using vehicles and reduce congestion on the roads." Hosein said.
He said the Government will also have to consider the timing of the removal of the subsidy since it will have to come up with a formula to prod businesses and the transportation sector to move into other fuels like CNG.
Hosein also raised the issue of a mass transit system inclusive of a rapid rail as a means of reducing the transportation burden on the population.
Since 2011, the former government gave itself three years to move hundreds of thousands of vehicles including the country's bus and maxi-taxi fleet to CNG but, to date, it has not been successful.
There have been several stumbling blocks including the high cost of the CNG tanks, the reluctance of the maxi-taxi operators to transition to CNG, insufficient service stations carrying CNG and the cost of conversion.