To Pass (or Not to Pass) Through International Fuel Price Changes to Domestic Fuel Prices in Developing Countries: What are the Drivers?

43 Pages Posted: 30 Oct 2020

See all articles by Patrick A. Imam

Patrick A. Imam

International Monetary Fund (IMF)

Kangni Kpodar

International Monetary Fund (IMF)

Date Written: September 2020

Abstract

While many developing countries limit the international fuel price pass through to domestic fuel prices, others do not. Against this backdrop, we examine the factors that determine whether governments allow international fuel price changes to be passed through to domestic prices in developing countries using a dataset spanning 109 developing countries from 2000 to 2014. The paper finds that the pass-through is higher when changes in international prices are moderate and less volatile. In addition, the flexibility of the pricing mechanism allows for higher pass-through while exchange rate depreciation and lower retail fuel prices in neighboring countries inhibit it. The econometric results also underscore the fact that countries with inflation tend to experience lower pass-through, whereas those with high public debt exhibit larger pass-through. Finally, no evidence is found that political variables or environmental policies matter with regard to fuel price dynamics in the short-term. These findings, which are consistent across fuel products (gasoline, diesel and kerosene), allow us to draw important policy lessons for fuel subsidy reforms.

Keywords: Fuel prices, Energy subsidies, Oil prices, Inflation, Consumption, WP, tag0, price, pass-through, country, government

JEL Classification: L71, Q48, H23, Q41, E31, E21

Suggested Citation

Imam, Patrick A. and Kpodar, Kangni, To Pass (or Not to Pass) Through International Fuel Price Changes to Domestic Fuel Prices in Developing Countries: What are the Drivers? (September 2020). IMF Working Paper No. 20/194, Available at SSRN: https://ssrn.com/abstract=3721219

Patrick A. Imam (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kangni Kpodar

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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