On Monday, the subsidy mechanism on gasoline by Banque du Liban may be completely lifted. (Credit: João Sousa/L'Orient Today)
The epilogue of one of the most redundant subplots of the Lebanese crisis could be played out on Monday. Several representatives and players in the fuel distribution sector are expecting the Banque du Liban to remove the last remaining portion of the gasoline subsidy after having gradually reduced it over the past month.
"Today, the price of gasoline is only subsidized by 20 percent and everyone expects the BDL to remove this ratio as early as the beginning of next week,” said Georges Brax, the spokesperson for the Gas Station Owners’ Union. “But we probably won't know until D-Day, a few hours before the new price list is published by the Ministry of Energy and Water," he added.
He expects that a majority of stations will remain closed on Sunday pending the new prices, as has happened several times in recent weeks. This tends to push drivers to rush to the few open stations, sometimes just to fill up a nearly full tank with a marginal saving.
New prices twice a day if necessary
The representative of fuel distributors Fadi Abou Chacra said Thursday he heard the same echoes. "The BDL has accelerated the movement since mid-August, and it would not be surprising if it went to through with [removing subsidies] on Monday," he said without wishing to speak for the institution. The press office of the central bank said it had no information in this sense. On the other hand, the Director General of Petroleum at the Ministry of Energy and Water Aurore Feghali announced to the industry Thursday that gasoline prices will be adjusted accordingly "as soon as the central bank announces the suspension" of their subsidy mechanism, according to press reports.
She added that the ministry was ready to adjust gasoline prices twice a day in case of significant fluctuations in the exchange rate and in international crude oil prices, which are taken into account via a dedicated index, the S&P Global Platts, to set gasoline and heating oil prices. "Until now, the rate had to fluctuate by LL1,000 Lebanese lira, regardless of the level of the S&P, for the ministry to react, but this margin has been reduced to LL500," said the President of the Union of Distributors of Gas Cylinders Jean Hatem.
While the lira has been depreciating steadily since late 2019 (which was at LL35,000 to the dollar Thursday in the parallel market, a depreciation of more than 95 percent from the official rate of LL1,507.5), BDL guarantees a ratio of dollars on gasoline importers' bills. This rate subsidy mechanism has evolved numerous times since its launch in October 2019. In its last version, BDL agreed to provide these dollars at the rate of its Sayrafa platform, at which the lira stands at below the parallel market rate (LL28,000 as of Thursday), in charge of importers to provide the rest in dollars purchased from legal brokers and the open market. The Ministry set prices taking into account these factors in addition to the price of fuel.
The exchange rate, the metronome of prices
The ratio of subsidized dollars rose to 100 percent in March, but fell to 85 percent in July and then to 70 percent in mid-August when it began to be reduced on a weekly basis: 55 percent the week of Aug. 22, 40 percent the week after, and 20 percent this week. "Crude prices are stabilizing [between $80 and $90 Thursday afternoon, whether for WTI or Brent, down sharply since late August], so a possible lifting on Monday will not be very painful for the consumer," assured spokesperson Abou Chacra. Since mid-August, the price of 20 liters of gasoline (95 and 98-octane) has risen by less than LL100,000 and remains at around LL640,000, below the LL700,000 mark reached in June during the peak of world oil prices (more than $120 a barrel). However, there is no guarantee that the exchange rate will remain stable, so any changes in the exchange rate, no matter how large, will be directly reflected in the price of gasoline.
The price of gasoline and diesel for certain vehicles will still be set in Lebanese lira unless there is a last-minute surprise. The prices of gas cylinders and fuel oil for private generators — the Lebanese solution to the shortcomings of the public electricity supplier — are set in dollars, with the price in lira varying according to fluctuations in the market exchange rate. However, this system poses problems for distributors' margins, which tend to melt when the rate rises. If they collect the end consumer's sales price in lira, they are forced to buy dollars to pay their suppliers. "For the market to remain stable, the authorities must allow distributors to sell their goods in dollars, otherwise the problems related to margins will remain," said Hatem on Thursday.
The shortages of fuel, real or organized, are one of the layers of the Lebanese crisis. They were particularly apparent in the summer of 2021, when BDL began to remove part of the existing subsidy mechanism, which also benefited fuel oil and gas imports. Although they limited the rise in fuel prices in lira for some time, these subsidies cost several billion dollars from the country's foreign exchange reserves, which have fallen from $33 billion to reportedly less than $10 billion since the end of 2019.
This article was originally published in French with L'Orient-Le Jour.