A measure that seems ill-advised in the midst of an economic recovery is actually a wise decision.

Time passes, and the cost of goods and services that meet our daily needs keeps rising. And it’s a cycle that, unfortunately for everyone, won’t end soon. Buying food is increasingly straining citizens’ wallets, and the worst part is that this situation will worsen with the sustained increase in fuel prices expected in the coming months, significantly impacting the finances of Colombian families.

Since June of this year, the price of a gallon of gasoline and diesel (ACPM) has increased by 250 pesos per month. However, starting in September, the increase will be gradual, rising by 400 pesos each month until the end of the year. And that is why, in this space, I will do my best to explain why a measure that seems ill-advised in the midst of an economic recovery is actually a sound decision, since this increase has not been caused as a direct consequence of inflation, but rather is an order decreed by the National Government.

To understand the reasons for this news, it is essential to explain that in Colombia, fuel prices are subsidized by all taxpayers. This methodology was introduced through Law 1151 of 2007, which created the Fuel Price Stabilization Fund (FEPC), a mechanism that aims to prevent us from being affected by international fluctuations in these types of commodities. How does it work? Through this Fund, fuel producers and importers are paid the difference between international and national prices. This mitigates fluctuations in the national market, and citizens are not exposed to excessive increases when filling up their vehicles. Few people know this, but thanks to the Fuel Price Stabilization Fund (FEPC), we currently have the lowest price per liter of gasoline per dollar in Latin America, after Venezuela, Bolivia, and Haiti.

So where does the money come from that is transferred to producers and importers to cover the difference? In theory, the FEPC was designed to be self-sustaining, saving when international prices were low and subsidizing fuel when prices rose. However, this principle is far from reality, as the Fund has tended to run a deficit since its inception, subsidizing more than it saves. In 2021 alone, the total deficit was around 11.7 trillion pesos (a figure close to the Carrasquilla tax reform), and over eleven years, it has resulted in deficits amounting to approximately 2.9% of GDP.

Therefore, the most sensible decision, though it may not seem so, is to increase the price of gasoline and diesel and gradually reduce the tax burden that comes from the National Budget. This announcement is undoubtedly unpopular, as it will have serious repercussions for the country’s economic recovery by raising the costs of the food supply chain and mass transit, to name just a couple of examples. Nevertheless, despite these consequences, this order cannot be postponed any longer.

Finally, it is worth mentioning that the Iván Duque administration postponed these increases for as long as possible, leaving the new administration with the difficult task of defining the pace of the adjustments. In this regard, it is expected that in the coming weeks, the Ministry of Mines and Energy, in conjunction with the Ministry of Finance, will begin to establish forums that will allow trade associations from different sectors of the economy to develop plans to mitigate the effects of this measure. In this case, it is not an isolated decision that would affect the finances of a specific group of people, but rather, without distinction, it would make the cost of living increasingly difficult for Colombian families to maintain.