Paper 2 practice set: Ending the fuel subsidy in Meridia. Part (b)(ii) of 9, 3 marks
Paper 2-style data response, part (b)(ii) (AI-written practice set; not an IB question).
Paragraph 1: Meridia imports almost all of its oil. For twenty years the government has paid a subsidy to fuel distributors so that petrol sells for M$1.20 per litre, well below the price in neighbouring countries. In Year 2 the subsidy was M$0.48 for each of the 10 billion litres sold.
Paragraph 2: The finance ministry says that the subsidy now costs M$4.8 billion a year. That is equal to 3% of GDP and is more than the M$4.0 billion spent on public health care. A household survey found that the richest 20% of households, who own most of the cars, receive 45% of the benefit of the subsidy, while the poorest 20% receive 6%.
Paragraph 1: The government has announced that the subsidy will be removed at the start of Year 3. It expects the price of petrol to rise to M$1.50 per litre. To protect low-income households, cash transfers of M$800 a year will be paid to each of the poorest 1.5 million households (the poorest 30%), at a cost of M$1.2 billion a year.
Paragraph 2: Business groups warn that higher fuel and transport costs will raise the price of almost everything and push up inflation, which is already above the central bank's target of 3%. Transport and fuel make up 12% of the basket of goods used for the consumer price index (CPI). Trade unions have said that they will ask for wage rises to match any increase in prices.
Paragraph 1: Environmental groups welcome the decision. They argue that cheap petrol has encouraged car use in the capital city, where traffic congestion and air pollution impose costs on people who do not drive. They want part of the money saved to be invested in public transport.
Paragraph 2: Oil is Meridia's largest import. Rising spending on imported oil helped to widen the current account deficit in Year 2, and the Meridian dollar (M$) depreciated by 10% against the US dollar. The depreciation made each barrel of imported oil more expensive in Meridian dollars.
| Item | Year 1 | Year 2 | Year 3 (government forecast) |
|---|---|---|---|
| Real GDP growth (%) | 3.1 | 2.4 | 1.8 |
| Inflation rate, CPI (%) | 3.0 | 4.2 | 6.5 |
| Unemployment rate (%) | 6.0 | 6.4 | 6.9 |
| Budget balance (% of GDP) | −4.6 | −5.5 | −3.5 |
| Current account balance (% of GDP) | −3.2 | −4.5 | −3.9 |
| Exchange rate (US$ per M$1) | 0.50 | 0.45 | not forecast |
| Item | Year 2 (with subsidy) | Year 3 (estimate, no subsidy) |
|---|---|---|
| Price paid by consumers (M$ per litre) | 1.20 | 1.50 |
| Quantity bought (billion litres per year) | 10.0 | 9.0 |
| Subsidy paid per litre (M$) | 0.48 | 0 |