By Alexander Nkosi
Fuel is a very important commodity. Movements in fuel prices affect everyone. Even if you don’t own a vehicle or travel the whole year, you will either consume food, wear clothes or use agriculture inputs that are transported from one place to another. An increase in fuel prices increases transportation costs and prices of goods and services. Even government is affected because it ends up spending more on transportation as well as on other goods and services it procures.
It is in the best interest of development to keep prices low and stable. Is stability of fuel prices good? Yes it is! However, it requires that we either engage in bulk procurement and keep huge reserves for a good number of months or we have enough money to cover the price differential arising from shocks on the international market.
What does this mean? Let us assume ERB reviews fuel prices every 6 months. Within this six months, there will either be a net increase or reduction in international crude prices. If there is a net reduction, then well and good but if there is a net increase then we need money to cover it because we have to wait for 6 months to pass on the cost to consumers. If in a month it increases from $70 to $90 per unit, the $20 increase per unit cannot be passed on to consumers because prices are reviewed every 6 months. What this means is that as a country we need to find money to cover this $20 per unit. Note that international prices may either increase or reduce and the international market is quiet volatile. Prices can change in days. The problem here is that we should always have money to cover an increase before a review is done. If we fail or delay to do so, we might run into shortages. This is the risky government is trying to avoid given our dire economic situation.
Why monthly review? What experts do is that they will study the trends and patterns in crude oil prices. If these studies inform them that the common pattern is for prices to go up than reduction and if some increases are too high to be covered with the revenue we have, then there is a high risk that government might struggle to cover these differentials leading to disruptions in the supply of the commodity.
This problem is not new, under the previous regime, we ended up accruing over $800 million arrears. Did we have a solution to the problem? No! We did not have any capacity to cover the differential, instead of addressing it, we only accrued huge arrears which have to be paid now. So the arrears have to be cleared and we have to fund current consumption. We have domestic revenue of K98.9 billion, allocation to debt service of K78.6 billion. The balance goes to civil servuce wage bill. Borrowing is also restricted given our external debt of $12.9 billion, domestic debt of K189.7 billion and domestic arrears of K46.9 billion. We are managing to fund activities right now because we have been allowed to default on some laons. Otherwise we don’t have any headroom to cover any huge increase in crude oil prices and we might find ourselves in a huge crisis of fuel shortages and resultant disruption in production. To avoid all this, given our dire economic situation, government opted for a monthly review of fuel prices. Others do it every two weeks. The idea is to quickly pass on the prices to consumers, be it a reduction or increase.
This is not to say monthly review does not come with its own complications and inconveniences. One of the biggest challenges is that Zambia mostly has small scale entreprises with a low capital base, these frequent fluctuations seem small but can be quite significant to most firms. They want stability and predictability to help them plan well.
The other challenge is that there is a tendency for firms to quickly adjust prices of goods and services when fuel prices increase, but when there is a reduction, prices will remain the same. It becomes difficult for government to regulate such prices, especially that it happens so frequently, we are also in a free market. A month is too short for a full transition, especially a reduction given that firms would want to keep prices of their goods and services high to make more profit. The end result is that reductions are not passed on to consumers.
It also becomes costly for firms to keep changing price tags. Consumers also don’t know what to expect when they go shopping. So there is a general sense of unpredictability. Others countries have fully adjusted but it is a learning phase for Zambia.
In conclusion, this article has explored both the sides; analysed the critical economic situation that makes it difficult for government to cover the price differential. It has also analysed the unpredictability and other shortcomings associated with monthly reviews.
Thank you.