DISCUSSING INCREASE IN FUEL PRICES- HUGE DEBT HAS LEFT US VULNERABLE TO EXTERNAL FORCES!
By Alexander Nkosi
Fuel is one of the most important inputs in production. When fuel prices go up, the cost of transportation goes up and the cost of goods and services also goes up. To producers, the cost of production goes up. To consumers, the cost of living goes up, this affects savings and investment. Hence, government’s goal is to keep fuel prices low, this is key in speeding up economic recovery lift people out of poverty.
For a country like Zambia, fuel prices are affected by prices on the international market and the exchange rate. So how do we keep prices low? 1) Build enough reserves so that we can cushion the country against external forces, 2) Strengthening the currency so that we don’t spend more kwacha to get dollars to procure the commodity, and 3) Clean up the procurement process to reduce inefficiencies. Number 1 and 2 can be achieved in the medium to long term while number 3 depends on the legal aspects of the running contracts. Terminating running contracts comes at a very huge cost.
Given this background we are faced with a very big dilemma to address high fuel prices. We are already subsidising (foregoing over USD 40 million in suspended taxes), implying that prices could actually be higher than this. What do we do? Do we subsidise further? How do we finance the subsidies? Our domestic revenue isn’t even enough to pay salaries for civil servants and meet annual debt outlay which currently is K78.6 billion. There is nothing to divert to fuel subsidies, even the previous government could not finance the the subsidy, hence the reason we accumulated huge debt. We are already borrowing to finance the rest of the items in the budget.
How do we finance the fuel subsidy? Let’s look at options:
(i) Borrowing heavily from the capital markets: Who pays for this? It is us Zambians as it will worsen our debt situation. It will affect debt restructuring negotiations and will have counterproductive result which will further push fuel prices up. Our economy right now depends so much on the success of debt restructuring. If this doesn’t work, we might end up with a situation where domestic revenue is not even enough to cover annual debt.
(ii) Increase taxes to raise funds to pay for fuel subsidy: It comes back to the same thing, Zambians have to pay high taxes which will push up the cost of production and cost of living. Tax the mines more? They have a clever way of reacting; they will shelve investment plans and take their investments elsewhere, they will cut down on production and since we are heavily dependent on the mines for export earnings, this will hit the economy hard and send our currency into depreciation. The result will be an increase in fuel prices.
In conclusion, painful as it is, we have limited options and the one that represents less consequences in future is passing on the increase to consumers. It will affect the economy and rate of economic recovery but borrowing to finance subsidies will have worse consequences.
We have a great opportunity to sustainably keep prices low once we review procurement which is currently limited by legally binding contracts signed. Once the IMF deal is approved and debt restructured, funds released from debt repayment will be used to build fuel reserves and cushion consumers against temporal external forces. Capital inflow and reduced loss of dollars since we will be paying less debt will lead to kwacha appreciation which will push down fuel pump prices.
Thank you.