FUEL SUBSIDIES ESSENTIAL

Fuel subsidies are essential as they reduce the cost of production which in turn increases economic growth.

Consequently, almost all countries of the world subsidies their fuel. It is worth noting that although almost all countries subsidies their fuel, almost all of them are indebted, some are more indebted than Zambia.

They keep on subsidizing fuel anyway because economic growth that may come as result of cheaper fuel can take them out of debt. In 2020, countries across the world spent more than USD420bn in subsidizing their fuel and more than USD5trn in subsidizing fuel and all other fossil fuels.

a) Why fuel subsidies are necessary
Cheaper fuel means that cost of production is lower which translates into more production and low inflation. If we produce more, even tax revenue collection would increase, high, enough to offset the money spent on subsidies. Actually, if poorer countries had the capability, they would make fuel price free to accelerate economic growth.
b) Fuel Subsidies and fuel price for Zambia
The government spends about K10 per litre of petrol on subsidies and the same litre costs about K10 at source today though the same was costing K2.46 in April 2020. It is worth noting that without subsidies and VAT having been waived on fuel early this year, the cost of a litre of petrol should have been about K31.86. However, it must be noted that in the litre price of fuel there is a component for fuel procurement and storage inefficiencies which are not desirable, they must be quantified and removed if possible. The country spends about USD21m on fuel subsidies every month.

c) Why subsidies should be removed.
There is very little economic justification for fuel subsidies removal. With subsidies, fuel price is maintained at manageable levels and every citizen benefit in one way or the other. This explains why almost all countries in the world have fuel subsidies, even the USA subsidies its fuel. Almost all countries that subsidizes fuel are indebted and some are more indebted than we are. However, we are not only indebted but we have defaulted on loan repayment before and we are looking for lenience from our creditors so that our debts are restructured, it is therefore immoral for us to keep our fuel subsidies in place .Otherwise there is nowhere else we can get a better satisfaction from the money spent on fuel subsidies more than we get from fuel subsides. It is actually much better to reduce a budget line and transfer this money to fuel subsidies.
d) Fuel price in Zambia
Fuel price is driven by two major items, namely exchange rate and price of oil on the international oil markets. Today oil price is at about USD72 per barrel when the same was USD21 in April 2020 yet we have not had a fuel price increase between April 2020 and today. The Kwacha had reached a rate of K23 per USD yet the fuel price has been kept constant. Why should we then not increase our fuel price? We are spending about USD21m per month on fuel subsidies but if the fuel price is kept constant while the ZMW keeps on depreciating against the USD and oil price continues going up, we shall start spending more than USD21m on fuel subsides per month unless we push the additional cost to OMCs who can only take so much. Is that what we want? It would be better to maintain subsidies at USD21m and increase fuel price as the cost of inputs increase, that’s if we choose not to remove subsidies. Increase fuel price to enable those in fuel importation business to have a motivation to continue serving us. It is wrong to expect fuel prices to be constant when exchange rate and oil prices do not support that and it is wrong for anyone who is trying to control inflation to advocate for fuel price increase as increase in fuel price results into increased inflation.

How should fuel price be increased?
If at all we are convinced that fuel subsides must be removed, we first need to quantify the cost of inefficiencies in fuel procurement and storage. Currently the subsidy per liter is about K10, how does the cost of inefficiency compare with the K10 spent on subsides. If for example, the cost of inefficiency is K5 per litre and it is possible to remove such inefficiencies, remove it so that the subsidy is reduced to K5. Remove the remaining subsidy in a phased a manner to reduce the negative effect on the economy. It would be good to even borrow money from CDF to maintain part of the subsidies that is awaiting removal and it is not in the budget.
As you remove subsidies increase fuel price as oil prices increase and the USD/ZMW exchange rate keeps on detoriarating.This will help Oil Marketing companies to keep on serving us or else they may stop importing fuel if there is no chance of making a profit.

Measures needed to be taken to control fuel price
It is surprising that even the most powerful and most financially literate countries have not done enough to hedge against prices of oil .The USA have stockpiled fuel to cover as much as five months consumption and last week they released part of this reserve to control fuel price on the market, in the USA. I wish poorer countries had stock piled fuel in this manner too . Imagine if a poorer country had storage capacity and bought fuel in April 2020 when a barrel price was USD21, compared to the current price of USD72.Countries have not done enough to hedge against the price of the USD either yet the price of the USD and the price of a barrel of oil are the two main determinants of fuel price. Hedging is not impossible but very necessary yet countries have not invested enough in it, it is surprising indeed.
Increasing fuel price is inevitable even if the subsidies are not removed. Removing subsides should be the last resort as they are important for accelerating economic growth especially in the era of the pandemic . There is no economic justification to remove subsidies, however a moral justification does exist.

Compiled by Naylor Kopakopa

The author is a Chartered Accountant & Financial Analyst

3 COMMENTS

  1. The question of whether we stop or continue subsidies on fuel, or any other commodity is two pronged.
    1) Affordabilty. Rich countries like USA are able to subsidies simply because they can afford it. Their subsidies are relatively insignificant compared to GDP. Zambian budget is already overstretched as such we cannot afford subsidies. Hence borrowing to pay fuel subsidies just adds to the insurmountable debt mountain.
    1) Economic necessity. This argument is predicated on the premise that a commodity is essential and yields more benefits directly and indirectly to the economy in the long run resulting in higher GDP. For example, cheaper fuel promotes higher economic activity creating jobs, increasing wages, taxes etc.
    In the case of Zambia however, affordabilty carries the day simply because we cannot continue to borrow to pay subsidies when we are defaulting on the same loans.

  2. (1) These same subsidies are being paid from our over taxed personal incomes. (2) Just save the $600 million on tax rebates in a year you have given mines and you will have the money to subsidize fuel for 2 entire years. (3) Boz has to control the kwacha to Usd rate and fuel imports will be cheaper. When they fail to bring this rate down to the promised K10 which would make fuel landed cost very cheap, they ran to remove subsidies to compensate this failure………………………….Modern times require modern solutions by modern people.

  3. 1) Affordabilty. Rich countries like USA are able to subsidies simply because they can afford it. Their subsidies are relatively insignificant compared to GDP. Zambian budget is already overstretched as such we cannot afford subsidies. Hence borrowing to pay fuel subsidies just adds to the insurmountable debt mountain…………WHY DO AN EXPANSIONARY BUDGET WHEN THERE IS NO MONEY?

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