TO SUBSIDIZE OR NOT TO SUBSIDIZE THE PRICE OF FUEL ???
By Sean Tembo – PeP President
1. In his 2024 National Budget speech to the National Assembly, the Minister of Finance argued that subsidizing the price of fuel is untenable as it would mean sacrificing other important benefits such as free education. In other words, the Minister was telling us that the Zambian economy will remain directly exposed to the world fluctuations in oil prices, which by the way are quite a lot. If Saudi Arabia cuts output, or the Chinese economy shows a huge quarterly rebound or Ukraine bombs Russian oil facilities or the US cuts subsidies for it’s electric car industry, it means the pump price of fuel will go up here in Zambia. The variables on the world stage which can cause fluctuations in oil prices are too many and too varied for the Zambian economy to be directly exposed to them without any kind of cushion, as Musokotwane suggests.
2. Fuel being a key production input means that any increase in price will have a huge adverse trickle down effect on the prices of other goods and services. In other words, the price of fuel is a key driver of inflation. Therefore, if the country takes the route of not cushioning the local pump price of fuel from the never-ending fluctuations in oil prices on the world market, as Musokotwane suggests, then it means that we need to brace ourselves for very high inflation. And remember that high inflation brings about a depreciation of the Zambian Kwacha against major convertible currencies. And when the exchange rate goes up, it means that we have to pay more Kwacha in order to import the same amount of fuel, since the price of fuel is pegged in hard currency such as the US Dollar. If we pay more to import the fuel, it means the pump price will further go up, which will further drive up inflation which will then drive up the exchange rate which will again drive up the cost of importing fuel which will again drive up the pump price. In other words, Musokotwane’s suggestion that we should not subsidize the pump price of fuel will only bring about a never ending cycle of high inflation, high exchange rate, high cost of importing fuel and even higher pump prices. That is exactly what we have seen in the past 2 years. A consistently continuous increase in the cost of living and a consistently continuous decline in economic growth.
3. But what about the alternative? What if we decided to subsidize the pump price of fuel? What’s the cost and what are the benefits? Before we proceed, it is important to put it on record that historically from as far back as 1991, successive Governments have always subsidized the pump price of fuel, and the New Dawn is the first administration in the history of Zambia not to do so. During Levy Mwanawasa’s tenure in office, he decided to take a more systematic approach to the issue of fuel subsidies by creating what was known as the Fuel Stabilization Fund under the Energy Regulation Board, when ERB was run by one brilliant Chiteta Chingambu as it’s Board Chairman. The way this Fuel Stabilization Fund worked was that when oil prices where low on the world market, the Fund would be credited with a surplus, and conversely when oil prices where higher than a set benchmark on the world market, the Fund would be debited with the deficit. This approach allowed ERB to revise it’s benchmark fuel pump price as infrequently as once per year, and therefore created some semblance of economic stability. Since economic growth can only take place when there is economic stability, Levy Mwanawasa was able to score some significant economic successes during his time in office.
4. But let us get back to the question of what the benefits and cost of fuel subsidies would be. If we subsidized the pump price of fuel and kept it stable for say a year, firstly inflation is likely to significantly drop because fuel, and by extension, transport, is a key driver of inflation. Ceteris paribus, a reduction in inflation is likely to drive an appreciation of the Zambian Kwacha against major convertible currencies. Consequently, the cost of importing fuel will come down which is likely to further benefit consumers in terms of reduced pump prices. In addition, stable fuel prices will bring about stability in the economic environment and the economy will be better poised to grow. We all know that economic growth brings about new jobs and better profits for traders and other businesses. In other words, when there is sustained economic growth, prosperity trickles down to everyone. Even the old lady selling roasted maize by the roadside will record higher sales and better profits.
5. But what would be the cost of subsidizing the pump price of fuel? Well, from my point of view, it is not really a cost but rather an investment. During his budget speech, Musokotwane argued that subsidizing the pump price of fuel would mean that the nation would have to forego certain benefits such as free education. The question that should perhaps be answered is whether the Zambian people are better off with free education and a non-functioning economy where the cost of living is through the roof, or they are better off without free education but with a properly functioning economy where job opportunities and business opportunities are readily available? Which one is the better poison? At this juncture, it might be important to remind ourselves that the reason Government came up with the initiative of free education is because most of the Zambian people were not able to afford to pay school fees. They are not able to pay school fees because the economy is in shambles and they don’t have an income. So if the economy can be turned around and the people have job opportunities and business opportunities, then the question of free education becomes otiose because people will afford to pay for their children’s education. In other words, when the economy is as bad as it is, Government’s initiative of extending some charity to the people in the form of free education, should only be a stop-gap measure. The real solution lies in fixing the economy itself.
6. Therefore, Musokotwane should be reminded that if we do not subsidize the pump price of fuel, the never-ending cycle of inflation, depreciation of the Kwacha, high cost of importation of fuel and further higher pump prices, will keep repeating itself as it has done in the past two years. The end result will be continued economic decline, high cost of living and abject poverty for the people. As Musokotwane himself correctly observed in his budget speech, our GDP growth rate has consistently fallen from 5,2% in 2021 to 3.5% in 2022 and projected to be 3% in 2023 and forecast to be 2.7% in 2024. These are not just numbers. These are actual human beings sleeping hungry. Therefore, Musokotwane and his people in Government should do the right thing. They should go back to the model which other previous administrations used to stabilize the pump price of fuel and create a stable economic environment that is necessary for the economy to grow and thrive. If Musokotwane wants to insist on his current path, then his Government should not only provide free education but also free food and free accommodation to the Zambian people. The people deserve better.
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SET 02.10.2023