WHY IT WAS INEVITABLE TO INCREASE FUEL PRICES!
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By Alexander Nkosi
1. INTRODUCTION
For us to appreciate the factors behind the hike in fuel prices, it is important to analyse this in the context of the economic crisis we face. This is not an isolated issue, the justification behind the move taken can only be understood in the context of wider economic challenges.
2. ECONOMIC CONTEXT
Zambia’s external debt is $12.9 billion, domestic debt is K189.7 billion and domestic arrears stand at K46.9 billion. Allocations to debt service in absolute terms have grown from K14.2 billion in 2018 to K78.6 billion in 2022. As a proportion of domestic revenue, allocations to debt service have grown from 29% in 2018 to 79% in 2022.
One would expect that since allocations to debt service have increased five times in just 4 years, the total debt stock should be reducing, however, this hasn’t been the case, we have been borrowing more than we are repaying. As of 2021, the domestic revenue we collect is not even enough to pay debt and salaries for civil servants. We are basically borrowing to pay salaries and borrow more to run all the sectors.
3. BACKGROUND TO THE FUEL HIKE
The previous government did not leave fuel prices where they found them, fuel prices kept increasing until months ago when prices were not increased not because government paid the difference but because government simply accrued more arrears.
This means government simply deferred the fuel increase without necessarily covering the cost (the differential between the price it was being bought and sold to clients). We ended up accumulating $506.1 million as at end of September 2021. Government is currently spending US$67.4 million every month in subsidising fuel. These subsidies are broken down as US$26 million on the price differential and US$41.4 million on foregone taxes. On an annual basis, this amounts to US$809 million.
I’m very hopeful the previous government will support this decision because even after leaving us with $12.9 billion external debt, K189.7 billion domestic debt and K46.9 billion domestic arrears, they still left us with $506.1 million arrears.
4. SHOULD GOVERNMENT BORROW MORE TO SUBSIDISE FUEL?
Should government borrow to keep this fuel subsidy? Government has to borrow $1.3 billion to clear $506.1 million arrears and $809 million annual subsidy. This would worsen our debt position. Which lender would accept our request for debt restructuring if we keep worsening our debt position? Also note that the $1.3 billion would have to be borrowed at commercial rates as it would be difficult to find anyone to lend us on concessional terms for this purpose.
5. WHAT IS THE STRATEGY MOVING FORWARD?
What is the strategy moving forward? The original plan as indicated during campaigns was to review the procurement process and reduce unnecessary costs. The challenge is that there are legally binding contracts still running and tempering with these would attract very huge costs which would make government spend even more.
The idea is therefore to let these contracts run their span and address these issues thereafter. It should also be noted that stabilising the exchange rate at around K16/$ will also help keep fuel prices low. Much as the kwacha is currently trading around K16.5/$, it has to stabilise at this rate for us to see tangible benefits.
6. WHY NOT SUBSIDISE AS WE WAIT FOR REVIEW OF THE PROCUREMENT PROCESS?
Why not subsidise until the current contracts have been concluded? As things stand, government has to find $506.1 million to pay for the arrears accrued, hence government would therefore need something like $1billion to clear arrears and pay for subsidies before these contracts are concluded and procurement is reviewed.
7. CONCLUSION
In conclusion, fuel is an important input in production, it affects the cost of production and cost of living. However, we are in a bad economic state such that we have to sacrifice even important things. Every decision has huge opportunity costs: Do we forego spending more on medicines to fund fuel subsidies? Do we scrap off FISP to fund fuel subsidies? Do we scrap off economic empowerment funds to finance fuel subsidies?
We also have to critically look at the following questions: To what extent does the increase in fuel prices affect citizens from different social economic clusters? To what extent does this increase in fuel prices negatively impact on cost of production? To what extent does it impact on cost of living?
If we borrow to keep subsidies, how does this impact on our already bad debt position and how do lenders view this as we step up debt restructuring negotiations? These are very tough questions that require deep analysis and not emotional reactions and motivational speeches.
My position is that let us allow fuel to be cost reflective, work on addressing procurement inefficiencies once current contracts expire and work on strengthening and stabilising our currency so as to positively impact on fuel prices in the medium term. The more we postpone taking a painful decision on this, the bigger the problem grows.
Thank you.