ZAMBIA’S ECONOMY IS LIKE A PATIENT WITH A TUMOUR, AN OPERATION WILL LEAVE A TEMPORAL WOUND BUT IT IS THE SOLUTION!
By Alexander Nkosi
Fuel prices affect both consumers and producers. High fuel prices increase the cost production and slow down economic recovery. It also increases the cost of living which slows down savings and further affects investment and production. Therefore, government would really want to keep prices down. The challenge we face is that we have limited options, and at a time we are engaging creditors over debt restructuring, we have to demonstrate we can limit our borrowing and make sacrifices.
Zambia is like a patient with a tumour. The tumour has reached a stage where it has to be removed now or never. All along the patient has been using expensive pain killers to relieve pain but this hasn’t necessary slowed down the growth of the tumour. The operation to remove the tumour is painful but necessary and it has to be done now.
The problem is not the slight adjustment in prices effected end of June 2022, but that it has significantly increased over the months. To bring prices down to a level where people feel the relief, government needs to subsidise heavily. These subsidies are like a pain killer, they offer temporal relief. In our case, as of 2021 the total cost of fuel subsidies was USD67 million. USD26 million was to cover the price differential to enable consumers buy fuel at a lower price. Government also suspended taxes on imported petroleum products and the revenue loss from this measure was estimated at USD41 million per month as of 2021. Note that the USD26 million price differential wasn’t necessarily being covered and it led to arrears accumulating to over USD700 million.
The new government inherited USD12.9 billion external debt, K189.7 billion domestic debt and K46.9 billion domestic arrears. Domestic revenue is not even enough to cover annual debt service and civil service wage bill. Government has to borrow to dismantle arrears owed to oil marketing companies. Had government opted to cover the price differential, it would have meant borrowing to dismantle arrears while covering the differential. The immediate focus was to dismantle arrears so that we don’t have disruptions in the supply of the commodity.
Note that despite prices being high, the tax waiver on imported petroleum products still remains in effect. Essentially government is sacrificing around USD41 million in foregone tax.
In conclusion: debt restructuring, kwacha appreciation, cleaning of procurement process and bilateral fuel supply agreements- will help lower the prices of fuel. This is the operation which is underway to remove the tumour.