The fuel price review made on 16th December 2021, was on the backdrop of the Government’s policy decision to scrap off fuel subsidies due to excessive government debt. Domestic fuel prices were thus adjusted upwards by K3.74 and K4.56 for petrol and diesel, representing a percentage increase of 20.1% and 29.2% respectively. Soon afterwards, a statement was issued by the Energy Regulation Board (ERB) on Tuesday 25th January 2022, that the agency had moved to a 30-day pricing cycle for Petrol, Diesel and Low Sulphur Gas oil (LSGO). At that announcement, the price of petroleum products was reduced by a fraction of the December increments with reductions in the range of K1 on both petrol and diesel. At the February month end, prices were again increased.
The monthly review of domestic fuel prices means that domestic prices of petroleum products will heavily rely on the performance of international oil prices and the kwacha-dollar exchange rate which are highly volatile. Adopting a 30-day pricing cycle strategy by ERB entails difficulties in manufacturers’ planning decisions as domestic prices of petroleum products will be expected to follow the trend of international oil prices and the performance of the Kwacha against the US dollar. Prices will rise whenever a rise is recorded either in the international oil prices or when the Kwacha loses value against the US dollar. Likewise, domestic fuel prices will decline whenever international oil prices reduce or when the Kwacha gains value against the US dollar. Without prediction models, manufacturers will have to rely highly on ERB.
Subjecting the manufacturing sector to such an unpredictable policy adds inconvenience to the already existing inconsistencies. The manufacturing sector has been grappling with supply chain disruptions triggered by the Covid-19 pandemic, where goods would move between a month and three months, travel time has extended to a period as long as 6 to 12 months. Thus, manufacturers cannot use ‘just in time’ principals but have to order raw materials and other stock way in advance hence disturbing their cash flow. Furthermore, electricity disruptions are usually unannounced and without schedule thus increasing down times for production. Additionally, consistent fluctuations in the depreciation of the Kwacha have made it difficult for manufacturers to effectively operate.
Given an unstable currency like the Zambian Kwacha and volatility in the international oil prices which might exacerbate on account of the invasion of Ukraine on Russia, international fuel prices are likely to rise further, and regular fluctuations of higher domestic fuel pump prices should be anticipated. Consequently, manufacturers will be faced with a problem of knowing how big a cost they should attach to fuel in the medium to long term, as fuel remains a key resource in the production process. With a rise in domestic fuel prices, increases in the cost of transportation of raw materials as well as distribution of final products for manufacturers will be likely and ultimately push the cost of production even further.
In the recent past, despite observing a rise in cost of fuel in December and February, manufacturers opted to maintain prices of their products to remain competitive on the market. This can be seen from the slower rise in prices or a reducing inflation rate which has been on a downward trend since August 2021. Food inflation drove total inflation (60% of manufacturers are food processors) unlike non-food inflation which has been seen to have risen in some periods. In January 2022, food inflation dropped to 16.9% from 19.9% which was recorded in December 2021 while non-food inflation rose to 12.7% from 12.1% in the same period. Increasing prices of products would have made local manufacturers lose out on customers as it would have made domestic products expensive relative to imported products from the region.
Nonetheless, manufacturers can no longer bear the pressure from increased costs of fuel. Inevitably passing on increased costs of production emanating from increases in domestic fuel prices will have significant negative effects on the economy. This may result into higher inflation, increased levels of poverty and an increase in job losses from the manufacturing sector. Lessons can be learnt from countries like Sri Lanka which suffered greatly from high oil prices before administering massive subsidies to cushion the negative effects of oil price increases.
To ensure stability within the markets, the Government should have opted for a phased approach of removing subsidies as opposed to completely scraping them off. Alternatively, creating a limit below which the Government will not implement subsidies can shield manufacturers and other fuel consumers in cases of large shocks. In cases where there is a large increase in international oil prices, only excess costs on domestic fuel prices could be subsidized by the Government. For example, limiting subsidy free fuel price increment per liter to K2, such that whenever domestic fuel prices increase by more than K2, only excess costs above K2 will be subsidized by the Government. Creating such a limit would assist manufacturers make medium to long term planning projections that will produce better economic outcomes which are in line with the Government’s targets of achieving high growth and recording a single digit inflation rate by end 2022.
