It has been over a year since the government abolished subsidies on petroleum products and instituted a monthly fuel price review through the Energy Regulation Board (ERB) to reflect a more accurate cost of the product. Fuel prices have since been fluctuating in the country resulting to monthly anxieties and uncertainties amongst consumers and suppliers of petroleum products. The Zambia Tax Platform (ZTP) has observed that in recent months, Zambia has seen a gradual increase in fuel prices which has affected among other things, transportation costs and production costs for businesses. As of 1st February 2023, the pump prices for petrol and diesel are set at K27.22/litre and K29.25/litre respectively.
The recent hike in fuel prices is due to a combination of global market trends (increase in oil international prices) and a weakened Kwacha, which has made imported fuel more expensive. The exchange rate depreciated to K18.9/US$ in February 2023, from K17.61/US$ in January 2023, representing 7.33 percent depreciation. Factors that have led to the depreciation of the Kwacha against the dollar include; speculations regarding the extended timeline in the discussions on debt restructuring of external loans resulting as well as the high demand for foreign exchange on the market.
Consequently, this has increased the cost of importation of fuel for Oil Marketing Companies (OMCs) despite government’s effort to scrap off excise and customs duty on both petroleum and diesel as of January 2023. The depreciation of the Kwacha also has the potential to result in lower fuel stocks in the country as some OMCs may choose to import less fuel (due to the impact on profitability), leading to shortages and ultimately passing on the costs to consumers through higher fuel prices as set by ERB. Equally, the costs of goods and services for consumers are generally increased as businesses continue to face higher operating costs thereby, putting pressure on already stretched household budgets, leading to concerns about inflation and reduced purchasing power.
Dealing with the rising fuel prices requires among other things, reducing the exchange rate. The Bank of Zambia, acting on behalf of the Government, has taken steps to control and stabilize the exchange rate by raising the Statutory Reserve Ratio (SRR). This aims to address liquidity issues and promote economic growth. Additionally, having a stable exchange rate helps cushion the impact of rising fuel prices. To further mitigate the risks of increased fuel costs, Government may also consider implementing or enhancing the following measures:
i. Encouraging fuel-efficient vehicles and public transportation options.
ii. Encouraging domestic production of biofuels to reduce dependence on imported petroleum.
iii. Building strategic fuel reserves to stabilize prices during supply disruptions.
iv. Pursuing regional cooperation with neighboring countries to negotiate better fuel import deals.
It is important to note that mitigating the risks of rising fuel prices requires a multi-faceted approach, involving both short-term and long-term solutions.
Ellen Makinishi (Ms)
Private Sector Enhancement Expert