Wednesday, October 27, 2021

Botswana Households under siege as fuel prices keeps going higher and higher…

The country’s National Petroleum Fund (NPF) which was set up to cushion its consumers is linked to a scandal relating to funds embezzlement.

The suggestion that the fund is now running dry leaves the beneficiaries, mostly retailers and motorists between a rock and hard place.

For fuel retailers, this could mean uncertainty on the usual cushion while for motorists it means less visits to the pump as prices are likely to go up every now and then.

Not so long ago, in November 2017, the consumer market saw the fuel price increase as a result of the rise in international crude oil prices and refined products prices. Petrol, diesel and paraffin were all each increased by 20thebe per litre.

Hardly a month later, 11th December 2017 another increase, this time of 30thebe each per litre was made.

Fast forward to 2018, just earlier this week motorists received yet another bad news. Petrol went up by23 thebe, 45 thebe for diesel and 38thebe for paraffin, all per litre.

Globally, the increasing average crude oil prices have largely been influenced by the Organisation of Petroleum Exporting Countries (OPEC) to restrict the supply of oil into international markets thereby triggering demand to be higher than supplies.

RUNNING DRY……

Other things held constant, the fuel price increase could start to be a burden to the consumers. The NPF is almost dry and needs atleast P600million to meet its statutory obligation going forward.

In July 2017 the government introduced the fuel tax calculated at 17.5 thebe per litre. This was in addition to the already existing fuel levy of 13.5 thebe per litre. The two special taxes could soon prove to be a burden to some motorists as wages on the other hand remain stagnant.

The impact is however expected to vary with each consumer depending on their geographical location as well as disposable income.

Moatlhodi Sebabole, Market Strategist-Treasury at First National Bank of Botswana explains that, naturally, it will be more costly for service provisions in rural areas than in towns as the logistical costs will be higher ÔÇô so businesses will tend to pass on such costs to the consumer which affects the price of goods and services that are rendered.

The FNBB market strategist is of the view that, the lower fuel prices observed since 2014 would have allowed the replenished NPF to recover. Allegations of misappropriation of monies in that fund, however  makes it difficult to assess the extent to which the fund will be able to provide its intended purpose of providing a price cushion especially at this time where oil prices are trending higher

Garry Juma, analyst at Motswedi Securities says all the consumers are facing one thing in common, which is an increase in fuel prices and a decline in disposable incomes.   

“Obvious consumers that are furthest will experience a slightly higher increase due to the transport cost,” he said.

According to Sebabole, two options exist for government. That is, to enact further fuel tax levies to assist in recovery of the fund, or perhaps to inject money into the fund through supplementary financing; obviously the increase in the levy hurts the consumer the most.

Other considerations he said, have to be made for administration of the fund going forward. “In efforts to stabilize future supply, the fund has had increases in capital expenditure (capex) directed towards storage infrastructure etc, and that has to be traded-off with the operational (OPEX) expenditure needs. Such a dynamic meant less funds became available for OPEX and might be anti-proposed reservation policy for fuel stations because if fuel stations will not get rebates in a timely manner, cash flows will be affected and make for difficult operations ÔÇô especially since the fuel suppliers mostly work on a supply cycle with limited cash conversion cycle.”

Subsidy, a good or bad concept?

The two analysts shared a different opinion on the subject. Sebabole says fuel subsidy is a good idea since it cushions the consumer from oil price volatilities ÔÇô so at times of higher oil prices like the trend we are expecting, the subsidy will help in protecting the consumers against aggressive fuel hikes.

Looking at current global oil prices against local fuel prices, according to Sebabole’s estimates the fuel subsidy implies consumers on average pay P2.00 below market price ÔÇô thus the subsidy if implemented well, benefits the consumer.

Juma is, however of the view that, subsidies are not always efficient as they encourage inefficient use and allocation of resources, further leaving the vulnerable members of the society worse off.  He said, “If the subsidy is too high, the prices of fuel may become so low this encourage over consumption which may lead to shortages and the emergence of the ‘parallel market’.” Juma cited an example that, in 2016 Nigeria removed a fuel subsidy which has been in place due to lots of inefficiencies.

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