Saturday, December 4, 2021

Fuel Price hike poses challenges to local economy – experts

As global oil prices continue with zigzag movements following Covid19 economic disruptions, the Botswana government through BERA continues to be under pressure to match the pattern of the curve.

At a regional level, the South African central energy fund recently indicated that fuel prices are expected to increase in August, hardly a month after another upward movement.

According to a media release by the Central Energy Fund (CEF) in South Africa, the forecast fuel prices indicate that for August 2021there is a significant price increase in all categories. The mid-month data currently indicates an increase of 83 – 87 cents per litre for petrol and 57 – 58 cents per litre for diesel. 

But now economists in Botswana have warned against another fuel hike in the domestic economy following a hike made just under a month ago.

Quotative analyst at First National Bank of Botswana (FNBB) Gomolemo Basele said although the expected fuel price increase is unlikely to play to a full degree like in South Africa, the changes in the international market is likely to affect the domestic market.

“We are likely to see an increase in domestic fuel increase because the national petroleum fund which could cushion the impact has depleted” said Basele.

He further said the changes will affect the both households and businesses, adding that for businesses as they continually move their goods across the country, it will become even more expensive.

“What is not clear is the degree to which businesses will be able to cushion those costs without passing them to the consumer”

“From the household perspective, the usual commute will cost more because fuel prices will influence public transport hike,” added Basele.

For his part, Independent Economist Powell Kebinaefhe said Presently Botswana sources its fuel from South Africa, considering the existing state of affairs, adding that it is envisaged that fuel prices in South Africa will rise.

“This will necessitated by cost push inflation that will directly affect fuel retailers in Botswana. However, that will greatly depend on the nature of contract sealed between retailers domiciled in Botswana and supplier in South Africa”

“In instances where financial derivatives such as call-options is not employed then in the short run of things increment in fuel prices in SA will certainly affect fuel prices in Botswana. This will generally spark inflation thus denting the welfare of consumers ultimately,“ said Kebinaefhe.

He further said Increment in fuel prices in SA (supply side) will result in cost-push inflation and the burden of it being shifted to motorists by retailer via exorbitant prices for fuel, saying this implies that motorists purchasing power in relation to fuel will be eroded to a very considerable degree.

“In instances where fuel prices are heightened motorists will face repercussions of such events. However, they can only be cushioned by relevant authorities provided there is reserved fuel for a satisfactory duration”

“Reserved fuel ensures that there is security in supply regardless of prevailing ugly situations from the supplier’s side and in that fashion economic shocks are absorbed by authorities thus extending cushion to motorists in Botswana” said Kebinaefhe.

He added that there is a plethora of factors that determine fuel prices saying they are all deemed to be global or national fundamentals such as supply and demand, customer expectations, refinery operations and pipeline deliveries, state of inventories in a country and financial market considerations.

“I observed that in South Africa basic fuel prices are influenced by import parity pricing principle”.

“I propose that we as a landlocked country consider supply strategy which focuses on diversifying the sources of fuel that is to say source fuel from array of countries such as Mozambique and Namibia a d construct reserves so to monitor unforeseen negative economic shocks.”

The reason for the steep increase in prices is due to the average international product prices for petrol, diesel and illuminating paraffin increased during the period under review, and the rand slipping against the US dollar during the period under review, on average, when compared to the previous period.

The riots and looting that have taken place in KwaZulu Natal and some parts of Gauteng have added pressure to the fuel price increase. Adding fuel to fire road networks, transporting of goods including fuel are restricted whilst refineries in KwaZulu Natal remain closed.

In July this year, Botswana Energy Regulatory Authority (BERA) revealed a press release informing the general public that the retail pump prices for petrol, diesel and illuminating paraffin will adjusted.

Retail pump of unleaded petrol 93 was increased 61 thebe per litre, retail pump price of unleaded petrol 95 was increased by 63 thebe per litre, retail pump price of diesel 50ppm was increased by 53 thebe per litre and retail pump price of illuminating paraffin was increased by 92 thebe per litre.

While the National Petroleum Fund (NPF) is supposed to provide a buffer against deep fuel price increases, the Fund has been depleted due to years of under-recovery dating back to 2018, as well as a highly-publicised saga involving the diversion of P250 million from the Fund.

RELATED STORIES

Read this week's paper