Sunday, October 17, 2021

New fuel tax may bite deep into gasoline costs

Local asset management firm Kgori Capital anticipates that the newly introduced fuel tax, in addition to the existing one, will eat into the National Petroleum Fund by P48 million every year and with time could result in an increase of the retail price for petrol.

The fund is a statutory buffer providing subsidised pump prices for the economy.    

A fuel tax of 17.5 Thebe per litre that came into effect beginning of this month was added to the existing fuel levy of 13.5 Thebe per litre. The new levy is expected to assist Botswana Oil to buy stock, meet insurance premiums for government oil storage facilities and construct other strategic storage facilities around the country at the backdrop of an estimated annual consumption of 1.2 billion litres of petroleum products.

Previously the tax on levy was used among other things to finance the construction and maintenance of roads.

It was said after its introduction that an increase of the retail price for petrol would not likely happen immediately as it was believed that the rise would be absorbed by the fund.

Kgori Capital says the increase in subsidised amount of the fund could result in outflows that will likely make maintenance of the fund difficult. The premise of unsustainability of the expected outflows of the fund is justified by a past experience in 2013 when government announced that the fund was running on empty because of the extended period of time with which the economy needed cushioning.

It goes to show that the buffer is in itself prone to external market forces particularly relating to the real petroleum product prices given that it meant to reduce their burden to consumers.      

According to Kgori Capital: “Given the current downward trend of the oil prices, save for this past week’s gains, the cost of petroleum products at the pump is expected to remain relatively unchanged. As it stands, our estimates suggest that it would result in at least a 4 Thebe per litre (P48 million per annum) disparity that will have to be covered by the Fund and as such will necessitate a fuel pump increase to compensate petroleum product sellers for the tax.”

The fuel tax is one of the mandatory contributions made among the list of taxes in Botswana, others being personal income tax, value added tax and vehicle license fee to mention but a few.

It is assumed that taxation of fuel provides a stable revenue base because the demand for fuel does not change significantly with short-term variations in price. In the case of Botswana price fluctuations are seldom felt by consumers because of the cushion of the fund.

The government closely monitors developments on petroleum products prices and from that determines appropriate retail price for petrol and diesel.

Since December 2014 when the oversupply of oil in the global market happened the government had responded with recurring decreases in the retail price for petrol and diesel. The following year government adjusted the retail price for petrol and diesel downwards three times.

This demonstrates the cushion that consumers have previously benefitted from. The expected increase in the retail price for petrol and diesel follows a buffer that consumers have enjoyed.

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