ERB and fuel prices
ERB and fuel pricesBy Editor
Monday April 16, 2007 [04:00]
It is sad to note that the government has totally resigned itself to international market forces with regard to the ever-rising price of fuel. The most recent increases in the prices have signalled a high level of panic and anxiety in industry. These prices have already overshot the year-end prices projected by industry. Going by the trend witnessed in the last three months, we can as well anticipate the pump price to reach K8,000 a litre by December.
What disturbs us is that the government has taken a lukewarm approach to this crisis. So far the government has failed to give any comfort or take measures that should stabilise the fuel prices. Energy minister Felix Mutati recently stated that the issue of fuel is a helpless one. According to him, the government cannot do anything against prices that are internationally determined.
The government appears to think that there are minimal economic and social implications by the frequent upward fuel price adjustments. Today, the nation is seriously stigmatised by any mention of the Energy Regulation Board (ERB). ERB is now synonymous with pump-price adjustments and this information is broadcast in the same manner boxing rounds are announced at boxing matches.
Every economy is there to be managed. In our modern world where there are sophisticated risk mitigation instruments, there is no excuse whatsoever for the government to turn a blind eye to this emerging disaster in the Zambian economy. Even Zimbabwe, with its immense economic dire traits, has instituted measures that will keep the price of fuel at less than one US dollar per litre.
Liberalisation does not imply the end in economic planning. Economic planning is anchored on the ability of the government to anticipate and effectively manage critical variables that would be harmful to the economy.
If the government does not understand the implications of what is now happening with regard to fuel prices, we want to point them to the following critical issues:
High fuel prices have implications on market confidence, productivity, inflation and the general welfare of the economy. If anything, fuel determines the effectiveness of all other economic variables.
All sectors of the economy are directly affected by high fuel prices. As is known, fuel drives the wheels of industry. Already, the Zambian economy has been said to be a high-cost producing destination. As a result, products and services produced locally are failing to compete within their own territory when pitted with imports.
Zambian industrialists have regularly complained that the high-energy costs are stifling the potential for economic expansion. Given this scenario, unregulated price hikes will not help matters. The projected seven per cent rate of economic growth for this year will be a dream in futility if the key input into industry keeps rising above the margins that were assumed by corporate entities, manufactures, farmers and other service providers.
It is possible that producers whose products and services are price inelastic will easily pass on this cost to the consumer. However, given the structure of the Zambian economy where imports are already much more competitive than locally produced goods, it is impossible for any investor to recoup these costs by increasing the prices. Many will end up closing shop and turning away employees at great social cost.
It is actually the norm in Zambia that for every increase in the price of fuel, there is a corresponding increase in the prices of goods and services. Already, the government is panicking about the sudden rise in inflation by about four percentage points within 90 days.
The increase in inflation is itself close to the projected year-end inflation of five per cent. This worries us. Economic variables are variables because they are manageable; we can vary them through prudent and active economic planning. Waiting for the maize harvest in order to contain economic volatility will only shock the government and destroy the current market and investor confidence.
We should also realise that 68 per cent of Zambians have no regular incomes. These are totally dependent on the few working relatives and incomes from informal businesses. Any rise in the price of fuel, therefore, only leads to a significant and irreconcilable rise in the cost of living. In other words, the rise in fuel prices cuts across the social and economic fabric of the economy.
Given this scenario, is it fair for the government to treat this matter as just a product of market forces to which economic leaders have no role? How come economies in the sub-region have vigorously and strategically contained fuel prices? On one hand, we can do nothing about prices that are induced from the suppliers with whom we have no negotiating power.
We know economies like South Africa have had increases in fuel prices but not at the rate Zambia has gone. This is because they know that leaving fuel prices to market forces or the invisible hand will result in an economic catastrophe.
There are many solutions to fuel prices. Some countries with effective hedge markets have utilised the derivative markets. This may, however, be far-fetched for Zambia given the recent experiences with vulture funds. Other countries have had huge fuel reserves that helped them minimise any such increases that would trigger economic shocks.
However, for Zambia, it is high time the government considered the option of subsidising fuel. Economically speaking, the real gains in terms of productivity can only be attained when industry and the economy at large have a level of price stability. This is a cardinal principle for any economy that seeks to expand output.
Of course it can be argued that subsidies are taboo and beyond discussion in Zambia. But which country does not have selective subsidy programmes? Subsidies work where a country has a solid economic or social goal. If such a goal is threatened by factors of cost or market limitation, subsidies become the most effective weapon.
The government should not be scared of discussing this possibility seeing that it has entrenched economic benchmarks induced by the likes of the International Monetary Fund. But if an economic programme best suits our challenges and aspirations, we should always make the right decision. We can no longer play the roller-coaster game in the issue of fuel prices.
If billions of kwacha can disappear from government institutions every year without the Minister of Finance and National Planning smelling some rot, there is no argument about the availability of resources for fuel subsidies. We should also investigate why fuel is expensive in Zambia and whether or not we need any such institutions as the ERB that appear to add to the cost of fuel.
ERB's mandate is to ensure that service providers earn a reasonable rate of return on their investments that is necessary to provide a quality service at affordable prices to the consumers. But are these fuel prices we are witnessing today affordable to the consumer? Is ERB living up to its mandate?
There is further need to invest in fuel processing plants that are cost-efficient and effective.
Labels: BIOFUELS, EDITORIAL, ERB, FUEL, NEOLIBERALISM
posted by MrK @ 4:10 AM
1 Comments:
" Energy minister Felix Mutati recently stated that the issue of fuel is a helpless one. According to him, the government cannot do anything against prices that are internationally determined. "
Excellent editorial. There are of course a lot of costs that are not part of international prices/events. Such as the dependence on a single refinery, the lack of a distribution/storage system that could stabilize prices, etc.
But wouldn't it be great if Zambia could be mostly selfsufficient in fuel, by producing ethanol it needs from potatoes, maize or hemp?
And speaking of hemp, this is a great source for biomass. The plant itself is a small supermarket, because of all the uses it's various parts can be put to.
The seeds are extremely nutricious, and can be used as a food source, or as bird feed. The fibers can be made into rope, or cloth, making it superior to cotton, because far fewer pesticides are required. It also grows well in dry regions. And as a factory of pulp for paper, hemp produces 3 times as much pulp per hectare of land than wood does.
The main advantage of biomass as fuel of course is that is grown locally, and does not need to be imported, with the related cost and waste of that process.
One remark though. Lowering the price artificially, doesn't increase it's availability. The only thing that does that, is increasing production (in this case, processing ability by having more than one Indeni) and increasing import of fuel products, as well as storage ability.
But in the end, the price of fossile fuels is influenced most by events in the middle east. If Zambia's fuel costs are higher than in the surrounding countries, then the cause should be sought in Zambia.
I think increasing storage, production and processing would be much more effective than artificially lowering prices.
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