Maravi

Fuel hike

Fuel hike
By Yusuf Dodia
Tue 19 Jan. 2010, 04:00 CAT

A fifteen per cent increase in the price of fuel can be compared to a currency devaluation, when the impact on domestic productivity is assessed.

Having said that, currency devaluation may make imports costs more, but it conversely also makes exports cheaper to the foreign markets thereby stimulating higher export earnings. Fuel price hikes only benefit the oil marketing companies while the rest of the economy has to brace itself to receive the kick in the gut.

Any increase in fuel prices hits different businesses in different ways. The least affected businesses are those that import a product and sell it on the local market. The net effect of increased fuel prices affects the cost of importation via air or road as in the case of landlocked Zambia. This extra cost is usually added to the market price of the commodity and the end user, also known as the consumer, pays the higher price. Technically, a fifteen per cent fuel price hike results in a fifteen per cent price increase of imported products.

The impact of a fuel price hike on the four strategic sectors of our treasured Fifth National Development Plan (FNDP) namely; agriculture, manufacturing, mining, and tourism, is much more complex and can have a multiplier effect on the increased cost of doing business.

Agriculture requires fuel for transporting the seeds, fertilisers and other inputs to the farms. Higher fuel prices make these inputs more expensive. Fields have to be ploughed and harvested using tractors and other machinery that use fuels. This is another area where the cost of production goes up. After harvest, the produce requires to be transported to the urban areas or milling companies for processing. The higher cost of fuel makes this exercise more expensive. Finally, the produce such as maize and other grain crops will need to be distributed into the various markets around the country. The cost of fuel has a final bearing on the consumer price of the commodity to the average person.

Manufacturing is undermined in much the same way as agriculture because the majority of our industry uses raw material imported from other countries and then follows a similar process as that of processed agricultural products. The multiplier effect and impact of increased fuel prices can easily be analysed throughout the various stages of a manufacturing business in Zambia.

Mining today requires that ore is extracted from the ground at one site and transported by trucks to the processing centre which is generally a relatively long distance from the extraction site. Thereafter, the ore is processed and the metals or other selected products are batched and packed for export. Finally, the mined product is exported by road or rail out of the country to the nearest sea port for physical removal from the continent and destined to outside processing markets.

Increased fuel prices add to the cost of doing business at each stage and the end product either has to fetch a higher market price to cover the increased costs of production, or as in the case of globally traded commodities such as copper, the exporter is forced to absorb the loss and therefore tighten the business operations to the extent that the business may cut corners in respect to salary increments, safety measures, health services, and allowances. These cuts are generally the ingredients for industrial disputes which often lead to production shutdowns and further losses in the mining industry. In the case of Zambia, there is potential for the country to fuel inflation and plunge the GDP growth goals from seven per cent to levels below five per cent. This may not be a risk that a growing and promising economy may want to take.

2010 offers another opportunity for Zambia to propel the tourism sector to become possibly the highest earning sector of the country, even surpassing mining. The recent earlier opportunity was the collapse of the Zimbabwean economy which dominated the tourism market in this sub region. Increased fuel prices in Zambia now place Zimbabwe in a more competitive position for tourism as the Zimbabwean fuel becomes much cheaper than that of Zambia. Tourism investments require food and other products to be delivered to the lodges and hotels across the country. These deliveries are done by road where fuel is the driving force. Tourists have to move from one tourist site to another by road, rail, and air.

These are all fuel based transport systems. Tourists have to come in and out of the country using transport systems that are fuel based. The various tourism products and events are all fuel based as game drives, boating, and even rafting support, all use fuel to get things done. Zambian tourism starts to get more expensive to foreign, regional, and local visitors to the extent that other options are chosen and Zambia loses. Zimbabwe starts to get back their lost market and the impact of 2010 World Cup on Zambia will be only the pictures on television and the media reports of how other countries in the region raked in huge profits as a result of strategic planning.

So, fuel price hikes actually undermine our own development programmes. Fuel price hikes actually undermine any development activities that a country may wish to undertake. In fact, fuel price hikes tend to motivate the private sector to move away from manufacturing, processing, and developing exquisite services in the country.

Fuel price hikes generally persuades any business minded person to put his or her investments into trading activities where the impact has a relatively lower effect, and leave the adventurous business of manufacturing and processing for more stable and predictable days out there somewhere in the future. This prospect is very real for Zambia, and the impending Comesa Customs Union implementation this year either motivates Zambian companies to rise to the challenges and opportunities offered, or through non supportive measures such as fuel price hikes, highlights the imminent threats posed by the more strategic and pro active regional economies in such a way that the Zambian private sector actually retreats to the safe trading grounds that buy and sell anything and everything made in the Customs Union irrespective of which country produces the commodities. What is Zambia’s strategy? Where do we want to go? What do we want to achieve? How do we intend to do it? Who are the players? Will fuel price hikes support our economic and social development goals?

Labels: FUEL, INFLATION

posted by MrK @ 6:23 PM