By Liywalii Kanyimba
In my last thought piece on fuel subsidies, I raised the question on whether or not fuel pump prices will further go up after 31 December 2021. This is on the backdrop of the suspension of duties and VAT applicable up to the aforesaid date (unless there is an extension I am not aware of).
Since then, I invested my reading time and research to understand how subsidies work and what exactly we are talking about in the case of Zambia, building up on the statement by the energy regulator, the Energy Regulation Board (ERB), that ‘the increase in fuel pump prices was necessitated by the removal of subsidies on petroleum products to reflect the correct prices of the commodity.
For context, subsidies in most analyses can be broken into two types, those given to producers of a given commodity and those to consumers. In the case of Zambia, the fuel subsidy is primarily a consumer subsidy, one which reduces the end price of petroleum products through government controls of the cost.
William Blyth, an expert in energy security and climate policy and author of a 2013 report on fossil fuel subsidies for the UK’s Environment Audit Committee stated as follows:
“Consumer subsidies are in fact often applied to products…..which only the relatively rich can afford. And that subsidy is coming from the tax base. So, in fact, what you see is that that subsidy is actually creating a transfer of wealth from poorer to rich people.”
With the context set above, what is the breakdown of Zambia’s fuel subsidy? Is the information disseminated on this very important issue accurate?
The Secretary to the Treasury, Mr Felix Nkulukusa brought into exposition in one of his thought pieces justifying the removal of subsdies that Zambia’s fuel subsidy is about USD 67 Million per month or USD 800 million per year, according to him the National Treasury is losing. He further went on to say that “more than 60% of fuel in Zambia is consumed by the mines….with only less than 2% being consumed by ordinary and vulnerable people who are genuinely supposed to be subsidised”.
In my view, the real beneficiaries are the mines and those alike and accordingly, should be the ones not to be subsdised as opposed to the approach adopted to impact all including ordinary and vulnerable Zambians that the Secretary has acknowledged as being the ones that are supposed to benefit.
Information that has emerged so far in the public domain indicates that the above USD67 subsidy cost per month comprise of two things:- USD 26 Million price differential arising from the exchange rate fluctuation and balancing of world market prices; and USD 41.4 Million (more than 60%) lost because of suspending taxes (VAT at 16%, Customs Duty at 25% and Excise Duty of K0.64/ltr on petrol and K0.62/ltr on Diesel).
The above occurs clear that the recent K4 fuel pump price increase has only factored in the cost of exchange rate fluctuations and balancing of world market prices. This means the rest of the suspended taxes, accounting for more 60% of the fuel subsidy have not been adjusted for in the current fuel pump prices as these remain suspended to 31 December 2021.
It is therefore partially inaccurate as pointed out by the energy regulator that the increase in fuel pump prices is due to the removal of the subsidies to reflect the correct prices when the suspension of the taxes accounting for more 60% of the fuel subsidies has not been lifted.
When the suspension of the taxes is lifted since the government’s direction is to do away with the subsidies, inevitably the fuel pump prices will further increase. And maybe suggestions that the pump price per litre should be above K30 should be correct looking at the amount of the monthly subsidy yet to be removed.
This said and the immediate adverse impact a wholesome removal of subsidies has on the cost of living for ordinary Zambians, as confirmed by the Secretary to the Treasury that more that 98% of the fuel and electricity subsidies combined benefit the mines and those alike at the expense of ordinary Zambians and the vulnerable who deserve to be subsidised, it may be advisable that a targeted approach towards the mines and those alike is considered in the next subsidy-removal phase for the sake of managing the cost of living.