By Dr. Fred M’membe
When the UPND took over the running of government in August 2021 the prices of petrol and low sulphur diesel were K17.62 and K17.82 respectively. Today, seven months later, the fuel prices are K26.50 for petrol (50.4 per cent higher) and K26.22 for low sulphur diesel (50.5 per cent higher). The UPND leadership had promised the Zambian people fuel price reductions of at least K4.02 if they were voted into office. They went to length to demonstrate arithmetically how this fuel price reduction would be achieved.
Today the story has changed. Makani abija! Like for many other things they promised but have failed to deliver, so many things or factors are being blamed for this failed fuel price reduction. On Tuesday, January 25, 2022, the Energy Regulatory Board announced that they were migrating to a thirty-day pricing cycle for petrol, diesel and low sulphur gas oil. And in that regard, fuel prices would now be reviewed every month starting with January, 2022. We warned that it was highly unlikely that fuel prices will be reduced at these reviews – they will instead be increased.
The price of fuel has a significant weighting in the basket of goods and services that are used to measure inflation in the country. Producers of services and goods are also expected to factor in the higher cost of fuel. This makes fuel prices a key determinant of the rate of inflation.
The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors, with a direct impact on the cost of farm produce. At the individual level, higher fuel prices mean that each of us pays more at the filling station, leaving less to spend on other goods and services. But higher fuel prices affect more than just the cost to fill up at the filling station; higher fuel prices have an effect on the broader economy. Inversely, when fuel prices fall, it is cheaper to fill up the tank for both households and businesses, and really eases costs on transportation-focused industries like trucking and buses – but it also puts a damper on the domestic fuel industry.
In general, higher fuel prices are a drag on the economy. When fuel prices rise, it can be a drag on the economy – impacting everything from consumer spending to bus fares to hiring practices. Fuel is an important input for transportation, which directly impacts households as they drive, but also businesses that rely on logistics and transportation chains. If discretionary spending is hampered by higher fuel costs, it can have knock-on effects throughout the broader economy.
A side effect of high fuel prices is that the discretionary spending of consumers drops as they spend a relatively larger portion of their income on fuel. Higher fuel prices also mean that shoppers will tend to drive less – including to places like the mall or shopping centers. All retailers are further squeezed as they are forced to pass on the higher expenses they also experience, which are associated with increased shipping costs to consumers. Anything that has to be transported could cost more as fuel prices rise. Likewise, many products that contain plastics or synthetic materials are based in part on petroleum. Higher fuel prices mean higher prices for these materials too.
Rising fuel prices will negatively impact efforts at economic recovery in terms of hiring practices. Rising fuel prices will force some businesses to re-evaluate their hiring plans, holding off because they are uncertain about the economy’s health. Less discretionary spending results in decreased sales, both of which can influence a company’s ability to hire.
Many job candidates have to weigh prospective positions against the costs associated with the commute. Some workers who have been offered new jobs have been forced to turn down the position simply because the costs to get to and from work would eat up such a large percentage of the salary. There is an undeniable correlation between consumer confidence, spending habits, and fuel prices. Increases in fuel prices makes people feel more pessimistic about the economy.
Clearly, we are headed for very difficult times!