Saturday, 21 September

Impact of fuel price hikes to the economic sector

Feature Article
The speculation that the government was once more going to increase taxes on fuels during the 2019 mid-year budget review contrary to public expectations has been confirmed. Therefore, in the coming days, consumers of petroleum products in the country will be paying more at the pumps as government announces increment in the energy sector levy to raise more revenue to pay off Ghana’s legacy debt.

Presenting the 2019 mid-year budget review speech on Monday, 29 July 2019, the Finance Minister announced an upward adjustment in the Road Fund Levy (RFL), the Energy Debt Recovery Levy (EDRL) and the Price Stabilization and Recovery Levy (PSRL). He stated that government proposes to increase the Energy Sector Levies by GHp20 per litre for petrol and diesel and GHp8 per kg for liquefied petroleum gas (LPG), so as to increase the inflows to enable Government issue additional bonds to pay down the energy sector debt obligations.

And so based on current indicative prices for petrol and diesel this translates to GHp90 per gallon increment, moving the current average price of both petrol and diesel to approximately GH¢24 per gallon.

Reactions and Concerns

Even before the supposed increments take effect, various groups are expressing their displeasure and opposing the announcement of fuel price increases.

The Chamber of Petroleum Consumers (COPEC) has already petitioned the Speaker of Parliament over the proposed increase in components of the Energy Sector Levies (ESLA), suggesting that the current fuel price increase is coming at the wrong time. The group suggest the increase in ESLA will eventually lead to an increase in the current fuel price by about four per cent.

It argues that “fuel price increase shall affect every aspect of the economy and could bring serious challenges to the standard of living of persons and their purchasing ability, indicating further that the group will protest the increase in the ESLA levies if attempts at dialogue fail.

Drivers across the various regions are also opposing the announcement of fuel price increases, suggesting that a further increase in fuel prices will cripple their business. They are therefore pleading with the government not to effect the increment since there is hardship in their business.

According to the drivers, an increase in fuel taxes will translate into in a hike in the pump prices which will have a cascading effect on the cost of transportation, goods and services, and the general cost of living in the country.
Quite funny it may sound, but the Funeral Criers Association of Ghana have also responded to the announced fuel price increases by reviewing upwards the rates of their “crying services”. One Ms. Dokli who purports to represent the group claim high demand for their services, amid an increase in fuel prices and general economic hardship have forced them to adjust their fees. She revealed that five dirge-singing criers who used to charge GH¢5,000 a day will now provide the service for between GH¢7,000 and GH¢8,000.

Fuel Prices: 2017 to Date

Oil prices have bitten hard over the past two years plus, on both local economies and on the world scale. In economies like Ghana and India where the fuel markets are deregulated, consumers have had to pay for the full cost of fuel consumed as dictated by key variables like the average world oil price (crude and refined), supplier’s premium, freight and insurance premium, taxes and levies, and the foreign exchange risk.

Source: Institute for Energy Security (IES)

The last 30-months had been a torrid moment for Ghanaians, as they had to contend with persistent increases in fuel prices. And not even the revision and the neutralization of the Price Stabilization and Recovery Levy (PSRL) aimed at reducing the impact of rising oil prices on the international market on consumers, and the downward review of the Special Petroleum Tax (SPT) embedded in Ghana’s Petroleum Price Build-Up (PBU) could stop petrol price from jumping by over 38 percent to sell at Ghs5.25 per liter (equivalent to one U.S. Dollar) between January 2017 and June 2019.

Source: Institute for Energy Security (IES)

The percentage increment of petrol over the past two-and-a-half years reflects largely the strengthening of international refined oil and crude oil prices. However, the depreciation of the local currency against the U.S. Dollar made matters worse for consumers.

The two graph shows that the prices of international oil prices and local prices track each other very closely over time; thus increases in crude oil prices are accompanied by increases in gasoline (petrol) prices on the international markets. Moreover, the quarterly changes in international gasoline prices and domestic gasoline prices are also very highly and positively correlated.

The persistent increases in fuel prices since 2017 has had motorists and commuters fuming, with the Chamber for Petroleum Consumers (COPEC) and the Industrial and Commercial Workers Union (ICU) embarking on a demonstration to protest what they called “hardship on the Ghanaian” last year.

Impacts

While the news story of the “funeral criers” elicited laughter and jokes on social media, for an Accra UBER driver who has fuel to buy or a company that relies on thousand gallons of diesel for production purposes, a discussion on fuel price hikes is not a matter for laughter.
The price of fuel remains a significant determinant of domestic and global economic performance. And the consequences of fuel price increases are grave, as it affects the different macro-economic variables such as production cost, inflation, interest rates, employment, and freights. Hikes in prices of petrol and diesel, directly and indirectly, affect all the major sectors of an economy like agriculture, transportation, manufacturing and production. This, in turn, affects the prices of daily essential commodities which are transported, including the cost of food.

Motorists: A direct consequence of rising fuel prices is an increase in what motorists spend on fuels every month for the same distance travelled. Back-of-the-envelope estimations show that a person driving 1050km per month in Accra is likely to notice monthly fuel bills in January 2019 go up by approximately Gh¢110 for a petrol car, compared to January 2017 (based on 42 kilometres per gallon journey). Those using vehicles with low carbon footprints are cushioned significantly compared to those with less efficient cars. The stop-start technology found usually in modern upper-end vehicles uses computers to sense when the car is in a stationary position to shut down the engine and reduce the consumption and emission of fuel.

Businesses: Higher fuel prices push freight cost up and increases production costs for especially businesses that use fuel as a major input (like power utilities, farmers, and processing plants), and who mostly pass on the added costs to the final consumer. It literally means that prices of essential commodities like fruits and vegetables, as well as other goods and services, will increase. And rising production costs also bites hard on products and services demand, business profitability, wages, and employment et cetera.

Public Transports and Commuters: Transport operators are the most exposed to fuel price increases as it remains a major input to their business. In such a case, individual transport operators who continue to set their own prices in the absence of a single transport economic regulator, are forced to pass on the added cost to commuters in the form of increased fares, most often in a confused manner. The increased fares is also likely to lead to an increased number of persons opting to walk or adopting other means of commuting, thus lowering the volume of people on the traditional transport system.

Households: Fuel price increases dents disposable incomes, by adding on to households budgets for not only fuels but also transport fares and essential commodities and other goods/services like utilities and automobile. High fuel prices over a prolonged period may compel households to reallocate resources by saving less or cutting down on expenses.

Inflation: If higher prices of goods and services last long, then it will have an inflationary effect. And the economic reaction to higher inflation may eventually result in increased interest rates. On the positive side, those with savings benefits from higher rates. But on the negative side, higher interest rates reduce the disposable income of consumers as a result of higher debt service costs; leaving them with less to spend on other products and services.

Aside from higher interest rates, prolonged inflation results in higher unemployment, higher utilities, currency depreciation, demand decline, tax revenue decline, and less real economic output; negatively affecting the overall economy.

As long as the oil price remains a vital macroeconomic variable, higher prices might lead to significant damage on local economies, and on the global economy. To manage fuel prices and maintain economic progress on the local scale, the government must re-invent the ways in which fuel demand is met, focusing largely on fuels from the local refinery (produced below import parity) than on imports. It may consider reviewing the taxes and levies on a litre of fuel, and also ensure that the local currency is strengthened against the major foreign currencies.

Written by Mikdad Mohammed, Institute for Energy Security (IES) ©2019

The writer is an enterprising energy policy researcher and analyst working with the Institute for Energy Security (IES) as a Senior Policy and Research Analyst. He has previously worked with the Bulk Oil Storage and Transportation Company (BOST) within the Corporate Communication section. He is an Alumnus of the University of Ghana.

Source: David Apinga