May 19, 2024
Economy

What you need to know about the latest fuel price hike

May 30, 2022
What you need to know about the latest fuel price hike

The Ministry of Mines and Energy on Monday increased the fuel pump price by N$2.50/litre for petrol and N$1.50/litre for diesel. The Brief compiled analysts’ views on the latest government decision and how it will affect the economy and our readers.

FNB Namibia Group Economist, Ruusa Nandago 

  • Given that fuel is an input in most industries, fuel price increases will certainly increase the cost of production and cost of operations for many businesses and retailers. Businesses and retailers will face increasing pressures to pass these on to the end consumers as they may not have any more capacity to absorb these increases. Given that fuel makes up a large part of consumer’s spending, a higher fuel price would mean lower disposable income to spend on other goods and services. The fuel price increase therefore presents a substantial shock to consumer disposable income and spending power particularly if wages are lagging far behind inflation.
  • Fuel prices only directly make up 5% of the overall CPI inflation figure, however their inflationary effects lie in the fact that fuel price increases tend to spill over into other items including public transport, retail prices of goods and services and wage increases. Given these substantial ripple effects, we expect this fuel price increase to add 0.9 percentage points to inflation.
  • Although fuel prices have increased despite the tax and levy relief, this does not necessarily mean the measures put in place are not effective. The fuel price increase would have been significantly higher had these measures not been implemented.
  • Global oil prices are expected to be elevated for longer above the USD100/barrel mark. Given that Namibia is an importer of oil, this will reflect in further fuel price increases over the course of the year. This, however, depends on the evolution of Russia’s invasion of Ukraine. Should the conflict be resolved sooner rather than later, it will result in lower global oil prices.
  • Fuel price movements are predominantly driven by developments in the international oil price. Many countries, including Namibia are therefore unable to fully prevent an increase in fuel prices. While one option is for the government to subsidise the fuel price, this would come at the cost of fiscal revenues. There is therefore very little the country can do to prevent these increases. The reduction in fuel levies and taxes is the best option in this environment 

Danie van Wyk, IJG Securities Head: Research

  • With the benefit of hindsight, the announcement by the Ministry of Mines and Energy to increase the Namibian fuel prices was somewhat inevitable seeing that the price of Brent crude rose by 9.8% in USD terms in May. As is generally the case when fuel prices increase, consumers will be spending a larger portion of their disposable income on fuel, meaning that less will be spent on other goods and services. Similarly, transport costs will increase for businesses, making it more expensive for them to manufacture and sell their products. These are often passed on to the consumer in the form of higher prices charged. These increases mean that inflationary pressure is likely to persist and could prompt the central bank to raise rates at a quicker pace than initially anticipated.
  • The government could consider further cutting fuel levies. However, the Road Fund Administration and the Motor Vehicle Accident Fund are the main beneficiaries of these levies and reducing the funding to these parastatals could negatively impact their ability to perform their duties. A direct subsidy would be extremely costly and would have to be funded from the government deficit, which is also not a sustainable solution.
  • Making a forecast on what will happen to oil and fuel prices one or two months from now is nearly impossible, as there are several factors (global supply & demand, the Ukraine war, sanctions against Russia, USD/ZAR exchange rate, etc.) that have an influence on these prices.
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Last modified on Tuesday, 31 May 2022 19:37
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