A shocker of a fuel price increase was announced yesterday that is set to have a massive ripple-effect on the prices of goods and services.
This as the mines and energy ministry is still consulting with the finance ministry on the possible temporary suspension of fuel levies and taxes that account for up to 45% of the cost of every litre of fuel.
State organs which benefit from these levies are also part of the ongoing consultations that are expected to be completed by the end of April.
Both petrol and diesel prices have increased by about 51% and 60% in the last 12 months, respectively.
Making the latest increase known, deputy energy minister Kornelia Shilunga warned that great financial sacrifices will have to be made at both the individual and national collective level. This caution emanated from the largest fuel increase ever in Namibian history, at N$1.95 extra a litre on petrol and N$2.95 extra a litre on diesel, which will take effect next Wednesday, 6 April. This will bring Walvis Bay petrol prices to N$19.10 per litre and diesel over the N$20 mark at N$20.23 per litre.
Main factors
Because of these massive increases, Shilunga said the nation’s collective sacrifices are the only way the country will be able to overcome the current financial difficulties.
During yesterday’s media briefing, she observed that the two main factors for this historic increase are the geopolitical tensions in Eastern Europe and their repercussions, as well as a widening mismatch between global oil supply and oil demand.
“The scarcity of a commodity usually means high prices for that commodity,” the politician said, adding that high oil prices are driven by market uncertainties regarding the availability of Russian oil in the near-term as Russia is the world’s second- largest crude oil producer after Saudi Arabia.
Shilunga further explained that the ministry’s April fuel price review indicated that the average prices for ULP 95 (petrol) significantly increased in March from US$109 to US$129 per barrel, while the average price for Diesel 50ppm increased from US$109 to US$144 per barrel.
Furthermore, whilst the Namibia dollar slightly appreciated against the US dollar in March, this appreciation was insufficient to offset the sharp increase in fuel products during March.
Said Shilunga: “Our recent review, therefore, shows huge under-recoveries recorded during the trading cycle under review, that is 220 cents per litre on petrol and 359 cents per litre on diesel.
Consulting stakeholders
Additionally, the ministry has initiated a consultative process with the Ministry of Finance as well as other State institutions that derive revenue from the levies and taxes imposed on the price of petroleum products. The aim is to explore the possibilities of reducing some of the levies and taxes to soften the burden on fuel consumers. The consultations are currently at a very advanced level, and are expected to be finalised in April 2022.”
The deputy minister continued that the National Energy Fund (NEF) will cover all the under- recoveries recorded at the end of March 2022, approximately to N$390 million, on behalf of fuel consumers.
Shilunga stated that the country is indeed facing a very tough and uncertain situation over the coming months, given what is currently happening in other parts of the world.
Levies imposed on Namibian petrol and diesel prices include customs and excise duty for the SACU Revenue Pool; National Energy Fund Fuel Levy (comprising the fuel equalisation levy, Namcor levy and National Oil Storage Facility levy), road user charges (which go to the Road Fund Administration (RFA) for roads maintenance; fuel tax, which is collected by the Ministry of Finance for the State Revenue Fund; and the Motor-Vehicle Accident (MVA) Fund levy, which is used to finance the activities of the MVA Fund, such as providing financial assistance to road accident victims.
Other local cost elements that push up the cost of fuel include the dealer margin for service station owners, the wholesaler margin for oil importers and bulk distributors, as well as other logistics costs and charges such as the service differential and storage fees.
Additionally, the pump prices include the road rates for delivery by oil trucks and the rail rate for delivery by TransNamib.
Responding to questions from New Era, economist in the energy ministry Abednego Ekandjo said the ministry is exploring several possible options involving the revision of levies and taxes imposed on the price of petroleum products.
“However, it must be noted that levies and taxes imposed on petroleum products are also serving to fund other equally important activities, such as the maintenance of roads via road-user charges and the national budget via the fuel tax. Discussions on this matter are already underway with all relevant stakeholders, and the public will be informed of the outcomes in due course,” he stated.
When pressed for a ceiling for the ever-increasing fuel price, Ekandjo questioned: “Which is better? Do you want to live in a country without fuel, or do you want to live in a country with fuel, although it is expensive? The latter is better, although cheaper fuel is preferable.”
When asked what local fuel prices will look like if international oil prices reach the US$200 per barrel mark as expected by some analysts, he responded: “It will be very high. Perhaps more than N$30 per litre.”
He went on to explain that the basic fuel price (BFP) or the import parity price is made up of components such as the fuel cost per barrel, insurance at sea, and the shipping costs. The exchange rate between the Namibia dollar and the US dollar also plays an important role since the greenback is used for conducting most international transactions.
“Government uses a cost-recovery model to determine the fuel prices at the pump. The slate calculation aims to determine if suppliers are fully recovering the cost of supply from consumers. A slate under-recovery means the prices set by government are not sufficient to recover the cost of supply, hence the deficit is claimed from the National Energy Fund by oil importers. A slate over-recovery means the prices set by government are way above the cost of supply. Thus, the surplus is forfeited to the National Energy Fund by the oil importers,” Ekandjo explained.
Economic impact
Also weighing in on yesterday’s extraordinary fuel hike, Simonis Storm Securities’ economist Theo Klein cautioned that historically, oil price shocks have led to economic recessions, where unemployment risks affect numerous industries.
“This has led to economic growth forecasts being lowered across the globe. Locally, we do see GDP growth coming under pressure as a result of higher global oil prices as well. This means that the local economy is unlikely to recover a significant portion of the jobs lost following the lockdown-induced recession in 2020. Certain industries which still have salary cuts enforced on their workers will likely keep these in place if the economy sees lower GDP growth in 2022,” he stated.
“Higher oil prices is the tide that lifts all boats in terms of inflation. Namibian consumers can, therefore, expect further price increases in all sorts of products such as food, alcohol, cars, furniture and public transport services such as taxi and bus fares. This will add pressure to household budgets, leading to less consumption expenditure, which accounts for about 70% of GDP. We believe the risks to inflation remain on the upside, and if history (think back to oil prices and inflation for 2008 in Namibia) is to repeat itself, Namibia could see inflation as high as 10.4% in 2022,” Klein warned.
He, therefore, cautioned Namibian households to readjust their budgets and prioritise on basic necessities, saying; “Now is not a time to buy luxury items.”
Questioned on possible medium to long-term solutions, Klein responded: “In addition to partially subsidising under-recoveries, we believe government can consider temporarily removing levies and taxes on fuel products in order to provide additional relief to the public, and reinstate fuel taxes once global oil prices normalise.”
(Graphic – logos included)
Levies breakdown