Tuesday, April 16, 2024
Money TalksLifting fuel subsidy entails inflation, relieves gov’t

Lifting fuel subsidy entails inflation, relieves gov’t

The government’s long-running fuel subsidy is about to come to an end. After months of planning, the federal government recently started to gradually remove the subsidy, unable to continue carrying the financial burden in an economy hit by the COVID-19 pandemic and war. 

It may not make complete sense to someone who is aware of the economic effects of subsidizing goods such as fuel and why the tax collected from the underprivileged would be used to provide subsidized fuel that the privileged mostly consume. 

It is also not difficult to comprehend how gasoline prices affect a nation’s economy and how it impacts the poor as a result of subsequent price hikes on a number of commodities. Fuel is a political commodity, as many assert. 

Everyone seems perplexed regarding these two arguments: the government needed to end the subsidy at this time, and the necessity of continuing to do so.

The State Minister for Finance, Eyob Tekalign (PhD) has tried to clear the paradox.

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“Why do we have to keep subsidizing fuel for vehicles of entities like Sheraton? Why do we have to subsidize US Embassy vehicles,” said Eyob in an interview with Fana Broadcasting Corporation (FBC).

About 146 billion birr is spent on fuel subsidy since the establishment of the Fuel Subsidization Fund. It was created to absorb the shocks of rising fuel prices, which officials now cite as a bottleneck to the economy.

“We have been providing subsidy unsupported by policies,” said Gebremeskel Chala, Minister for Trade and Regional Integration in a press briefing held this week, adding “Rich individuals and companies with the ability to buy fuel in the international market were subsidized equally with those who needed it.”

Experts like Alemayehu Geda (Prof.), an economics professor at Addis Ababa University, agree with the government’s assertions that it has had enough in funding fuel subsidies.

But lifting and putting the burden on the public is what doesn’t hold water for Alemayehu.  

“The effect this will have on the lives of each individual is incomparable to the effect it will have on the government. There is no question it will have a huge inflationary impact on the public, while the government cleans the burden from its accounts.” Alemayehu said.

Ethiopia’s fuel import costs are rising as a result of market disruptions around the world, most recently due to the Russia-Ukraine conflict. The amount of Birr Ethiopia had to shell out dramatically increased due to the fast depreciation of birr, averaging 32 percent against the USD in the last one year and half. 

During the last fiscal year, the government had to pay 72.6 billion birr to import 3.7 billion metric tons of petroleum products. This represented a 17 percent rise in value from the preceding year but a 3.8 percent decline in volume because of a fall in imports of jet fuel.

Nearly two billion metric tons of petroleum products have already been imported into Ethiopia in the first and second quarters of the current fiscal year. The cost of fuel imports for the first two quarters is close to 63 billion birr, up by 35.5 billion birr compared with the same period last year. 

Ethiopia has been paying about USD three billion in foreign exchange to purchase fuel, which is a bit less than what the nation makes through exports.

 “We are spending three forth of our export income on fuel imports,” said Gebremeskel.  

However, given the significant price increase in the international market, the cost of importing fuel is already poised to exceed the revenue from exports. Ethiopia will most likely pay USD 5.6 billion for fuel imports next year. It is such changes that forced the government to start removing fuel subsidies.

Since last May, the price of benzene and diesel, the two largely consumed fuel types, increased by 11 and 13 birr per liter, reaching 47.83 and 49.02 birr per liter, respectively. 

About 164,000 public transporters, 10,000 fewer than anticipated, have enrolled under the program the government refers to as a “targeted subsidy.” They will not be subject to an average 34 percent rise for both fuel types.

The termly increasing fuel prices, which will expire shortly before a year from now, will nevertheless, be endured by the remaining 1.2 million automobiles registered in Ethiopia.

However, it is not as simple for the cabs and buses that also provide public transportation services. They must endure a 10 percent rise every three months and will be out of the scheme after five years. 

Until then, city minibuses will receive 25 liters of fuel, three-wheel taxis will get seven liters, and cross-country and city buses will have 65 liters of fuel a day. Anbessa like city buses will be provided with up to 102 liters of fuel on a daily basis at discounted rates. 

According to Alemayehu, the government’s decision to exclude trucks used to carry various goods from the subsidy program is a grave error.

“It is particularly concerning as the subsidies have not adequately targeted vehicles with actual inflationary effects,” Alemayehu said.

According to Alemayehu, the 34 percent average fuel price increase will undoubtedly result in an increase in commodity prices due to a surge in cost of logistics. He is worried inflation will be out of control when the subsidy is fully removed in less than a year. 

However, for Gebremeskel, it is not fair to continue in this way for the general population, while expressing his regrets over the amount of money the Fund had lost.

“The 1.3 million vehicle owners can’t keep eating up the money of 110 million people,” he concluded.

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Video from Enat Bank Youtube Channel.


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