Business News of 2014-07-22

Analysis: Is there a way out of the recurrent fuel price increases?

Monday July 14, 2014’s upward adjustment of fuel prices was the third since January this year. Apart from the obvious debilitating effects of this recurring phenomenon on businesses in Ghana its unpredictability has been a source of frustration for Ghanaians.

Fuel price increases are not uncommon in Ghana. What is new however, is the significant jump in percentages in the recent figures released by the National Petroleum Authority (NPA), the industry regulator, when world price of crude oil has not increased. In January 2013, a liter of petrol, the commonly used product, sold at GH¢1.70 but the commodity currently sells at GH¢3.36, representing 197%.

From January 1 this year to July, the price of petrol has been increased by 44.21%. This is very significant since the slightest hike in petrol affects the price of every product in Ghana. The latest figures in the petroleum price review are as high as 25.60% for premix fuel (the highest) and 15.68% for liquefied petroleum gas.

Petrol recorded 23.08% in price increase. Only Unified (2.08%), Kero Mines (0.62%) Gasoil to Rig (0.79%) Gasoil Mines (0.79%) saw a semblance of their usual range in price increases. So what accounted for the jump in the prices of the major commodities in the latest NPA review, and what has accounted for the spiraling prices of the commodities since 2013?

As NPA Public Relations Officer, Yaro Kasambacta, would explain, Petrol, premix fuel and marine gas saw such significant increases in their prices because of the withdrawal of the fuel subsidies on them, coupled with foreign exchange losses incurred by importers of the product. Government scrapped some fuel subsidies earlier this year in a bid to reduce a strain on the country's economy, a move policy think tanks like the Africa Centre Energy Policy (ACEP) strongly advocated.

Also, renowned think tank, IMANI-Ghana Centre for Policy and Education, backs the entire removal of subsidies in order to reduce "investment by way of the forced sale of low cost energy, which inevitably affects the short term and long term supply chain demands."

According to IMANI in a constrained fiscal environment, such as Ghana’s, amidst mounting debt, and arrears in subsidies owed to various sectors and the constraints to the supply chain are further aggravated.

This is true. Recently, government’s inability to pay a GH¢1.8 billion debt owed Bulk-oil Distribution Companies (BDCs), caused an acute shortage of fuel in the country.

"The low profitability ultimately leads to underinvestment and poor maintenance, thus perpetuating the cycle. The only way to break the cycle is the removal of subsidies, which will then attract investments to the sector and have the positive externality of freed up financial resources", IMANI had published in its report last week.

So although government has removed some fuel subsidies in a move to restore fiscal stability after the finance ministry overshot its budget deficit target by almost 100 percent in 2013, analysts still believe this is not enough. Government’s inability to deregulate the sector has inured to the sector. Deregulation will ensure market forces rather than government, in determining the price of the commodities.

To be fair, the recent price adjustment could have been higher. According to some importers government intervened in a what could have been a 43% price hike on petrol especially, by asking them (importers) to withhold the forex differential on the products. The cedi has been falling against major trading currencies from January this year.

But pressure on government has been fierce from Organised Labour, who say fuel subsidies are important to mitigate the financial strain brought on by “the prevailing economic challenges in the country and the high cost of living”.

Silent causes of petroleum price hikes

Price of crude oil on the international market, which used to be NPA's justification for increasing the commodities have edged up only marginally, 2.5% between May and June, 2014 -- $105.73 a barrel in May as against $108.37 per barrel in June. So why the significant increases in petroleum product?

Dr. Charles Wereko-Brobby, an energy expert, is certain fuel prices set by the NPA include a levy on the cost of operating the country's defunct refiner, Tema Oil Refinery (TOR) -- a move that could be a contributing factor to the frustrations brought onto Ghanaians by the periodic fuel hikes.

He also questions why government continues to tax Ghanaians on loans contracted by TOR and pay the salaries of its workers when the refiner has been shut down. Perhaps taxing Ghanaians to bring back to life one of Africa's few refineries is not a bad idea, the problem, however, is a lack of communication and precise roadmap on when TOR will work again.

The poor performance of the cedi is also a culprit in this whole affair. Despite the central bank's intervention to halt the falling cedi through interest rates increases from 18 per cent to 19 per cent (100 basis points), the currency's depreciation has not seen a let up.

Way out?

Top on the debate on petroleum price hikes is the issue of subsidies. “Subsidies are a big toll on government finances and eventually distort the markets of oil dependent countries”, remarked Mohammed Amin Adam in a 2009 analysis of petroleum product pricing. Backers of the removal of subsidies believe they actually hurt the poor more than they support them in terms of the opportunity cost.

They say the rich more than the poor benefit from subsidies – at least the type of subsidies government currently provides. Furthermore, petroleum pricing by NPA is a bit of a murky business. Ideally, the ex-pump price of the commodity is the sum of the ex-refinery price, taxes and margins.

That is what we pay at filling stations for a gallon of petrol includes the cost incurred in bringing the commodity from a North West European country including insurance and freight charges right down to the cost of transporting the commodity from storage to the filling station. “Since this is a fixed-price regime that also aims to cover all economic costs, there is need for full transparency”, says IMANI’s Bright Simons.

“There cannot be any commercial secrets or even confidentiality...Consumers need to know how much each person in the chain makes precisely, every company that gets a cut somewhere along the chain needs to be known”, he adds.

There is a need to deregulate the sector, to allow market forces instead of government to determine the price of petroleum products. That means if government is having a hard time managing the sector properly and ensure its stability without strain on national coffers, then it should not be in the way.