Malawi’s consumers ask for cushion on fuel

Malawi Government’s adoption of the automatic pricing mechanism (APM) for fuel has compelled consumers to ask for a cushion to fall on whenever the price of the commodity goes up on the global market.

Since the Joyce Banda administration, as part of free market economic reforms pushed by the International Monetary Fund (IMF), adopted the pricing strategy in June this year, fuel prices have gone up three times with the latest being on September 7, causing a reciprocal rise in the prices of goods and services, hitting consumers’ already depleted disposable income.

Under APM, prices are adjusted to reflect fuel price movements on the global market to allow fuel importing companies to recover importation costs on real time basis.

Pump prices, therefore, are adjusted to reflect the changes in the value of In Bond Landed Cost (IBLC) of petroleum products and movements of the kwacha against the US dollar.

APM is set to operate within a threshold of +-5 percent which is the trigger limit, which means that a change in IBLC of more than five percent will trigger a price adjustment.

Finance Minister Dr. Ken Lipenga said, in the 2012/13 budget, that to reduce the burden of fuel subsidies on the financial plan, since it is expensive, government decided to scrap off the Price Stabilisation Fund (PSF)—a fund meant to cushion consumers should fuel prices jump on the international market.

He said then: “The price build-up for fuel was based on a deemed price which was always significantly lower than its in-bond landed cost. In 2010, the cost of fuel subsidies was K6 billion.  In 2011, the cost of fuel subsidies increased to K10.5 billion.  If we had not increased fuel prices in May, the total cost of fuel subsidies by the end of the year would have been K36 billion.” 

The Consumers Association of Malawi (Cama), which has recently been vocal on the fuel pricing mechanism, argues that consumers should not be at the mercy of changes of fuel price on the international market.

Cama executive director John Kapito on Friday said government did not consider the welfare of consumers and how they could be cushioned when it adopted the system in view on the volatile fuel price movement on the international market.

“If the price of fuel on the local market keeps on changing to keep pace with those on the international market, consumers will be feeling the pinch because they have nowhere to fall back on.

“Government should think of reintroducing the price stabilisation fund to deal with the instability in the fuel price on the international market,” he said.

The Economic Empowerment Action Group (Eeag) president Louis Chiwalo also asked government to come up with a way in which consumers can be protected during the rise in the fuel price.

He noted the APM does not allow time for planning because fuel prices are adjusted when consumers and businesses have already planned their expenditure based on the ruling fuel price.

Lipenga could not be reached for a comment, but he told The Daily Times on Friday that the PSF did not work as expected and government ended up pumping billions to help stabilise fuel prices on the market.

But Chancellor College economics professor Ben Kalua argues that APM is sustainable and will mitigate losses fuel importers incur.

“Anything that is automatic is sustainable unlike anything that is managed,” Kalua said in an interview.

Economics Association of Malawi (Ecama) deputy president Edward Chilima agrees with Kalua, adding that when government had the PSF, prices remained stable artificially for some time.

“But this was artificial and we all know the system failed the economy. It is unsustainable. Subsidies are not sustainable in the long term. The problem is that we were used to subsidised services and we are finding it hard to adjust,” he told Weekend Nation.

He explained that the challenge with PSF is that if the fund keeps growing, it forces government to resort to tax increases or domestic borrowing.

Chiwalo advised businesspeople to work on their planning and information intelligence to read world trends and adjust accordingly.

But be that as it may, consumers are feeling the pinch of the pricing system and not all of them have the capacity to plan based on world trends.

With the private sector foreign currency reserves now at $236 million or 1.25 months of import cover as of August 31, and the rising global fuel prices, the possibility of fuel rising further in the short to medium term cannot be ruled out.