Mera’s costly fuel price hike reversal

Malawi Energy Regulatory Authority’s (Mera) recent withdrawal of a fuel price hike is projected to cost the industry K1 billion in under-recoveries this month alone.

Industry players have since warned that with the kwacha continuing to slide and global oil prices trending upwards, Mera’s move could also inject double pain into motorists and other fuel users.

The pain would comprise the delayed jolt that should have come with the October reversed prices and the expected price jab in November, which could combine into one shocking dose to households, firms and the national economy.

On October 3, Mera announced a 5.79 percent, 6.30 percent and 8.20 percent hike for petrol, diesel and paraffin, respectively.

Petrol, diesel and paraffin briefly went up from K539, K521 and K434.30 per litre to K570.20, K554.80 and K469.90 per litre respectively only to be reversed less than 24 hours later on October 4.

Mera chief executive officer Dr Allexon Chiwaya is on record as having said the authority would communicate shortly on the resumption of the revised fuel pump prices once the matter was resolved.

But in an October 10 2012 letter to Mera CEO, Petroleum Importers Limited (PIL), while explaining that fuel importing consortium has adequate financial instruments to import approximately 26 million litres of fuel during the month of October, complained of the heavy losses they are likely to incur.

PIL said due to delays in implementing the revised pump prices, the estimated under recovery is approximately K700 million if the exchange rate remains at the current level of $ 1 to K318.

But PIL said it predicted higher losses if the kwacha continued to depreciate against the dollar during this month.

The estimation hits K1 billion in under recoveries at an exchange rate projection of $1 to K330.

As of Friday, the average exchange rate was $1 to K319.

Cost to consumers

Meanwhile, Consumers Association of Malawi (Cama) executive director John Kapito said he was aware of the huge negative impact the unrevised prices will have on the consumer.

 “My fear is that importers are making losses which will be heaped on the consumer together with the anticipated fuel price hike.

“The kwacha has dropped sharply over this period which will have a huge impact on the next price increase. This will not only affect pump prices, but other goods and services as well. This is a result of weak decisions by government.”

Kapito said it was not clear whether the withdrawal was implemented in fear of public reprisal or was supported by economic fundamentals.

Chiwaya did not pick up his mobile phone when contacted for comment.

Recently, government asked local oil firms to be patient with it as it sorts out their under-recovered money, which were last month estimated to have accumulated to K11.5 billion.

The K11.5 billion was accumulated during the Bingu wa Mutharika administration, which subsidised fuel to cushion people against frequent price adjustments, a policy that critics said was only postponing a problem that would still return home to roost.

To help fuel companies hedge against importation losses, government was supposed to pay the oil marketing companies (OMCs) for any losses using the price stabilisation fund (PSF) levy.

However, this fund was almost always too low to cover widening loss margins as global oil prices galloped at a speed the PSF could not keep up with, leaving it in the red; hence, the piled under-recoveries.

But when the Joyce Banda administration took over, it overturned that policy to mitigate against importation losses by re-introducing a fuel importation and pricing regime based on the so-called automatic pricing mechanism (APM) that allows full cost recovery for all fuel imports.

The Banda administration, however, retained the PSF so that operationally, it serves to compensate importers directly by absorbing all changes in product landing cost that are within ± 5 percent of In Bond Landed Cost (IBLC).

Under the APM, fuel pump prices are being adjusted to reflect fuel price movements on the international market and allow fuel importing companies to recover importation costs on real time basis, according to Mera.

This is why effective June this year, pump price adjustments have tried to reflect changes in IBLC of petroleum products and movements of the kwacha against the US dollar.

To minimise the impact of frequent fuel price fluctuations on the international market, the APM is operating within the threshold of ±5 percent, which is also the trigger limit.

A change in IBLC of more than five percent triggers a price adjustment. Compensation within ±5 is supposed to be through the PSF in the price build-up, which has also been set at five percent of the IBLC.