When political convenience drives fuel pump prices

If a Malawi Energy Regulatory Authority (Mera) update on economic fundamentals and their impact on the landed cost of petroleum products dated June 8 2021 is anything to go by, the scale largely tilts towards adjusting local pump prices upwards.

Between December 2020 and March this year, Mera effected two fuel price increases. During the December 16 2020 review, the pump prices went up by a staggering average 28 percent while in the March 9 2021 review, the average hike was 11 percent.

Effective March 9 this year, consumers pay K899.20 for a litre of petrol, K898 for diesel and K719.60 for paraffin.

Malawi uses an Automatic Pricing Mechanism (APM) whose key determinants are the changes in the value of the kwacha exchange rate to the dollar and free on board (FOB) prices of refined petroleum products on the international market. Under the system, prices are supposed to be adjusted everytime the change in the landed cost or the exchange rate goes beyond minus/plus five percent.

The APM is meant to ensure that importers recover importation losses.

From March to date, the values of both the kwacha exchange rate and landed costs have been changing. In June, for instance, Mera data shows that the landed cost of petrol was up 11.8 percent while for diesel it was 7.68 percent up and for paraffin it stood at 8.41 percent.

In contrast, in March when the pump prices were revised upwards, the percentage change in landed cost of petrol was 9.6 percent, diesel at 9.7 percent and paraffin at 8.93 percent.

Of course, the March 9 2021 pump price adjustment was based on trends in February which saw the landed cost for petrol up by 15.01 percent, diesel at 16.08 percent and paraffin at 16.92 percent. It is also worth noting that there was no price adjustment in January 2021 despite the December landed cost trend being a whopping 68.09 percent for petrol, 42.39 percent for diesel and 62.32 percent for paraffin.

During the second quarter of this year covering April to June, the kwacha lost value against dollar by an average 2.7 percent. Naturally, this is below the minus/plus five percent trigger point. But changes on the other side—the landed cost—were phenomenal.

In an ideal situation, the fuel pump prices should have been adjusted upwards after the last review.

But why are prices not responding to the changes? Is the APM still in force? What is influencing the pump prices?

My instant reaction is that the APM has “technically” been suspended. Politics has taken over. In the meantime, Mera is using the Price Stabilisation Fund (PSF) in the petroleum pricing build up to cover the situation and massage the consumers to believe all is well.

But then, there is a limit to which the PSF can stand the pressure. PSF has been depleted before and is dwindling right now as, according to a recent Mera update, the balance as of August 2 2021 averaged K1.7 billion which is way below the recommended minimum of K5 billion.

Former Australian Prime Minister Paul Keating (December 1991 to March 1996) said “good economics is good politics”, meaning that when one gets it right on the economic front, the political side is well taken care of.

But in the Malawi situation, for a long time political correctness has tended to override economic sense. Several examples abound. Pricing of many strategic commodities, including fuel, fertiliser and even maize is driven by politics.

Currently, government, already staring a K718 billion budget deficit in the face amid dwindling revenue collections and no direct budget support, is expected to fork an extra K70 billion to ensure that one million farming families are retained on the Affordable Inputs Programme.

But while political expediency may work in the short-term, the long-term implications outweigh the “political gains” and the very same people being appeased today may rise up in arms after feeling the heat.

Economic realities should influence economic decision. There are simply no two ways about it..