Fuel hikes make economy sweat

The record rises in fuel prices are expected to place further strain on consumers and hurt consumption growth in a weak economy, say analysts.

Retail petrol prices are up nearly 25% since March. On Monday, the Central Energy Fund announced that the price of unleaded 93 petrol will rise 99c this week, unleaded 95 by R1 and diesel R1.24. Illuminating paraffin will cost an additional R1.04 and liquefied petroleum gas R1.79.

This comes as the Absa purchasing managers’ index (PMI) showed that activity in the manufacturing sector dipped to 43.2, the lowest level in more than a year, dimming hopes that the industry will make a recovery in the third quarter.

SA tipped into a recession for the first time since the global financial crisis in the second quarter. The PMI suggests stagnant economic growth will continue into the third quarter.

In September, the government intervened in setting fuel prices for the first time since the early 2000s by diverting funds from the slate levy after five consecutive months of fuel price hikes. The slate levy is part of the fuel levy, which was used to fund last month’s increase.

However, any further interventions would be unsustainable given the precarious state of the government’s finances, according to analysts.

“The state cannot absorb the higher petrol prices in October as it has depleted its slate levy trust fund, and the cost of imported rand oil prices has risen substantially, which is beyond the control of the government,” said Investec chief economist Annabel Bishop.

The fuel levy, at 5% of the national tax revenue, is the fourth-biggest source of income for the government after income tax, company tax and VAT.

The opposition has lashed out against the government and called for changes to be made to the fuel levy. The DA called for the fuel levy to be cut by at least R1 and the IFP called for a complete suspension of the levy.

Fuel increases have had a significant adverse effect on households’ real disposable income, particularly with a higher tax burden, said Absa economist Miyelani Maluleke.

It is difficult to predict whether SA will face further fuel increases in the last two months of the year as the price of oil and the rand’s strength against the US dollar are the two primary factors that influence the price on a monthly basis.

Both have uncertain trajectories. Crude has climbed almost 25% in 2018 , while the rand has lost just over 12% against the dollar. The Reserve Bank governor has warned that these are risks to the inflation outlook.