2021 - THE YEAR OF FUEL SUBSIDIES
Commissioning of the 750MW Kafue Lower Gorge Power Plant. This will drastically improve the energy security of the country. Load shedding good news for the sector. If could be a thing of the fundamentals dictate that past all things being equal. the price
THE Wbest way to de scribe have started the 2021 the review year 2021 of against the pe a troleum backdrop of subsector signif- icant is that challenges it was a year precipitat- of fuel ed subsidies. by the In global January pandem- 2021, ic-Covid 16 percent 19. VAT was waived
on It fuel is undeniable in addition that to Excise global economies Duty which including was partially Zam- re bia moved in particular on Petrol have while suf- on fered Diesel untold it was misery removed because comof pletely. the same. With a second wave This of is in attack addition underway to the 25 and percent economic Customs activities Duty which go- ing had on been under removed a new earlier normal, in it 2020. is expected When that you oil compute prices on these the taxes international on an market average will monthly continue consumption, being relative- an esti ly mated low with total revenue low level of fluctua- K15 bil tions lion was with lost an due overall to tax upward related
trend. subsidies alone in 2021.
However, should ma-
In addition, as more pres
jor economies go into lock
sure mounted to increase the
down, the global oil prices
pump prices after August 2021
are likely to nose dive once
due to a price escalation of
again. If no major lock down gets crude underway, oil on the country international spe- cific market situations and a poor which performing impact on local the currency, exchange Government rate are in likely troduced to be another the main type of driver fuel of subsidy the direction - compensating fuel pump some prices oil companies will take. as a way of cush ioning them from making loss es on imported fuel.
Initially, FUEL PRICING it was reported that Government was spend ing $21m on this mechanism. Twenty-one Fuel price United adjust- States Dollars is equivalent to K360m
ment- In order to on average per month.
guarantee ener- From this, one gets
gy security and the impression that at least
forestall
K17 billion may have been lost due to fuel sub sidies alone. doubt, 2021 will be a chal- lenging year as well because of a COVID-19 environment and a national election in August, 2021. To build upon the partial success of 2020 energy security and energy diplomacy from a fuels point of view, factors which could harm energy security have to be watched closely. These factors include the exchange rate, turnaround time to mobilize forex for imports and transporter mobility is- sues.
According to the nation- al economic recovery plan which was launched by the Head of State, H.E. Edgar Lungu in December, 2020, it was highlighted that the pricing mechanism in the petroleum subsector will be revised in 2021. This is aimed at reducing the costly ineffi- ciencies in the supply chain.
Converting K17 billion to US
Government has re-assured
dollars is about $1 billion spent
that its policy is to ensure
in one year!
That’s how fast fuel subsi dies can accumulate. The en tire IMF bailout package can be lost to fuel subsidies in one year. I would not be surprised if the figures are a lot higher than this due to challenges of accessing information in Government de partments
apart
operation from by what all means” is in public domain.
One billion US dollars is a lot of money which could build 1, 000 km of bituminous roads in the country. I would not be surprised if 20 percent of the 2021 national budget was lost to fuel subsidies alone.
To this end, 2021 could apt ly be described as “The year of fuel subsidies.” In December 2021, unprecedented major fuel hikes were implement ed to avert further financial bleeding from central treasury.
Regardless of whichever ad ministration was going to form Government after the August 12, 2021 general elections, the issue of fuel subsidies was go ing to be dealt with as per ex tract from my January 4, 2021 article:
“According to the nation al economic recovery plan which was launched by the Head of State, H.E. Edgar Lungu in December, 2020, it was highlighted that the pricing mechanism in the petroleum
Renegotiation of the elec- tricity tariffs between Independent Power Pro- ducers (IPP) and the na- tional power utility com- pany. We are not privy to these contracts but can only speculate that since these contracts are in US Dollars, the depreciation of the local currency in a COVID-19 environment has drastically affected the ability of the utility com- pany to mobilize enough Kwacha, convert it into US Dollars and pay IPPs their dues which are in US dol- lars. The utility company buys power in US Dollars and re-sells it in Zambian Kwacha by and large. It is undeniable that the utility company is owing suppli- ers outstanding amounts in millions of Dollars.
subsector will be revised in 2021.
This is aimed at reducing the costly inefficiencies in the supply chain. Government has re-assured that its policy is to ensure that pricing should be cost reflective.
However, as highlighted on the dashboard of the econom ic recovery plan, Government has accumulated USD727.3 million debt payable to sup pliers of fuel as at June 2020. These arrears have accumulat ed since 2016.
It is likely that Government may have slid into fuel sub sidies to cushion the public among other factors. I must emphasise that fuel subsidies are very costly and could ac cumulate very quickly. That is why am against unhealthy subsidies in the energy sector.”
Indeed, reforms have led to the removal of subsidies. We are yet to see the full scope of the subsidies because reforms
Renegotiations with fuel are suppliers. generally broad Government in nature. is In still the participating medium to long in term, the procurement of refined
fuel. Government re- solved to disengage from participating in the pro- curement of refined fuel in 2017. Had this policy been implemented fully, the outstanding arrears in the range of $700 mil- lion would not have ac- the cumulated fuel pump to prices this much. could come However, down depending the process on the of performance enacting of the the Petroleum local cur rency. Management Fuel availability Bill has was fair tak- for en most long. parts It of is expected year but there that were Government significant challenges may nego- in that tiate several with filling current stations did fuel not suppliers have fuel especially to supply Petrol the in January industry to directly February and and indi- the last rectly quarter instead of the of year. supplying
After to Government. plummeting Govern- below zero ment in 2020, will also oil prices negotiate re covered the purchase to their highest price of levels fuel in years (CIF) with in the its second suppliers half fol- of
lowing the conclusion of 2021.
a detailed price review of Still, as demand improved
the cost elements. amid rising coronavirus vac cination rates, oil companies have Fuel maintained price adjustment- a tight grip In on order capital to expenditure. guarantee energy
security and forestall fur- For sure, like much of the
ther debt accumulation, it global economy, the energy
has been directed that the sector has entered 2022 on a
60 days’ price review pol- significant icy be adhered uncertain to environ in order ment to sustain as the omicron a self-financing Covid-19 variant mechanism launches in a new the ugly sec- chapter tor. Inability in the to coronavirus ensure a pandemic. self-sustaining financing
While mechanism full blown is lockdowns a definite are harbinger unexpected, for this unhealthy pandemic still fuel remains related a major subsidies. threat An to the extract global from economy. the Econom- Already airlines ic Recovery cancelled Plan thousands which of was flights recently over the launched Christmas by weekend. Government says, “Hence-
To forth, be honest, price adjustments the global industry should is be still effected experiencing every significant time the challenges 2.5% trigger and band the level in of the uncertainty Cost Plus is relatively Model high (CPM) compared is exceeded to the pre-pan to en- demic sure era. cost reflective pricing
Most and positive leading yields authorities in the project sale of that petroleum the price products. of crude oil With will not cost change reflective significantly pric- from ing the in current place, there levels will of $77 be per no barrel losses but and could Government potentially reach will $85 be able per barrel. to liquidate the However, exposure over a time number without of
allowing it to grow.” This is possible factors could also bring the price down. Such factors include the coronavi rus pandemic and a possible deal with Iran which could free more crude oil on the global market.
The fact that OPEC + has left the door wide open after its last meeting is evidence enough of the uncertain days ahead of us.
Based on various scenarios, it can be deduced that from our local settings, the only fac tor which can be relied upon to manage the fuel pump price in 2022 is likely to be the ex change FILE: ZESCO rate. Muzuma substation being
upgraded to KV 330 (from KV 220) in
The crude oil price is un
order to be connected to the national
likely to move up significantly
grid as soon as the Maamba coal plant from station its is current commissioned level although there are some projections that it could In conclusion, reach $85 by the I wish end of to the state year. that To the this dashboard end, support of ing the 2021 Government energy sector initiatives out- which look looks are aimed positive at rebuilding and as- the suring economy all things will lead being to a equal. bet ter If all performing these key local touch currency. buttons A get better actualized, local currency the is sector likely to will be be the far tramp much card better for man than aging it was the in 2020. fuel pump With prices a nation- in 2022. al election in August, 2021,
the With environment a revised pump could price pose review challenges cycle for reduced the actualiza- from 60 days tion to of 30 what days, is a on stable the dash- local currency board. will Energy be crucial diplomacy other wise entails there continuous will be frequent engage- tin kering ment to with the fuel key pump stakeholders price.
with a view to sustaining *Johnstone and improving Chikwanda upon energy is an energy security. expert and a Fellow of the Engineering Institute of Johnstone Zambia, Chikwanda a PhD candi is an date energy at expert Johnson and University, a Fellow Knoxville, of the Engineering Tennessee, Institute USA. Email: of Zambia, j_chikwanda@ya a PhD candi-
hoo.com date at Johnson University,
Knoxville, Tennessee, USA