Fuel Subsidization too costly

The fuel crisis that is rocking the region due to the ongoing renovation of the oil pipelines in Kenya and the fears by international suppliers caused by the recent Somali pirates, who have been hijacking vessels plying the Indian Ocean-Gulf of Aden route, has not yet, rather surprisingly, affected the fuel pump price in Rwanda. The price has consistently remained at Rwf756 per litre for both diesel and petrol. In neighbouring Uganda, petrol shortages across the country have, reportedly, precipitated price increases of between Shs3, 500 and Shs10, 000 per litre; this is probably due to speculation. The government of Rwanda has continued to highly subsidize fuel despite the acute shortage; and consumers have enjoyed consistently low fuel prices. It is reported that fuel in Rwanda is subsidized by over 50% to tame inflation. But last year, inflation hit a record high—at over 20% according to the finance ministry, mainly due to a rise in fuel prices. One then wonders what the situation would be if such a huge subsidy was removed. Although fuel prices have remained constant, consumers still suffer because of serious petrol shortages. Only a few stations around Kigali have stocked sufficient quantities of petrol and many of them have created unnecessarily long queues while giving large quantities of fuel to only their most loyal customers. Consumer discrimination among petrol stations is now rampant and unfortunately continues unchecked. Pump attendants are also becoming very corrupt—thereby giving this country a bad name. The person, who reads in papers that in Rwanda zero tolerance to corruption is practiced, sees the malaise every time he/she goes to refuel as young fuel pump attendants accept bribes to give higher-than-allowed volumes of precious fuel. It is shameful. Corruption does not only end in big public offices but also goes down to the lowest levels of our society. It is easier to fight organised corruption in public offices than petty corruption amongst the lowest levels of society. When I read that government has continued to forego over 50 percent of import duty to encourage dealers to trade in fuel, I feel that it sounds like too much spoon feeding. The government needs more taxes to work on socioeconomic development programmes and also reduce dependence on foreign aid. Subsidising means foregoing government revenues in form of taxes. A subsidy is a cost to government. This cost must stop somewhere and leave the forces of demand and supply dictate. There are normally worries that if government doesn’t over subsidise fuel, inflation will reach a record high—which is true, but on the other hand over subsidising scares away potential big investors. Fuel business is oligopolistic in nature. Firms price their products on a cut throat competition basis. They would put a very small profit margin but maximise economies of scale to stay in business. They normally compete on price, thus no prudent dealer will price exorbitantly for fear of losing customers. I also look at other benefits that would accrue such as employment creation and higher tax revenues collected. I also read that: “to cover the gap created by this shortage, the government supplied at least 5 million litres from its reserves as it waited for more supplies to arrive”—which is a good thing for crisis management. I think government should not deal in fuel at any cost. Private sector normally looks at government as one of the potential big consumers…if the government is going to supply itself then this somehow kills the market. Last year, we read about how some government officials were tempted to award fuel consignments. Awarding contracts of supply to private fuel dealers would not only encourage investors but will also go a long way in solving problems related to fuel management among government institutions. These ideas may seem and sound harsh to a final consumer but if we need to grow and also empower the private sector, we truly need to face the reality of things and leave the forces of demand and supply dictate. The writer is a communications specialist at the Private Sector Federation. mansur_kakimba@yahoo.com