How Govt fuel subsidies are curbing inflation

Transporters of goods across the country have welcomed continued intervention by the government to subsidize fuel costs saying that it will go a long way to stabilize the cost of logistics and consequently cost of goods. Last week, the government, through the Rwanda Utilities and Regulatory Authority announced that diesel prices would remain unchanged at Rwf1054 per litre despite the global increase in prices. Petrol prices rose to Rwf1143 per litre from Rwf1,088. Without government intervention, prices of diesel and petrol would have risen by Rwf 110 and Rwf 80 respectively, to about Rwf1,134 and Rwf1,198. Transporters say that without the intervention, the increase in costs would have seen them revise their prices upwards which would have seen prices of goods consequently rise. Fabrice Mugwiza who operates trucks moving agricultural produce across the country said that an Rwf80 price increase in Diesel would have led them to adjust costs incurred by farmers which could have seen an increase in food prices. “Given that business is yet to fully pick up after disruption by Covid-19, most transport operations are quite price sensitive and any changes in fuel could see the costs transferred to clients,” Mugwiza said. Without the subsidy, the public transport prices would have also increased as the costs would have eaten into public transporters profits which have already been stretched thin by the measures to curb the pandemic. Kigali based public transport bus companies told The New Times that with most of them currently paying loans which they recently restructured, increase in cost of fuel would have led them to engage RURA on revision of prices. Kigali’s public transport prices which are regulated by RURA were described by public transporters as ‘sensitive’ as they seek to strike a balance between ensuring affordability for passengers and returns for investors. This would have led to a repeat of a scenario last year which paralyzed public transport in December when a number of public transport companies decided to park their buses when it emerged that they would be operating at losses as the cost of operation was higher than income. This was as a result of measures to curb Covid-19 spread which reduced capacity of public transport buses. At the time, the government invested about Rwf29.3 billion to subsidize the cost of public transport to ensure that it remained affordable without being loss making for operators. Increased costs of transport is one of the key drivers of inflation in an economy. Inflation is an increase in the level of prices of the goods and services that households buy with high levels of inflation leading households to forgo some of what they previously consumed. For instance, increased inflation from transport prices could see some households have to reduce their food basket. Minister of Infrastructure Amb. Claver Gatete told The New Times that the subsidies have been informed by assessment of the kind of fuel largely used in the country and impact on cost of living. Gatete said that currently, 70 per cent of all fuel used in the country is diesel, (public buses, trucks, and construction equipment) which informed the move to cover the Rwf 80 that would have been the price increase. He said that an assessment of previous months of the subsidy programme show that it has had much impact on the economy as the economy heads towards recovery without inflated prices. Government subsidizes the cost by foregoing some of the taxes for petroleum products consequently keeping the pump prices lower.

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How Govt fuel subsidies are curbing inflation