Experts call for quick reforms in energy sector
Economic experts have asked local authorities to consider instituting reforms in the energy sector, particularly on fuel pricing mechanism.
The call follows revelations in The Nation this week that Malawi Energy Regulatory Authority (Mera) must pay fuel importers K785 billion in compensation for incurring losses for importing petroleum products due to indecision by the Malawi Government on fuel prices.
In its Malawi Economic Monitor for July, the World Bank observed that effective underpricing of fuel creates an implicit subsidy that is borne by the Reserve Bank of Malawi, Mera and private fuel importers who have accumulated large claims against the energy regulator.
In an e-mailed response on Tuesday, World Bank senior economist for Malawi Jacob Engels explained that the continued under-pricing of fuel has led to the depletion of the Price Stabilisation Fund (PSF), following extended periods where government has not adjusted the pump price in line with global prices.
He said: “This [not adjusting pump prices in line with global prices] means Mera has to look to the government for support
“Continued delays in the price adjustment continue to increase arrears to importers and the effective contingent liability on the government.”
All this is a result of government’s slowness to implement key reforms to promote efficiency in fuel pricing.
The Ministry of Finance and Economic Affairs has backtracked on a commitment made to the International Monetary Fund (IMF) to raise import duty, value added-tax (VAT) and excise tax to raise the price of imported cars to the regional average to contain fuel demand.
In the November 2023 country report, IMF observed that on average fuel consumption in Malawi grew on average by 7.7 percent over the past six years partly driven by a rapid increase in imports of used motor vehicles, which had doubled during the same period.
The proposed reforms could have mitigated the economic fallout created by “the persistent lags in upwards revisions of fuel prices”.
Speaking in an interview on Wednesday, Scotland-based Malawian economist Vel l i Nyirongo said government should take a balanced approach to upward adjustment of fuel could negate the positive effects caused by the subsidies.
He said: “Lower fuel costs stimulate growth by lowering costs and boosting spending. They also help to contain inflation considering the weight of fuel price on non-food inflation in the country.
“But we need to have a long-term strategy to contain the pressure on fiscal space and local foreign exchange reserves.”
Nyirongo urged Mera to consider boosting investment in hybrid fuels, which are cheaper and could potentially lessen the pressure posed by traditional diesel and petrol.
Economics Association of Malawi acting president Bertha Bangara-Chikadza, in an interview on Wednesday, urged the government to put on hold radical reforms on fuel pricing models until local inflation, currently at 33.6 percent, moderates to a manageable level.
“We recommend that government should only introduce these price adjustments once the foreign exchange challenges have improved to ensure that the country is not made worse-off,” she said.
On the proposed solutions to the fuel challenges, Bangara-Chikadza, who is also an economics lecturer at the University of Malawi, called for investment in public transport infrastructure to reduce dependence on personal vehicles.
Adequate investment in infrastructure in the long-term could ease the pressure on vehicle imports in the short to medium-term, according to the expert, and if managed well, it could create conditions to reduce pressure on forex in the short-to-medium-term.
