Fuel calamity

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ndecision by the Malawi Government on fuel prices has resulted in K785 billion losses which Malawi Energy Regulatory Authority (Mera) must pay petroleum importers in compensations, The Nation has established.

Mera’s failure to reimburse the under-recoveries has now forced fuel importers—desperate to shore up their working capital and keep trading—to withhold K330 billion in levies which are supposed to be remitted to beneficiary institutions, according to some fuel importers and multiple sources in ministries, departments and agencies (MDAs) that shape energy pricing policy.

Some of the non-remitted levies, which are statutory, include Road Maintenance Levy and Rural Electrification Levy, with the former’s non-remittance derailing road projects and the latter putting the rural electrification programme on hold, escalating costs.

Mera used to rely on the Price Stabilisation Fund (PSF), another levy built into the petroleum price build up to cushion consumers when changes in the in-bond landed cost (IBLC) go outside the trigger band of plus or minus five percent.

But the import losses have depleted PSF, which is set at five percent of IBLC, leading to negligible payments from the fund, thereby crippling its ability to cushion consumers from price oscillations.

Most of the outstanding under-recoveries date back to at least two years ago following the 25 percent devaluation of the kwacha in May 2022.

That month, free on board (FOB) prices of petrol, diesel and paraffin had also jumped by around eight percent compared to April 2022 prices.

But government, worried about the devastation on an already weak economy and what a full-adjustment in line with the automatic pricing mechanism (APM) would bring, only agreed to a 25 percent average hike.

While that increase almost matched the devaluation rate, it ignored rising oil prices on the international market, which had jumped eight percent, according to our sources.

The last time Mera adjusted fuel prices was last November by an average of 46 percent after the Reserve Bank of Malawi had devalued the kwacha by 44 percent.

Yet again, Mera’s Energy Pricing Committee gave little consideration to changes in IBLC which had surged beyond the five percent APM trigger.

IBLC—comprising FOB, transport, insurance and handling costs—is the main variable in Malawi’s petroleum price build-up alongside the exchange rate, although levies, taxes and industry margins also weigh in.

The Nation analysis shows that between January and August this year, IBLC has recorded an average increase of 34 percent.

While the official exchange rate has not changed much and showing that the local currency has depreciated by less than one percent between January and August this year, importers buy the dollar at a much higher rate than the official one because commercial banks put a lot of mark-ups on the benchmark rate, said a senior executive at one of the fuel importing firms on Friday.

A highly-placed Ministry of Energy official said the banks’ “huge” mark-ups on the dollar disguised as fees have increased the cost of buying fuel in kwacha terms on the international market where prices have also surged.

Said the source: “Since the PSF is no longer able to compensate fuel importers for the losses incurred because the cost of landing fuel in Malawi right now is higher than the Mera-approved fuel prices, losses to importers have risen to K785 billion and Mera must cover those losses otherwise we are heading towards a new fuel crisis.”

Due to the fuel importers’ diminished working capital resulting from Mera’s failure to cover the losses, national fuel stocks have plunged from 30 days of coverage in April this year to five days for petrol and 16 days for diesel in July, according to a well-placed source at the State-owned National Oil Company of Malawi (Nocma).

The recommended days’ cover for both fuel and diesel is 90 days, according to Mera.

Nocma has the highest loss claims against Mera standing at more than K590 billion followed by Petroleum Importers Limited, a consortium of four private sector oil marketing companies, at K156 billion with the rest of the importers sharing the balance of the K785 billion under-recoveries.

Mera opts for borrowing, raise fuel price

But Mera, said another source from the Ministry of Finance and Economic Affairs, does not have the money to reimburse importers and it can only raise such funds through a combination of three strategies.

These include immediate adjustment of pump prices by at least 30 percent; urgently let Mera borrow from banks to help settle the outstanding losses and, over the long term, reform the fuel price structure to achieve stability, predictability and efficiency in the sector.

A Treasury source confided in The Nation that the Mera board has already recommended new prices to government and that President Lazarus Chakwera has been briefed and is being nudged to approve.

This detail was corroborated by a senior technocrat in the Office of the President and Cabinet (OPC).

Said our OPC source: “The President has no choice, but to approve an upward adjustment of fuel prices because the current situation is unsustainable. We know the President is deeply concerned that higher pump prices will have negative effects on the economy.

“But we have equally made it clear to the President that not implementing cost-reflective pump prices will cause even more damage to the economy and consumers because when importers’ working capital gets depleted, there will be no fuel coming into the country and we will return to countrywide fuel shortages and long queues. Nobody wants that.”

On the second part of the strategy of allowing Mera to obtain loans to pay part of the accumulated losses to importers, our Ministry of Finance and Economic Affairs source said Treasury has authorised Mera to borrow K150 billion from commercial banks.

This was corroborated by a well-placed source at Mera who, speaking on condition of anonymity, added that the energy authority already secured K50 billion of the needed loan package more than two months ago and disbursed it to top three importers to ensure continued supply.

Mera, Treasury, Ministry of Energy and OPC could not comment officially on our findings pertaining to the three-pronged strategy over the weekend.

But last Wednesday, Mera public relations and consumer affairs manager Fitina Khonje conceded in a written response to The Nation that the authority is not collecting the road maintenance levy because importers are using the same as compensation for import losses.

Meanwhile, economists have called for effective implementation of the APM, saying only cost-reflective fuel prices are sustainable.

They also argued that both Mera and fuel importers have no excuse for violating the statutory requirement on remitting levies.

Mzuzu University based economist Christopher Mbukwa said government must stop sticking to unrealistic fuel pricing.

He said: “I see a case of a pricing structure that is sub-optimal, that is, it is not reflecting reality as such it is working against some players; hence, they are not willing to respect it. It is indeed the case of the State trying to mechanically hold the fuel pump price increase, which is unsustainable.”

Economist Dalitso Kubalasa, a long time public finance and economic governance analyst, argued that allowing importers to divert the fuel levy is a clear breach of Mera’s mandate.

“From a governance perspective, bending the rules can set a dangerous precedent, potentially undermining the authority’s credibility and eroding public trust in regulatory institutions,” he said.

On cost-reflective fuel prices, Kubalasa, while agreeing that this is the most sustainable path, urged a balanced approach to protect the interests of both importers and consumers.

On his part, Public Accounts Committee of Parliament chairperson Mark Botomani called on the Secretary to the Treasury to sort out the non-remittance mess.