Take politics out of fuel pricing, let market forces dictate

 In my June 2021 entry of Business Unpacked headlined ‘When political convenience drives fuel pump prices’ I lamented the tendency to discard economic fundamentals for political expediency in deciding the pump price of fuel.

That time, a Malawi Energy Regulatory Authority (Mera) update on economic fundamentals and their impact on the landed cost of petroleum products dated June 8 2021 indicated that the scale largely tilted towards adjusting local pump prices upwards.

Under the Automatic Pricing Mechanism (APM), whose key determinants are the changes in the value of the kwacha exchange rate to the dollar and free on board (FOB) prices of refined petroleum products on the international market, prices are supposed to be adjusted whenever the change in the landed cost or the exchange rate goes beyond minus/plus five percent bracket. Essentially, the APM is meant to ensure that importers recover importation losses.

However, in reality the APM and its fundamentals do not always decide what consumers should pay at the pump. Politics looms large.

When politics takes over, Mera turns to the Price Stabilisation Fund (PSF) in the petroleum pricing build up to cover up for the situation and massage the consumers to believe all is well.

But then there is always a limit to which the PSF can do the cover up as it tends to get depleted as it has now when Mera has found itself in a situation where it owes importers a whopping K785 billion as compensation for the losses incurred due to under-recovery emanating from the government’s indecision on fuel prices.

In the arrangement, importers and oil marketing companies pay the various levies, including the Road Maintenance, Rural Electrification and others. Every month, Mera works out estimates based on prices on the international market as well as the exchange rate, but where the price does not reflect the cost based on landed cost, importers incur losses and claim from the PSF. Thus, the PSF only gets positive returns where the projected landed cost is lower and there is under-recovery by importers.

But this time around, the situation is tight in that the actual prices are suppressed, a situation that is worsened by Mera and the importers’ use of the official exchange rate as determined by the Reserve Bank of Malawi. While the authorised dealer banks may on paper quote the official rate, in reality the importers pay more in form of charges. For instance, the official exchange rate quotes the dollar at K1 751, but importers pay for the same at up to K1 900.

The Mera board, on its part, has made several recommendations for upward price adjustments based on the business sense. But their proposals have hit blanks largely based on political expediency.

At the end of the day, Mera is seen by the wider public as defying own laws yet behind the scenes there is a ‘big brother’ thwarting efforts to run fuel imports as a business.

Now, Mera faces two hard choices, to increase pump prices or borrow to fill the K785 billion hole dug by the indecision by politicians. President Lazarus Chakwera, meanwhile, holds the key.

Prices may be suppressed now, but that cannot happen forever. There will always come a time when reality will catch up with us and the consequences could be ugly if not well managed.

Former Australian Prime Minister Paul Keating (December 1991 to March 1996) said “good economics is good politics”, meaning that when one gets it right on the economic front, the political side is well taken care of.

However, in the Malawi situation, for a long time political correctness has tended to override economic sense affecting most strategic commodities, including fuel, fertiliser and even maize.

In whatever we do, economic realities should influence economic decision, otherwise the country is sitting on a ticking time bomb that may explode with disastrous consequences. Take politics out of the pricing of strategic commodities, let market forces set the pace.