Business NewsFront Page

World Bank cautions on G2G fuel deal risks

World Bank says international experience has shown that government-to-government (G-2-G) procurement arrangements for commodities such as fuel can lock the government into paying fixed prices “significantly” above the global price.

In its January 2025 Malawi Economic Monitor (MEM) published yesterday, the World Bank said such agreements could also leave State-owned National Oil Company of Malawi (Nocma)  Limited as the sole importer and increase pressure on the Reserve Bank of Malawi (RBM) to provide foreign exchange from its limited reserves.

Motorists queue to refuel at Kanjedza Puma Service Station in Blantyre

The sentiments by the bank come as government is implementing the G2G arrangement of importing fuel expected to be fully operational by March 2025 and with State-owned Nocma as the sole importer.

Reads the MEM in part: “Moreover, Malawian legislation exempts these transactions from the PPDA [Public Procurement And Disposal of Assets] Act, thereby evading important oversight mechanisms.

“While the longer repayment periods under the new arrangement may provide some temporary relief from acute fuel shortages, the underlying structural problems will persist unless the government implements the necessary reforms to address price distortions and foreign-exchange constraints.”

Under the arrangement, President Lazarus Chakwera announced in a national address in November last year, Nocma will be backed by flexible six-month letters of credit (LCs), giving it up to 180 days to pay suppliers.

The President announced the shift to a G-2-G fuel procurement method last November ostensibly to cut out middlemen, eliminate potential corruption along the supply chain and ease pressure on foreign currency externalisation through longer payment periods for fuel supplied.

In a national address, the President said his administration was mooting a G2G fuel deal with the United Arab Emirates (UAE) through flexible payment arrangements to avert perennial fuel stockouts, which worsened last year.

Already, through the arrangement, government said it has bought 40 000 metric tonnes (about 51.5 million litres) of diesel and petrol from Abu Dhabi, UAE under G-2-G arrangement.

Minister of Energy Ibrahim Matola indicated that the fuel was procured under a bilateral arrangement between Kenya’s existing G-2-G arrangement with Abu Dhabi and Malawi.

National Advocacy Platform executive director Benedicto Kondowe earlier said the new procurement model should lead to more favourable terms, a reduction in fuel costs and mitigating the burden on consumers while enhancing national economic resilience.

Meanwhile, the World Bank says Malawi’s fuel shortages result in part from the government’s decision to set fuel prices below cost recovery, which has resulted in K785 billion in losses for petroleum importers while Nocma’s arrears exceed $70 million.

The bank observed that while the Malawi Energy Regulatory Authority is covering these losses, importers are withholding K330 billion in levies that are supposed to be remitted to beneficiary institutions to finance road maintenance and rural electrification projects.

Since January 2021, gasoline prices have been adjusted only five times, with the last adjustment in September 2023, while diesel prices have remained frozen for nine months.

According to Nocma data, Malawi uses 1.05 million litres each of diesel and petrol per day.

The country spends $600 million (about K1 trillion) on fuel importation per year, according to the Reserve Bank of Malawi. In total, the country needs $3 billion to meet its import requirements.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button