What is really causing the fuel crisis in Malawi?

The fuel crisis over the last few years has been caused by low supply comparable to demand. In simple words, Malawi’s economy has an insatiable appetite for Fuel than what is being provided which is creating a deficit of supply.

In order to understand why we are having these major Fuel problems, the key is to look at why Supply is low and demand is high. Let’s look at why Supply is low in the first place.

The first and widely known factor is lack of Foreign Exchange. Oil is priced in US dollars not Malawi Kwacha’s, in order for us to buy Oil therefore we need to have US dollars. Malawi does not have enough US dollars to be able to purchase fuel from the energy Markets.

Seeking for fuel

It is true that the price of Oil due to the unrest in the Middle East has been rising. For example Crude oil prices stood at USD80 per barrel in 2010, our daily demand for fuel stands at 1.124 million litres. As of May 2011 the price of Oil was USD 115 per barrel. At the May 2011 prices the value of Malawi’s fuel imports was USD30.5 million while at the same time in May 2010 the same volumes were valued at USD 21.4 million.

However, fuel prices have also been falling since May 2011 right the price of Crude Oil is hovering just above USD 100 per barrel depending on the debt and equity market sentiment of the day. I would not be surprised if Fuel prices rise again due to the uncertainty surrounding Iran’s nuclear programme and how the west plans to resolve it and the continued unrest in the Middle East. If this will be the case then it will exacerbate the Forex problem.

Essentially, Malawi obtains its Foreign Exchange mainly via two means: Donors and Tobacco.

Donors have lost confidence in our economic management and human right record. As such they have withheld their funding which is bringing a shortage of Foreign exchange in our coffers. The Malawi Government claims it is reengaging with donors for them to resume providing aid but this remains to be seen. As for Tobacco, its common knowledge what happened at the Auction floors this year.

Focusing on Demand. The Malawi economy has been doing pretty well. On average it GDP has grown by 7% comparable to the average sub-Saharan growth of around 5%. As a result, Malawian’s have been importing more goods than they have been exporting. According to the recent budgetary statement, Malawi’s exports stand at 20% of our GDP while Imports are 39%. This means we have a trade deficit of 19%. In other words, we are moving out of the country more money (dollars) than we are bringing in. For ever dollar therefore that goes out of Malawi, 50 cents is returned. This is creating further pressure on foreign revenue.

Indeed due to this unprecented economic growth, Malawi is now registering up to 3000 imports of vehicles a month. This high volume of vehicle purchase by ordinary Malawians is pushing the demand of Fuel. We have to compete for fuel whose supply has not increased at all. The fuel crisis therefore is a just a sign of how good the economy has been doing and also a sign of how poor monetary and fiscal policy by the current administration has been.

The solution to the current fuel crisis therefore rests in implementing policies that increase supply of oil and reduce the demand to sustainable levels of fuel. The Government keeps saying that it is constructing fuel reserves. Although this is a long term solution it has failed to stipulate short term solutions. However, a closer look at our fiscal policy for 2011/2012 we can see that the Government did introduce some measures to curb the heavy demand as follows.

  • Introduction of 20% excise duty on big buses (over 45 seats).
  • Introduction of additional 20% excise duty on passenger carrying motor
    Vehicles aged 8 years but not exceeding 12 years of age
  • Introduction of additional 50% excise duty on passenger carrying motor
    Vehicles exceeding 12 years of age
  • Introduction of 20% excise duty on goods carrying motor vehicles aged 15
    Years and over. This rate is applicable to vehicles carrying 10 tonnes and
    Above.
  • Introduction of 20% excise duty on vehicles imported by car hire operators
    under CPC 4000.443. This rate will be applied on the existing concessary
    rate of 10% import duty and 16.5% VAT.

These measures are commendable and their effectiveness is yet to be seen. However in my opinion these are not enough. Any vehicle more than 8 years old should not be allowed in the country, these vehicles consume a lot of fuel and Malawi is not a dumping ground of used Japanese or German vehicles.

Any Vehicle above the age of 8 seeking to enter the country should have excise duty of 100%. This will discourage importers. Furthermore any vehicle moving on the roads of Malawi that have the same age should have to pay a higher road tax rate.

*Dumisani Kapanga is Malawian based in Scotland

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