Why Ugandans pay a lot more at the pump

Data from the Economic Policy Research Centre (EPRC) indicates that the economy’s demand for goods and services has increased by nearly 21 percent (petrol) and 16 percent (diesel).

The government has been quick to attribute the unsettling situation to escalating international crude oil prices. Such is the possibility of price transmission that every dollar increment in global fuel price is likely to see nearly $2 (Shs7,000) passed through to the pump price.

READ: Rising fuel prices push up sugar costs

To compound matters, a tax component in the pecking order sticks out like a sore thumb.

But could the soaring price of crude be solely responsible for the travails of Ugandan motorists at the pump? Not really. A transmission lag of crude on local fuel pump prices of between three to six months means the increments cannot be pegged to the former. What is apparent is the fact that fuel price crises in the country always tend to coincide with the policy decisions aimed at raising taxes on petroleum-related products.

Fuel inflation

When the government  increased tax on fuel (per litre) by Shs100 for petrol (from Shs1,350 in 2020 to Shs1,450 in 2021) and diesel (Shs1,030 to Shs1,130), it didn’t take long for pump prices to rise. Albeit steadily.

As of last week, both petrol and diesel pump prices were hovering at nearly Shs5500, far beyond the exchange rate which traded at Shs3,550/60 per US dollar. The Civil Society Budget Advocacy Group (CSBAG) estimates that—in the last year alone—pump prices spiked anywhere between 35 to 40 percent.

The fuel inflation has not been without implications. The Uganda Bureau of Statistics (Ubos) says the inflation ceiling of five percent is under threat for the first time since 2016.

Inflationary digits for the 12 months to April 2022 currently stand at 4.9 percent, up from last month’s 3.7 percent.

Whereas the Shs100 tax per litre increment from August 2021 to date is—according to Finance ministry technocrats—intended to boost domestic revenue, it has left Uganda grappling with pump price hikes that are unparalleled in the EAC region.

An EPRC report titled ‘Drivers of Changes in Uganda’s Fuel Pump Prices During the Covid-19 crisis’ makes known how prices for petroleum products in Uganda are the highest in the region. Countries such as Tanzania, Kenya, and Rwanda have put in place fuel price regulations. These, the report adds, help them take the hedge against shocks such as the recent rise in crude prices by tailoring the international price shock to be absorbed by fuel dealers rather than consumers.

In Tanzania, for one, the Energy and Water Utilities Regulatory Authority implements a fuel price ceiling. Here, a uniform wholesale price is fixed for each type of fuel (petrol or diesel) while factoring in import, tax, and other related costs. As a result, the retail fuel price only varies according to the region because of variations in distribution costs.

Elsewhere in Kenya, the Energy & Petroleum Regulatory Authority (EPRA) uses the Petroleum Development Levy to soften the blow on consumers. Such regulatory measures, which ensure observance of fair competition and protection of the interests of both consumers and investors in the energy and petroleum sectors, are conspicuous by their absence in Uganda. This, the EPRC adds, ensures that Uganda is a fertile ground for unfair trade practices. Price adjustments can hence be made at the discretion of fuel dealers in the country.

Laissez-faire

Besides fuel price manipulation, the EPRC report also indicates a possibility of the emergence of a cartel and collusion. This is because only two oil companies (Vivo Energy Uganda Ltd and Total Uganda Ltd) dominate the market, accounting for 30.17 percent of the market share (16.86 percent and 13.31 percent for Vivo Energy and Total respectively).

ALSO READ: Fuel prices remain high months after govt assurance on stability

The report also illuminates concerns about imperfection in the market. It, for instance, notes that the current actions of charging higher fuel prices may result from the dealers’ need to recover lost revenue during the first and second lockdowns, among others.

Researchers Tonny Odokonyero and Enock Bulime add that fuel shortages—exacerbated by a weak fuel reserve capacity—have driven the skyrocketing fuel price observed during January and February 2022. This is in addition to the tendency of an oligopolistic cartel-like structure of the petroleum market, which also seems to amplify the fuel price crisis.

Consequences

Fuel energy is a critical intermediate input in the production of goods and services. Any fuel price crisis, therefore, has far-reaching adverse effects on the economy.

It deteriorates the business environment by escalating the cost of doing business because of increased transport costs. In fact, the World Bank says high fuel price is the single greatest contributor to total trade-related transport costs. This, it adds, accounts for more than a third (35 percent) of the costs.

Increases in fuel pump prices also undermine poverty reduction efforts through the impact on the prices of all other goods which use petrol and diesel, among others, as intermediate inputs.

Ubos, for instance, says food is the most affected if anything because the poor spend disproportionately a higher share of their total household expenditures (over 40 percent) on food.

The current fuel price crisis comes at a critical time when the economy is struggling through a recovery path because of the devastating effects that the Covid-19 pandemic and its containment measures inflicted on the economy.

Fixes

Mr Odokonyero and Mr Bulime further state that domestic policy actions can influence tax-related costs, distribution, and profit margin rather than the international crude oil price. The two economists reckon that—in the medium term—the GoU can align fuel taxes with the inflation target. Because fuel price increase spurs inflation, measures can be established to regulate price and costs related to distribution and margin.

To minimise potential losses, tax measures should be implemented alongside regulatory measures as is the case in some of neighbouring countries.

But while they say a fuel stabilisation fund or subsidy can mitigate the effects of the international price crisis, Ramathan Ggoobi—the Secretary to the Treasury—has previously held that subsidies end up concentrating money in the hands of the rich.

President Museveni also took the option off the table while delivering his Labour Day speech last Sunday.

DON'T MISS: Fuel prices: What is the status of reserves?

Mr Odokonyero and Mr Bulime also proffer building an effective fuel reserve system (with higher capacity) as a crucial plank for price stabilisation during fuel crises. For now though, Ugandans find themselves bearing the brunt of high fuel prices with no respite in sight.