Ethiopia established a “Fuel Price Stabilization Fund (Proclamation No. 247/2001) a couple of decades ago to stabilize the volatility of the price of fuel in the local market, caused by volatile global prices.
When the price of fuel decreases globally, the pump prices locally are not changed. The significant gain will be transferred to the fuel price stabilization fund, which will be used to smooth out the local prices when the global price increases.
On Dec 29, 2021, the Council of Ministers decided to cut the subsidization of fuel prices for specific automobile types. This decision came after the claim that“the subsidization process was not being guided by a well-organized policy. Moreover, it is supposed that the residents are affording the fuel price amidst the mounting debt on the Price Stabilization Fund.
The council’s decision is expected to be implemented after six months of preparation starting from Dec 29, 2021.
Abdulmenan Mohammed, a business and economy expert, says, “The drawback of the Fuel Price Fund is that in time of steady increase in global fuel price, an adjustment in local fuel prices lags. As a result, money in the stabilization fund would be consumed so fast and the government would be forced to add more money to the fund. To recover this money, the government normally increases the local prices of fuel substantially.”
So the discussion should be whether the current method is working well or not, says Abdulmenan.
PM Abiy Ahmed raised the fuel shortage and price issue in the parliament on Feb 22 underscoring the fact that the federal government had been subsidizing more than 100 billion Br (around 2 billion USD) for oil provision.
"As Ethiopia’s oil price is the lowest from the countries in the region, illegal smugglers are selling it to neighboring nations at an expensive cost. They buy it from Ethiopian petroleum dealers wIth the cheapest price. This is witnessed to be the major cause of fuel shortage in Ethiopia.”
Bewketu Tamiru, an expert who had been in the fuel market for more than 40 years told Addis Zeybe that, “the oil market in Ethiopia suffers embezzlement from organized crime and corruption, which is leading the country towards supply shortage.
"Most of those criminals are buying Ethiopia’s oil and selling it at expensive prices to neighboring countries. Amazingly, most fuel dealers and fuel sector officials in Ethiopia are also part of these crimes. In this case, the government’s fund is supporting those criminals and illegal smugglers.
Desalegn believes most of the government’s fund is applied to urban areas. Nowadays, the price of fuel is supposed to be affordable for urban residents. “I hope the funding will continue to the public transport sector, if not it will directly affect the suppliers and also the residents,” Desalegn adds.
Bewketu believes a high economic burden will occur when the fuel stabilization fund is terminated, most of the impact will fall on low-income citizens. Every cost of the services related to fuel, such as public transportation, food, and supplies will rise high. But as a permanent relief, its implementation becomes a must.
“In my opinion, the decision to revoke the fuel funding system is urgent. The financial cost allocated for the fuel funding should be transferred to infrastructure, health, and school and other development projects,” Desalegn suggests.
Another headache for the worldwide fuel market is also currently here- the Russia-Ukraine confrontation.
The Russian -Ukraine conflict drives the global oil prices up. For instance, the price of Brent crude went to $114, the highest in eight years. The impact of this increase is being felt everywhere.
On March 7, 2022, Russia warned that Western countries could face a rise in the oil price of over $300 per barrel and the possible closure of the main Russia-Germany gas pipeline if the governments threaten to cut energy supplies from Russia.
The economy expert from London said In the UK, the pump prices of petrol and diesel increased a record high since the conflict started.
“The global increase in crude oil prices will affect Ethiopia. Considering the fast depreciation of Birr, the impact will be compounded. This situation will force the government to make a significant increase in the pump prices of fuel in the near future, exacerbating the inflationary situation,” Abdulmenan says.
Desalegn, in his part, opines that the Russia-Ukraine war affects Ethiopia and other developing nations directly. “When fuel price in the current market rises, it is expected to create socio-economic instability in a country like Ethiopia, where most of the price is being covered by the government.”
What should be the next step?
Economy experts are concerned about the price increase. Abdulmenan says, “Passing over the full price increment on to consumers may inflict significant pain on their pockets. Note that pump prices have been increased several times over the past year. This suggests that the government needed to keep a significant amount of funds in its coffers which would have been spent to subsidize fuel on a temporary basis not to exacerbate the inflationary situation. The subsidy can be made selectively.”
Bewketu says that other alternative solutions should also be devised to address the problem. “In my opinion, the solution is changing our automotive culture, like selecting cars based on their fuel consumption.”
He also urges society to live like an individual living in a poor country. “I don’t think the problems will be solved while some individuals are driving a car bought by millions of birr before tax, which are high fuel consumers.”
Despite the different viewpoints they hold regarding the situation all the experts agree that the Ethiopian government should set itself up for the global shortages and price increases of fuel in an early time. It should keep sufficient reserves in the depots scattered across the country.
In recent news the English weekly, The Reporter disclosed that the National Bank of Ethiopia (NBE) is under preparation to conduct a study on the implications of international fuel prices on Ethiopia’s import bill as well as the economy.
As quoted by The Reporter Tadesse Hailemariam, CEO of Ethiopian Petroleum Supply Enterprise said, “We are expecting an additional forex allocation from the central bank, the Ministry of Finance and the Planning Commission.”