High fuel price is false

By Yohannes

AnberbirEthiopia has been setting domestic fuel prices above the costs of importing the fuel, an official government letter sent to the International Monitory Fund IMF reveals.The reason given is that it is an attempt to reduce the country’s debt, a large part of which is due to loans previously obtained to subsidise fuel.

“Domestic fuel prices have been adjusted monthly since October 2008, with prices set higher than import costs to enable the Oil Stabilization Fund OSF to repay its accumulated debt to the banking system,” Sufian Ahmed, Minister of Finance and Economic Development MoFED and Teklewold Atnafu, Governor of National Bank of Ethiopia NBE recently wrote to the IMF regarding the administration’s effort to reduce the country’s debt.The government had spent almost seven billion birr last year to subsidise domestic fuel prices until the scheme was terminated in September 2008. The inflated food prices of the time were the reason given for the removal of the subsidy; the government decided subsidising vital foodstuffs was a higher priority.

The Council of Ministers, which was responsible for adjusting domestic fuel prices, prior to the removal of the subsidy, authorised the Ministry of Trade and Industry to make adjustments on a monthly basis. The change in domestic fuel prices in the month following the removal of the subsidy was negligible; however, scepticism has been developing recently with people querying why a litre of benzene now costs 10.9 birr. Their answer has now come with the admission that the government is using the fuel premium to pay off its debt.A top government official arguing for the policy shift said the subsidy was done for the benefit of the public and the government is now trying to recover those costs.

The government had been obtaining credit for the importation of fuel, but the shift occurred when dwindling foreign currency reserves weakened its debt servicing capacity, the official added.Six months ago, the foreign currency reserve dropped to a level that can only support four weeks of imports. However, it has been rebuilt to 1.5 billion dollars, which can support seven months of imports, according to data of the central bank.

The foreign reserve crisis had been pushing the government to prioritise its expenditure and to scrutinise the necessity of imports before allowing foreign currency to be obtained.”Importing fuel using hard currencies is unthinkable to the government given the situation of the reserve crisis, so credit is again a must to import fuels, or it will have to find donors support,” the official told Capital.But reducing the debt of the government and stabilising the macroeconomic situation are still prerequisites for finding the credit, or foreign financial aid, the official explained.Ethiopia currently owes a total of 2.8 billion dollars. Fuel credits make up the lion’s share of the total debt, according to a three year macro economic and fiscal policy package of the government approved a few months ago by the Council of Ministers.

The government has budgeted 887,600,000 for this fiscal year in order to service the country’s foreign debt and expects 9.5 billion birr in foreign aid, which it hoped would ease its foreign reserve crisis.However, reductions in aid inflows and the troubled global economic environment has made the government pessimistic, the letter sent to IMF stated.

The letter that explains commitments of the government in stabilising the macroeconomic situation of the country requested the IMF’s financial support to the tune of 240 million dollars. The request is currently awaiting the board’s approval

Source: Capital.

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