By Luke Mulunda
Fuel prices have started rising again. This, of course, was expected. No one imagined it would keep dropping forever or remain low for a very long time. While international indicators still show the likelihood of low prices, locally we are not benefiting optimally from the situation.
This raises questions about fuel price regulation policy introduced early this decade. Through the Energy Regulatory Commission, the government sets maximum prices for all categories of fuel every mid-month.
Initially, it looked like a great move. But increasingly, the regulation has turned into a barrier to competition in the fuel market.
Because prices are set, all fuel marketers, except state-run National Oil, charge the maximum limit. This means the customer losses out as there isn’t an option for bargain hunting. In the initial set up, fuel marketers would compete on pricing of fuel and quality of service. There would be huge price differentials between one dealer and another. Even branches of the same marketer would have different prices.
This way, fuel consumers would make a conscious choice geared at making a saving. With the free market competitiveness, fuel would trade at the minimum, unlike now when it’s pegged on the maximum price.
That’s why the government needs to rethink this fuel price regulation. The only thing it has succeeded in is to neuter the cartel of oil markets that was accused of manipulating prices. Yet the bottomline should be tangible benefits at the pump, not just a level playing field among the fuel companies and feel-good value-adds.
You can imagine how far fuel prices would have fallen locally if the market were driven by competitive pricing! The government should find a way of dealing with cartels and leave the market to the forces of supply and demand. This is the fairest way of discovering the true prices of commodities and services in an economy.
Also, the ERC should focus on the small but critical issues in the fuel market. Take, for instance, the capacity measures of those fuel pumps. No one inspects them to ensure that whatever fuel they dispense is equivalent to what the customer pays for. There’s talk of dealers manipulating the pumps to dispense less fuel even though the meter reading would show otherwise.
ERC needs to also look at the quality of fuel. Sometime back, motorists suffered after fueling at some petrol station on Mombasa Road. It turned out the fuel was contaminated. The fuel station got away with only an apology. ERC never took action.
Actually, it should invest in initiatives that would ensure consumer safety. It’s not all about pricing.
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Gambling with the shilling
As I wrote this piece, the shilling had dropped to 96 point something units to the dollar. Currency swings are normal, but often painful to one side of the pendulum. When the shilling weakens, many people feel the pinch. This is because our economy is a big importer and thus spends more shillings to buy dollars to pay for these commodities. It is this demand, especially when it goes out of the normal trend that pushes the shilling down like is happening now.
Exporters are smiling. For them, a weak shilling is a gain. Exports are paid mostly in dollars, and sometimes in euros. In the current circumstances they are getting Sh10 more on every dollar compared to the more favoured rate of 85. So if you were paid $100,000 dollars, you make an extra Sh1 million, thanks to a weaker shilling. Not a bad thing, huh?
The current predicament has been caused by a combination of three things. First, reduced inflow of dollars from tourism battered by recent terror attacks. Dollar inflow increases demand for the local unit and stabilises the exchange rate at some point in a counter-current flow of the currencies.
Second, imports have been rising as the government, both county and national, invests more in infrastructural projects. The number of vehicle imports has also grown since the beginning of the year and this has sucked more dollars out of the economy.
Third is the fact that listed companies are paying annual dividends to shareholders. The Nairobi Securities Exchange has a huge portion of foreign investors who are paid in dollars.
The outlook is not so rosy. Imports are growing, tourism has slumped and the dividends season has just begun. Don’t forget also that the dollar has been strengthening globally.
This is the right time for Central Bank to intervene. We do not want to get to the 106 level of 2011. Rising inflation will combine with this to spark an increase in commodity prices and hurt growth.
It’s unfortunate that Central Bank has taken a very conservative stance only to be forced to come in when the damage has been done. The Monetary Policy Committee recently retained the benchmark CBR rate at 8.5%. That leaves the economy at the mercy of the mighty dollar.
