ENERGY Regulation Board (ERB) chairman Raynold Bowa says Zambians will start enjoying full benefit of any gains in kwacha strength as it translates to low prices in the fuel pump price.
Featuring on Hot FM’s Hot Breakfast show yesterday, Bowa said he could not however vouch for K20 a litre as suggested by talk-show host, stressing that the benefit of low price if not properly arrived at can cause shortages on the market.
“Of course the two most significant components in pricing fuel are the international price and the exchange rate. The fuel is traded in dollars ultimately. It is procured in dollars, it is sold locally in kwacha but we have to convert that back to dollar to pay the supplier. So to the extent that the kwacha performs well and continues to be a strong currency that is very supportive of the local cost of fuel price and that is reflected in the price that is currently prevailing which we announced on the 31st of July for the month of August. You will recall that in the previous month, the exchange rate had been K17.2 to the dollar. As at the last price review, we were working with an exchange rate of K16.5. Indications are that the kwacha continues to strengthen and the Zambian people will receive the full benefit of any gains in kwacha strength,” Bowa said. “I cannot speak to the K20 that you would like. We would all love that. Mind you I also buy fuel at petrol station so I do enjoy a low pump price and I would certainly like to give that to our people if we can but I must prudent. The benefit of a low price if it is not properly arrived at would be shortages in the market and we have seen that before. It has not happened in a long time because we have managed to handle this matter prudently. So let us pray for K20 but in the meantime we will survive at K24.”
Bowa said Zambians needed a pat on their backs because ERB had begun reducing the fuel debt owed to suppliers.
“At the beginning of September of last year, the amount owing in arrears was north of US $500 million. The government has been paying that down over this period. And to the best of my understanding, we are somewhere a little south of US $300 million. It is significant and that is why we needed to move a little quickly to address this problem,” he said. “As you may gather from the numbers I have given it means government is paying down on that amount but the more important thing is that we are not accruing new arrears. The amounts that are being paid off are not being generated from money that is being raised now or from the sale of petroleum products. If we were to try to do that the price of fuel would be much high than it is now. So what we are trying to do is just essentially be cost recovery so that we are not creating new arrears and the old arrears are being paid for from other government sources.”
Bowa explained that although the sector was not funding itself, they were not accruing any further debt.
“What happens in this market is that after fuel is supplied by private businesses that are licenced to supply fuel into Zambia, those institutions and entities procure fuel on the international market, supply it in Zambia and then gets sold to the consumer. When the consumers make the payment in cash in exchange for the fuel, that payment then goes to the bank, gets converted into dollars and then gets paid the original supplier of the fuel product. Therefore, the amount that actually gets paid to the supplier is directly related to the amount that is received at the pump in kwacha and also to how much that amount converts in dollars. So at the point where the supplier delivers, he issues an invoice, that is the value of the product he has supplied. Our job is to make sure that that fuel can be sold into the market and sufficient quantity recovered to cover that invoice in dollar terms. Now to the extent that the price is wrong in the market what would happen is that you would have money but not enough to cover the value the invoice that you are obligated to pay,” he said. “If that happens then you are owing the supplier some money. And that is how you build up arrears if that happens consistently over a long period of time.”
Bowa justified the monthly price reviews saying that it was the prudent way of managing the sector.
“The nation is aware that the situation with regards to fuel supply was a bit precarious at the time when the change of government occurred in August of last year. At that point the government had accrued massive arrears to the fuel suppliers and this was a situation that could no longer be sustained. Therefore, we needed to shift our country’s procurement model from one in which we were accumulating arrears to one that was self-financing at least,” said Bowa. “Almost all our neighbours are doing the same. South Africa, Tanzania, all of our neighbouring countries, eight of them. Actually, two are doing it even more frequently. They are doing a bi-weekly review because of the current instability on the world market in petroleum prices. So we have done this now for the last seven months or so and it appears to be working. If we get it wrong, the consequences for the country are dire. So we are on a good track. The idea is to have some kind of stability and in our judgment, one month is long enough to provide us a reasonable level of stability without the excessive exposure to price movements from the international market. You will be aware that the price of petroleum products changes on a daily basis and is published internationally. So it is actually theoretically possible to be adjusting the price of fuel every day.”