Subsidies on fuel good but…

Just like other growing economies, Rwanda partly relies on oil to run industries and generate electricity.

Just like other growing economies, Rwanda partly relies on oil to run industries and generate electricity.

It is estimated the country consumes over 15 million cubic meters of fuel monthly. But the overall fuel consumption levels could have slightly dropped as many no longer use kerosene for cooking, instead have turned to charcoal, some motorists have parked their cars and now use public transport—after all the economy is predictable—meaning if one has Frw4,000 (about $8) this is enough transport money especially for a person working 20-days monthly and staying within a radius of 15 km from town and is using government buses that ply to these suburbs 24/7 .

Soaring fuel prices

Oil prices on the international market are soaring partly due to increasing demand, the persistent falling dollar, and recently, countries in the Great Lakes Region suffered when the post-election crisis in Kenya cut off oil supplies to some land locked countries.

In January last year, pump price of petrol in Rwandawas at Frw607 while diesel was Frw595 per litre. By then, Government was subsidising 61 percent on petrol and 72 percent on diesel. In January this year, government increased its subsidies on petrol by 90 percent while diesel was at 91 per cent, the move was to stabilise fuel prices at Frw726 per litre.

Whereas some countries in the region pay heavily for fuel, Rwandans are consuming petrol and diesel at only Frw726 per litre. To make fuel more cheaper and affordable , government increased petrol subsidised to 98 percent while diesel is 100 per cent—partly because diesel is highly demanded for running industries and heavy machinery in the country.

Case for subsidies

Vincent Karega, state minister for industry and investment promotion says government subsidises heavily on petrol and diesel to avoid economic disruptions as these products have a big impact.

"Therefore, the logic behind subsidises is to keep the prices low for the citizens’ sake," Karega said. This is true since fuel prices affect the prices of other commodities. It therefore means citizens will access essential commodities at cheaper prices, which in turn will not hurt the economy.

According to Eugène Torero, deputy commissioner general Rwanda Revenue Authority, Rwanda is the only country in the East African Community charging very low taxes on oil products. This is to ensure that the public enjoys more affordable public transport and industries that use oil incur lower operating costs.

Rwanda has a strong case; in Uganda were fuel is not sudsidised, consumers suffered during the post-election crisis in Kenyan, with fuel hitting a record Ush.10,000 (Frw3,175) per litre. Whereas Rwanda, where government has forfeited the oil taxes, motorists were fueling at Frw726 per litre (about Shs2,280).

Karega says kerosene is not subsidised because it has less demand compared to other petroleum products that are used for generating electricity for lighting and running industries.

Revenue loss However, considering the sums of money the government misses out through tax exemptions, subsidises on oil products hurt poor and developing economies.

Economic experts argue that one of the adverse effects of subsidies is market distortion, meaning the price of the commodity does not reflect its actual cost. This jeopardises the national economy as it would lead to excessive fuel consumption and wastage in addition to unhealthy practices such as smuggling.

The Government cannot allow the gap between market and subsidised prices to increase as this could encourage exploiting. Today, irresponsible citizens can make illegal profits by purchasing diesel at subsidised prices and selling it at higher prices to the non-subsidised neighbouring countries.

Another outcome from heavy subsidies is the smuggling of fuel, particularly diesel, to neighbouring countries. This is similar to giving foreigners the subsidies intended for Rwandans. This would mean the country is suffering a great loss. For example, if projected subsidies are Frw6.6 billion for 2008, smuggling 10 percent of fuel out of Rwanda would be equivalent to an outflow of Frw660 million.

Torero of RRA said smuggling of fuel from Rwanda is not common because of the stern measures to crack down on fuel smuggling. But when there was fuel supply shortage in the Great Lakes region during the post-election crisis in Kenyan crisis, there were reports that Ugandans used to cross to Rwanda to fuel. Though RRA says the cases were minimal to warrant any worries.

May be Rwanda, like Singapore, should not allow locally registered vehicles to leave the country, with more than three-quarters of a tank-full of fuel.

Should subsidies be scrapped?

Subsidises are huge sums of revenue or money lost, there are ‘opportunity costs’ which prevent the government from allocating more to national development to benefit a larger segment of the population. Savings from subsidies could be used to build more schools, hospitals and public facilities which would provide long lasting benefits for future generations.

They also jeopardise the ability of the government to reduce the budget deficit yet it is just a developing economy. And this is likely to continue since the more fuel consumers use, the higher the amount borne by the government for subsidies.

Furthermore, most oil subsidies do not go to the people in whose name they are paid: the poor. Cheap petrol, for example, benefits most those who drive the biggest, most inefficient cars, namely the rich. The poorest have no motor vehicles at all. Perhaps government should subsidise kerosene, since the poor often use it for cooking.

And besides, taxpayers eventually foot all these bills for subsidising. Meanwhile, growing public debt puts upward pressure on interest rates and reduces the capital available to more productive borrowers. In the long run, that could cause far more damage than high oil prices.