The temporary reduction in fuel taxes has no impact on economic growth

By Josef Kefas Sheehama.

The reduction in fuel prices is a manifestation of the concerted efforts of the government and stakeholders to revamp the economy through various measures aimed at improving the purchasing power of consumers.

We applaud the government for this positive development. Fuel pump prices have had an effect on the cost of living, as fuel is the driving force behind the prosperity of any nation’s economy and therefore should be readily available and at affordable prices. As the Russian-Ukrainian conflict continues to impact the price of crude oil globally, this has a direct impact on fuel prices in Namibia. But even with lower fuel prices, the economic impact is negligible and the resources available in the equalization fund can only last for a limited time. Only two to three months, then fuel prices will rise again by more than they were reduced.

The temporary reduction in taxes imposed on fuel is an opportunity cost for the various government agencies that are funded in whole or in part by one or more of the myriad taxes added to the base price of fuel. The use of estimates of the opportunity cost of oil can improve the assessment of the costs and benefits associated with alternative and development strategies. In addition, setting an appropriate opportunity cost for oil levies enables cost-benefit analysis and allows the country to decentralize its decision-making, which is necessary to encourage investment and thereby promote economic growth and Development.

The opposite is true if revenues decline because a business may not break even or have very low profit margins. The only scenario where a decrease in revenue is not detrimental to a business is when costs also decrease. If costs also go down, the business may be in the same overall financial position, but with lower revenue and overhead.

Therefore, I am not convinced that the Road Fund Administration, the National Petroleum Corporation and the Motor Vehicle Accident Fund will have sufficient financial resources to carry out their mandates. It is important to note that the levies and taxes imposed on petroleum products perform equally important functions such as road maintenance, the national budget and financial assistance to road accident victims. The economy can be unpredictable and no one can tell what the future will bring in an ever-changing world.

In addition, I expected the government to intervene on the prices of basic necessities and transport. This can be done by establishing regulations in conjunction with transport operators to set a tariff. The decrease will be significant if it relates to transport or market operation. Without this, lowering the price of fuel will be meaningless.

The oil market is global and Russia’s withdrawal from the global supply chain has and will continue to drive up the price of oil. With no end in sight for the war in Ukraine, the price hike will continue. Geopolitical tensions and supply shortages will support high crude prices. The reason the government has spoken of “temporary relief” is to indicate the unpredictability of crude markets.

If the government was serious about reducing fuel prices, it should have restored prices to the original amounts that were there before the increases. This would have had a real positive impact on the economy. Otherwise, it’s just window dressing and it won’t help matters.

The objective is to reduce the price of fuel at the pump in order to reduce the cost of living. The monetary value of levies and royalties adds up to significant dollars each year. The government has a duty to protect its stakeholders, including consumers and businesses. The measure can undoubtedly become a stimulus for the economy thanks to the reduction in prices and the increase in the multiplier effects of consumption.

The reduction will have different impacts and implications for different groups. Lower pump prices are good news for end consumers as they increase disposable income. But institutions that receive all or part of their funding from fuel taxes will see their revenues decline. They will either have to reduce their expenses, look for other sources of income, or do both.

To that end, I do not see the removal of price stabilization and recovery taxes leading to lower food prices, as many factors affect transportation. It’s not just fuel prices, but also running costs and insurance, among others. Even if you reduce fuel prices, it is only part of the total cost.

The other components are still intact, and they continue to increase. Thus, the reduction in the price of fuel alone will not be enough to offset the other costs. That’s why I say food prices won’t go down, transportation costs won’t go down, and the overall effect is that food prices will go up. The poor and vulnerable will continue to bear the brutal brunt of the rising cost of living.