Sunday, December 11, 2016

South Sudan’s Economy: Is fuel the new dollar?

By John A. Akec

I recently asked a young relative what small business he would start if I were to give him some money. His answer came quickly, with no hesitation whatsoever: he would be buying and selling fuel (diesel and petrol) and charcoal. In that order. I was somewhat amazed to know that charcoal business was that lucrative to be on the same league as fuel, but was not shocked to hear that diesel and petrol would sell like hot cake at a premium. And for the last few weeks, it has become apparent to this writer that many of our citizens living around our capital city have discovered yet another money-making machine through buying highly subsidised fuel and selling it on the streets at five times its original price to make a fortune. And here is how.

Nile Petroleum Corporation, the South Sudan’s national oil operator, spends about one dollar (or between USD 0.98 to USD 1.05) to purchase a liter of diesel or petrol and then sells it at a retail price of 21 SSP (20 cent or USD 0.2). Retailers (Nile Petroleum Corporation included) then sell it to consumers at 22 SSP or so per liter, as from January 2016. At the beginning of 2016, South Sudan pound exchange rate against dollar in the parallel market was round 25 SSP to a dollar. That amounted to subsidies of SSP 23 million a month to supply the market with 2 million liters in January 2016 alone. As demand picked up and South Sudan pound exchange value against dollar continued to deteriorate, the value of subsidies began to increase exponentially to peak at SSP 500 million for the month September 2016 alone.  

Overall, fuel subsidies, according to reliable sources, for 12 months from January to December 2016 amount to around SSP 3 billion to supply the market with 112 million liters of fuel. As things stand, and at current exchange rate, one would estimate that fuel subsidies will cost the nation some SSP 6 billion next year from January 2017 to December 2017, assuming exchange rate stays the same, which is doubtful. If not, it could cost even more to maintain the subsidies in 2017. The minimum projected fuel subsidies for year 2017 is equivalent to 20 percent of approved budget of the SSP 30 billion for fiscal year 2016/2017.  It is the money our government will spend on the premise that it is helping keep low the prices of transportation services and other fuel-price sensitive goods. 

Looking more critically at current fuel subsidies though, the next question is who is really benefiting and how the government has been able to afford such a huge undertaking? The beneficiaries are young men, women, and children selling fuel on roads’ side, and their distributors who are pocketing subsidies at most. It explains why fuel queues are so long at our fuel distribution stations and depots.  Many motorists fill their tanks with diesel or petrol at 22 SSP and sell it to young street retailers who in turn sell it at more than 100 SSP a liter, and share the differences as profits. Others would fill containers and sell the fuel themselves at higher prices. The next day, many of them are back on the queue to buy more to sell. But at whose expense? Calls to float the prices of fuel and remove subsidies as well as opening the market up to private sector providers, it seems, have fallen on deaf ears.

It is a similar story to how the system of fixed exchange rate was exploited for a decade before it was finally and partially abolished in December 2015. Those well connected were able to buy dollars at low fixed exchange rate from the central bank and made twice or three or five times the value on the black market rate. It was for that very reason that many economic activists supported the floating of the exchange rate so that government can get value for money from its oil revenues.

By the time the Ministry of Finance finally gave a go ahead to the central bank to float the exchange rate, monthly income from oil revenues had already dwindled due to fall of prices of crude oil on the world markets. An important window of opportunity had been missed, and a deep economic hole had been dag.

What’s more, the system of auction of dollar at the central bank in which all the bidders – from the highest, to middle, to the lowest, won, is seen by this writer and other economists spoken to as not the best because it is open to price-fixing and, and vulnerable to internal dealings.

It is small wonder that things had not improved even after switching to floating exchange rate policy. From this author’s viewpoint, the policy of floating exchange rate was a sound one. However, the implementation of the policy, as well as delayed adoption, have left much to be desired. Besides, rushing to increase salaries of the members of armed forces by 300 percent without proper cost benefit analysis has wiped out any gains that could have accrued to the nation coffers.

The other part of the question that has not been addressed adequately in this article is how does the government afford to pay for these huge subsidies? Reliable sources have informed the author that a share of South Sudan’s crude oil is handed over to a foreign company that gives South Sudan a certain quantity of refined fuel every month at an agreed price. Hence, though it appears at the surface that Nile Petroleum has unlimited ability to sustain the losses month after month, ad infinitum, it is coming at the expense of reduced oil revenues to the government of South Sudan. What goes around must come around, the saying goes.

Finally, the question I need to pose is whether or not these subsides are worth it? And I fear, they are not. For once, the subsidies are not reflected on rate of transports either on fairs of matatos (mini-buses) and boda-bodas (motor cycles). This is because the owners of mini-buses and boda-bodas still pitch their fairs to reflect the inflation, even if fuel prices remain fixed officially. It therefore begs the question whether it is worth it to put our scarce resource to alleviate the economic burden on our citizens where it makes no real impact.

In conclusion, the Ministry of Finance and Economic Planning in our Republic, in its effort to cut expenditure, should consider removing fuel subsidies completely (the sooner the better), and allow private companies to supply and sell the fuel to those who need it at competitive prices which  are determined by "market's invisible hand."

Redirecting resources away from fuel subsidies could help reduce the deficit in the current budget from 40 percent to about 20 percent. It will not solve all our economic owes, but will partially assist towards closing the large gap in our public finances. It will also help stabilize the exchange rate of South Sudan pound against dollar as it will increase the oil revenue coming in.

Cynics will describe such a proposal as a politically risky undertaking to pursue. However, not taking bold measures, such as this one, to put our public finances in order is simply to delay the inevitable. For sooner, or later, not doing the right thing, at the right time, will catch up with our struggling economy. To the disadvantage of us all.


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