Economists linked to the Reserve Bank have published a study calling on the government to lower fuel prices, which have been a major driver of inflation and a burden for consumers.
In the study, the two economists, Zaakirah Ismail and Christopher Wood, identify four ways to improve price-setting mechanisms. The study comes a fuel-price hikes are expected to hit in September due to the weaker rand and rising international oil prices.
The Bank’s priority is to maintain price stability through its inflation-targeting framework, and it has struggled to keep rates at the 4.5% midpoint of the 3%-6% range, due mainly to high fuel and food prices. The petrol price fell slightly in July, but rose again in August and is projected to increase 160c/l in September, adding 0.3 percentage points to the monthly inflation rate.
Ismail and Wood said the government should review the methodology for calculating retail margins and reconsider proposals to move the petrol price to a maximum instead of a regulated price.
Methodology
Ismail said the government should also review the viability of the Road Accident Fund (RAF) against alternative approaches, such as compulsory third-party insurance, and reconsider the methodology for calculating inland transport costs. He said the government should update several outdated elements of the basic fuel price calculation.
“Price increases are the result of a combination of deliberate policy choices, institutional failures — particularly in the case of the RAF — real price and capacity changes in the broader economy, and the specific methodological choices made by the prices-setters at the department of mineral resources & energy.”
While reducing these prices is complex because they are linked to key social considerations such as the viability of road accident insurance and the wellbeing of more than 70,000 forecourt employees at petrol stations, “each 10c/l increase in the fuel price costs the economy just over R1bn per year”.
Wood said that even though finance minister Enoch Godongwana has indicated that a process is under way to review the petrol price, none of these reforms is “likely to be easy”.
Even though meaningful reductions in the fuel levy seem unlikely, given the severe constraints on the fiscus, two reforms that could offer the most significant benefits are a review of the RAF system and a shift to a maximum petrol price. However, he warned that these reforms are also the most difficult as they would require significant additional evaluation work and weighing of large and vested interests.
Limited relief
“With global fuel markets entering a period of protracted instability, even marginal improvements to the regulation of the petrol price could offer real benefits to strained consumers,” said Wood. “While global petrol prices are outside SA’s control, improvements to the administered components of the petrol price may offer some limited relief for consumers facing steep inflation.”
A big portion of the price for domestic fuels is determined by a complex mix of taxes, levies and cost margins. SA is a price taker in global fuel markets, and most of the volatility in domestic prices results from global movements that are beyond local control. “Decisions about these fees, levies and margins are mostly split between the minister of finance and the minister of mineral resources & energy.”
Correction: August 30 2023
This article has been changed to reflect that the study is still to go through internal Reserve Bank processes for debate. It is not yet a Reserve Bank policy directive.
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