In anticipation of a huge fuel price increase amid the war in Ukraine, finance minister Enoch Godongwana has proposed a two-month extension of the reduction in the general fuel levy at an additional cost of R4.5bn that has not been fully funded.
The original relief, which was announced at the end of March and implemented in April, was due to expire at midnight on Tuesday, leaving SA motorists facing an increase of about 25% to above R25/l for petrol.
The proposal, which is contained in a letter Godongwana submitted on Tuesday to the speaker of the National Assembly, Nosiviwe Mapisa-Nqakula, is just the latest step as governments battle a cost of living crisis that is hitting workers and sparking protests in rich and poor countries alike.
Unlike the R6bn sacrificed during the initial tax holiday, the government said the sale of strategic fuel reserves will not be enough to cover the cost of the extension, implying an impact on the budget either through raising extra revenue or cutting spending elsewhere.
For the government, the danger is that if markets do not revert, political pressure will build for the “temporary” measures to become permanent. That in turn, would risk long-term damage to finances that are recovering after the Covid-19 outbreak and lockdowns.
Framework
According to a joint statement issued by the National Treasury and the department of mineral resources & energy, the R1.50 reduction in the fuel levy will continue to July 6, and then be adjusted to 75c/l until August 2, before being withdrawn the next day.
The department announced that the price of petrol will increase at midnight by between R2.33 and R2.43/l, while diesel and illuminating paraffin will rise by R1.10/l and R1,56/l, respectively. The withdrawal of the temporary levy relief as planned would have led to petrol prices jumping about R4/l.
The Treasury said, without providing any details, the latest temporary reduction in the fuel levy will be accommodated in the current fiscal framework “in a manner that was consistent with the fiscal strategy” outlined in the February budget. Changes, if required, will be announced in the 2022 medium-term budget policy statement.
Hugo Pienaar, chief economist at the Bureau for Economic Research at Stellenbosch University, said the government could be counting on higher-than-projected revenue from commodities to fill the gap. SA’s coal exports, in particular, have been boosted by an energy shortage globally.
“It is likely that Treasury is banking on revenue from corporate taxes, from industries such as mining, coming in better than anticipated,” he said.
The question remains of what the government will do if prices stayed elevated.
The plan set out on Tuesday is “sensible”, he said, “especially if government wants to avoid a similar situation as it now finds itself in with the Covid-19 social relief of distress grant”.
The grant, which was first implemented in May 2020 as a six-month temporary measure to assist the unemployed during the height of the pandemic, has been extended several times and is due to run until March 2023.
The extension of the relief in the general fuel levy would shave about 0.3 percentage points off headline inflation in June, though the rate is still poised to rise above the Reserve Bank’s 3%-6% target range, to 6.6%. The rate was 5.9% in April.
Determining the effect of the temporary relief over the full year is “a bit trickier”, Pienaar said, because final estimates would depend on assumptions about the direction that oil prices and the rand would take for the rest of the year.
The department of mineral resources & energy and the Treasury said the temporary reduction in the levy would smooth the effect of persistently higher fuel prices on consumers and businesses, as the economy adjusts to the new reality.
Other measures that will be implemented include a 3c/l reduction in the basic fuel price in the coming months and the removal of the demand-side management levy of 10c/l on inland 95 octane unleaded petrol from June 1.
The government also intends to continue with consultations and proposals to remove the price cap on 93 octane unleaded petrol, which would partially deregulate the fuel market and introduce more competition to lower pump prices.
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