The double-edged sword of Africa’s rising petrol price

Several African countries will in July be grappling with increased fuel prices as governments impose more taxes and drop subsidies, moves which, players in the industry argue, present both risks and benefits for the continent’s development.

As Kenya doubles the value-added tax on petroleum products to 16 percent from July 1, Tanzania is introducing excise duty of Tsh80 ($0.033) per litre and increasing the fuel levy by Tsh100 ($0.042). These are expected to significantly increase fuel prices in the two countries.

In Nigeria, petroleum prices have nearly doubled as citizens went into panic-buying after the new administration announced plans to scrap the fuel subsidy that has kept prices below half the real cost since the 1970s.

Coming against the backdrop of international oil market disruptions, experts argue these changes will not only exacerbate the high cost of living that Africans are already struggling with but will also impact the economies wholesomely.

Some players in the energy sector say the increased fuel prices will suppress demand for the products, shrink revenues and force them to lay off some of their staff.

The impact won’t stop in the oil sector, they warn.

“If demand reduces, the entire private sector will have to take measures to reduce their overhead costs, including reducing their workforce,” a senior executive in a regional energy company, who asked not to be named because his firm is still lobbying the government, told The EastAfrican.

According to him, the rise in fuel prices will curtail expenditure on most commodities, reducing the government’s revenue collection from value-added tax and eventually slow the entire economy.

“It’s a zero-sum game. If revenue is not met, government will take austerity measures, and if the state doesn’t spend as it should, it will depress the entire economy,” he said.

In Kenya and Tanzania, the new taxes come after the respective governments dropped fuel subsidies due to persistent calls by multilateral financial institutions, including the International Monetary Fund and the World Bank.

While the lenders argued that the subsidies were unsustainable and put undue pressure on the countries’ budgets, they have also in the past discouraged the subsidization of fossil fuels because they “encourage pollution, contributing to climate change and premature deaths from local air pollution,” a document on the IMF website says.

Clean energy bonanza

Some stakeholders in the energy sector contend that scrapping subsidies and imposing more taxes on petroleum products is the best way to discourage their consumption and accelerate transition into renewable energy sources to beat the 2030 net-zero emission deadline.

IMF’s principal environmental fiscal policy expert Ian Parry argues that levying more taxes on fossil fuels is the most effective way to disincentivise their continued use, in favour of clean energy sources, thereby limiting the greenhouse gas emissions resulting from the energy sector.

“Other policies are less effective than carbon taxes,” Parry wrote in a column in the lender’s monthly publication Finance and Development.

“For example, incentives for renewable power generation do not promote switching from coal to gas or from these fuels to nuclear, do not reduce electricity demand, and, not least, do not promote emission reductions beyond the power-generation sector.”

Kenneth Oyakhire, managing director of GE Gas Power for Sub-Saharan Africa, says that although the increased fuel prices on the continent will indeed lead to increased inflation, they are for the greater good of the continent in the long run.

“In the short-term, it will stifle business activity for maybe 3 to 6 months, but there is a huge possibility that over the next one year, there will be a boom of opportunities to sell clean energy more,” he told The EastAfrican.

According to Mr Oyakhire, the increased taxation on petroleum products will not just discourage the consumption of these fossil fuels but will also show that African governments have the political will to lead transition into cleaner energy sources and to take meaningful action to tame fossil fuel use.

This, he said, will attract more investors willing to finance the continent’s renewable energy projects and in the end fast-track Africa’s transition from fossil fuels amidst increasing impacts of climate change-related calamities.

“What governments need to do [to avoid backlash from citizens] is to demonstrate that there is value from the additional taxes, or withdrawn subsidies,” he said.

Collective pain

“Everyone is going to feel the pain, in terms of inflation and higher oil prices, but it is only natural that if we all understand that there is going to be a better tomorrow, we can bear with the pain for a short while.”

The IMF says, mass protests resulting from withdrawal of subsidies or increment of taxes on fossil fuels are the primary reason governments across the globe have been reluctant to take such action, albeit the need for it.

They recommend that such reforms should be accompanied with – among other things – transparent and extensive communication with the citizenry on their impact and improving the efficiency of state-owned enterprises.

In Kenya, the government has admitted that, apart from looking to collect more revenue from the additional taxes, it is also meant to discourage fossil fuel use to reduce its impact on climate.

Kimani Kuria, chair of the Finance and Planning Committee in the National Assembly, told legislators that while the state has increased VAT on petroleum products, it has incentivised cleaner energy sources such as biofuels, which are now zero-rated.

“There is a global discussion on climate change and going green. Many countries around the world are moving away from fossil fuels to the consumption of clean energy,” Mr Kuria said.

“If we continue to incentivise use of clean energy, we are going to get away from these fossil fuels and reduce the pressure on our [oil] imports, leading to the stabilisation of our shilling and make the movement of particular sectors much cheaper.”