What could happen if South Africa stopped regulating its fuel price

Last week President Cyril Ramaphosa confirmed that government was currently looking at ways to soften the blow of the recent fuel price increases.

With promises that new measures would introduced within the next six weeks, Ramaphosa may have a difficult task in choosing exactly where the money will be coming from in a budget that is already taking serious strain.

According to Dave Mohr and Izak Odendaal, strategists at Old Mutual, South Africa’s economy is still stuck in a low gear and all indications are that there was very little growth in the first half – if at all.

However, what really hurts the economy is that other commodity prices have not followed oil higher (apart from coal), the strategists from Old Mutual said.

“With the price of our main import (oil) increasing and our main exports (iron ore, platinum, gold) declining, our so-called terms of trade have worsened.

“This will put pressure on the current account deficit, as well as on consumers and businesses because of higher fuel prices. With the rand hovering around R13.50 and the oil price still above $77 per barrel, despite Donald Trump’s best efforts at talking (or rather tweeting) it down, this means another petrol price hike potentially looms in August.”

Reducing the petrol price

Old Mutual said the simple reality is that South Africa imports most of its petroleum products from abroad at prevailing global prices and exchange rates.

The strategists added that this situation is unlikely to change until there is a meaningful shift to electric vehicles.

“The only way to lower the fuel price would be for government to reduce the fuel and RAF levies – which would have to be replaced with other forms of taxation – or to deregulate the setting of the price completely,” Old Mutual said.

“The latter could bring the price down by increasing competition and squeezing wholesale and retail margins, but could result in a situation where fuel is much more expensive or simply unavailable away from the large urban centres.

“Subsidising the fuel price is a costly and distortive exercise that other developing economies are trying to move away from.”

Old Mutual said that the fuel price also matters from a inflation point of view, as it could impact the extent to which companies can pass on the higher fuel price to consumers.

“In the current tough environment, they have limited scope. In fact, if consumers spend more on transport, they will have less to spend on any discretionary items,” it said.

“The second round impact of fuel prices is probably limited, and the Reserve Bank is unlikely to respond with higher interest rates. It is, however, keeping a hawkish eye on global capital flows and the exchange rate.”

Read: Government is looking at ways to lower the fuel price: Ramaphosa

Must Read

Partner Content

Show comments

Trending Now

Follow Us

What could happen if South Africa stopped regulating its fuel price