Prepare for difficult few months, perhaps even years, says economist after record fuel hike in South Africa

 ·1 Jun 2022

The Automobile Association (AA) welcomes the government’s announcement that it will extend fuel relief in the form of a reduced General Fuel Levy (GFL) in June and July, but it says that the massive increases in fuel prices are still going to hurt consumers and the economy.

The ministers of finance and mineral resources and energy on Tuesday (31 May) announced the extension of the reduction of R1.50 to the GFL for June. This will be followed by a 75 cents reduction in July and the GFL will then return to its normal rate of R3.93 in August.

“The continuation of the Russia-Ukraine conflict, supply-chain bottlenecks and a tightening of global monetary policy have led to further unfavorable changes in the two key drivers of the regulated petrol price — the exchange rate and the global oil price,” Treasury said.

“These events have led to even larger increases in fuel prices compared to a few months ago when the temporary fuel levy relief was introduced.”

Fuel has an almost 5% weighting in South Africa’s inflation basket, meaning the scrapping of the intervention would have placed upward pressure on prices, Bloomberg reported.

Even so, the retail price of 95-octane petrol in the central Gauteng province has risen by R2.33 rand a litre to a record R24.17 rand per litre, and the price of 93-octane by R2.43.

The price of diesel will increase by between R1.07 per litre and R1.10 per litre. The price of illuminating paraffin will increase by R1.56.

The wholesale price of diesel in Gauteng will increase to around R23.06 per litre.

“The joint announcement is a welcome development, and we are sure consumers are grateful that the government has stepped in with this financial reprieve. Even so, the adjusted fuel prices still take the fuel price to record highs, and consumers will have no option but to tighten their belts to accommodate for these significant price jumps,” said the AA.

“Apart from this immediate relief, we acknowledge that government has limited options in dealing with a crisis that is affecting countries around the world, not only South Africa.”

In addition to the extension of the fuel relief, the AA said it also welcomes the government’s plans to implement further measures to help reduce fuel prices in a more sustainable manner.

“The temporary relief is exactly that: temporary, and it’s now apparent that government must find more longer-lasting solutions to mitigate against rising fuel costs. Government must now to initiate a review of the fuel price: to examine all the components that comprise a litre of fuel, establish their continued relevance as part of the fuel price, and determine if the calculations used are still correct.

“Such a review is long overdue and the longer government delays in getting this started, the longer it will take to find sustainable solutions,” the AA said.

Foregone Revenue

The additional relief will cost the state R4.5 billion in foregone revenue, Bloomberg noted. While the initial concession was funded by selling part of South Africa’s strategic fuel stocks, the extension will have an impact on the national budget, the Treasury said.

“The proposed temporary reduction in the fuel levy will be accommodated in the current fiscal framework in a manner that is consistent with the fiscal strategy outlined in the budget, and any required changes will be announced together with the 2022 medium-term budget policy statement,” Treasury said.

It warned that the economy will need to adjust to the new reality of higher prices and the temporary levy reduction will only smooth out the impact.

The government will also take further measures to help reduce fuel prices in a more sustainable manner, including removing a demand-side management levy of 10 cents a liter imposed on 95-octane gasoline in inland areas, it said.

Treasury is also considering reducing the basic fuel price by 3 cents a litre in the coming months and removing the price cap on 93-octane unleaded gasoline, which will partially deregulate the market and introduce more competition to lower pump prices.

‘Enough is enough’

Debt Rescue chief executive Neil Roets said that the latest hike takes increases in the petrol price over the past 12 months to 41.5% – and all indications are that prices will keep on rising in the months to come. “This is also the highest month-on-month increase ever recorded – a whopping 11% increase from May 2022 to June 2022,” he said.

Economist Dawie Roodt said that the increase is a result of factors completely out of the country’s control, such as the global oil price, and a volatile rand. He said the price of fertilizer has also increased sharply and that all of this will lead to another significant hike in food prices that will see people going hungry.

“The reality is that there is a worldwide increase in the prices of goods and services, especially energy and food prices, leading to a rise in global inflation and also here at home, forcing central banks to increase interest rates. All of this means economic growth will be lower than projected, and that will result in more poverty and unemployment. We are in for a difficult few months, perhaps even years,” he said.

The implications of this, according to Roets, will penetrate every aspect of our lives, with knock-on effects almost too catastrophic to imagine – “and this comes at a time when South Africans have reached breaking point and can no longer withstand the volley of the never-ending fuel, electricity and interest rate increases – especially as salaries are not being adjusted in line with inflation”.

“If this does not topple South Africans over into a personal state of disaster, I will be very surprised,” said Neil Roets.

“It is deeply distressing to see the impact on families of the rising living costs, especially when it comes to core staple foods, which are fast disappearing from the table for millions of South Africans. Now an even more frightening scenario is unfolding with the impact of this latest price hike set to heavily impact food transport networks,” he said.

According to Gavin Kelly, chief executive officer of The Road Freight Association, this will have an impact on every single item that is transported to and across South Africa. “No one would have thought that we would see such increases in the fuel price as we have experienced over the past six months. Now, as we reel from these increases, the reality of one of the greatest price increases that we have ever seen is looming,” he said.

Oil remains above the $120 per barrel mark, while the rand remains volatile trading in the R16.00 range, and the effect is a sky-rocketing price for fuel in South Africa, said Kelly. “It has an impact on every single item that is transported to and across South Africa.”

“Enough is enough,” said Roets. “At a time when 88% of households have had to cut sharply on basic goods and services to manage their increased living costs, people simply cannot absorb any more bad news with regard to food security.

“Now they have to contend with concerns related to the food transport networks – and whether the nutritious foods they need to keep their families healthy and well will even make it to their corner of the country – let alone how it will add to the astronomical price of basic foodstuffs.”

The ANC government, which adds 33% to the fuel price through taxes and levies, is taxing South Africa into poverty, said the Democratic Alliance. The opposition party proposes the following:

  • Extend the temporary relief on the fuel levy, currently R1.50 per litre;
  • Better still, scrap the fuel levy entirely, saving R3.93 per litre;
  • Allow drivers out of the unnecessary R2.18 Road Accident levy; and
  • Deregulate the fuel price immediately, so that competition can drive down prices.

Read: Here is the official petrol price for June

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