Economic aspects of fuel levies, charges reduction

Saturday October 09 2021
Fuel PIC
By Honest Prosper Ngowi

On October 5, 2021, President Samia Suluhu Hassan ordered the authorities involved to reduce levies and other charges on petroleum products.

The aim is to reduce pump fuel price in the bid of reducing cost of living. The pecuniary value of the levies and charges is Sh102 billion annually. There are several economic aspects of this measure - as partly outlined here-in below...

Fuel price determinants

Tanzania imports all of its fuel needs. Therefore, the primary determinant of fuel price in Tanzania is the cost (of purchasing in the world market), insurance and freight (CIF).

This is exogenous variable that basically Tanzania does not have control on. Once fuel has reached Tanzania, the pump price is a function of several variables.

They include levies and charges imposed by various public institutions as well as transport cost and profit margins charged by the business community. Available data indicate that the pump price can be more than double the CIF in total - thanks to the above fuel price determinants.


Levies and charges

The levies and charges imposed on fuel constitute some sources of reviews for some public institutions. Part of the levies and charges are attributed to cists involved in the process of handling fuel. Part however, are among sources of revenues needed to finance involved institutions. Available data would show that there are about 20 different levies and charges imposed on fuel in Tanzania with different rates. Some of these are shown in what follows.

Some levies and charges

Among the levies and charges on fuel in Tanzania include several local costs payable to various institutions. Some are charged as percentage of CIF price and others as a fixed amount from a litre of fuel.

They include wharfage, Railway Development Levy, customs fees, Weight and Measures fees, fees for TBS, Ewura and Tasac, fuel marking, demurrage costs, surveyors cost, financing cost, evaporation losses, service levy payable to local government authorities, fuel levy and excise duty.

After these come overheads and profit margins for oil marking companies, retailers margin, transport and other charges. Figures for each of the above are available. They range from Sh413 to Sh1 for fuel levy and Weights and Measures respectively.

Impacts on pump prices

Available data show that levies and charges imposed on fuel can hike the CIF price over twofold. For example, a CIF price of Sh1,162 per litre can be hiked to Sh2,405 pump price on average depending on how far the final consumer is located in the country. This is an increase by Sh1,243 per litre which is a whole 107 per cent increase. Necessary as they might be, it is true that they do hike pump price substantially. Some levies and charges may arguably be necessary evils.

Why reduction

The Presidential directive to reduce levies and charges is a typical case of government intervention in price setting. The intervention is important even in a free market economy where prices are primarily determined by the free interplay of market forces of supply and demand.

The government has the duty to protect its stakeholders including consumers and businesses. in this case the point is to protect consumers. Indirectly though, the measure may arguably become a stimulus to the economy through price reduction and increased consumption multiplier effects.

Impacts and implication

The reduction will have different impacts and implications to various groups. Reduced pump price is good news for final consumers in at least two ways. For consumers of fuel there will be reduced pump price. It implies that one can afford buying and using more fuel or having more disposable income after fuel purchase. This income can be devoted to other transactions.

They will also benefit from at least not increased prices of goods and services produced by fuel as one of factors of production. In all of the above, the ceteris paribus condition (other factors remaining constant) has to hold. Authorities that have been getting income from fuel levies and charges, will see reduced incomes. They will have to either reduce expenditure, look for other sources of income or do both.

Other measures

Among the efforts to reduce fuel price in Tanzania include bulk oil procurement that has enabled enjoyment of economies of scale. This is by way of quantity discount, managerial and other economies of scale. Another alternative could be government subsidy. However, this depends on the government’s fiscal space.