Ethiopia has recently halted subsidizing fuel prices and instead raised domestic prices above import costs, according to an official letter sent to the International Monitory Fund (IMF). The letter revealed a deliberate action geared towards a reduction of the country’s accumulated debt. The implementation of the new policy has been instrumental in driving up food prices. Some critics have called the policy “a case of robbing peter to pay paul”.
“Domestic fuel prices have been adjusted monthly since October 2008, with prices set higher than import costs to enable the Oil Stabilization Fund (OSF) repay its accumulated debt to the banking system”, Sufian Ahemed, Minister of Finance and Economic Development (MoFED) and Teklewold Atnafu, Governor of National Bank of Ethiopia (NBE) recently wrote to the IMF regarding efforts to reduce the country’s debt.
Stabilizing food prices
Prior to October, 2008, about 7 billion birr was spent to subsidize the domestic fuel prices; a policy that was instrumental in driving up the prices of foodstuffs. The withdrawal of the fuel subsidy, needed to stabilize the food market, was subsequently authorized by the Council of Ministers. The Ministry of Trade and Industry has since taken over fuel price adjustment on monthly basis.
Although increases in domestic fuel prices at the early stage of the adjustment program was negligible, criticisms are now rife as most people question the ludicrous price per liter of benzene, set at 10.9 birr (about 0.90 cents), on the domestic market against the world market price of 74 dollars per barrel.
Defending the government’s policy shift against claims that Ethiopians are being made to suffer the consequences of the government’s reckless accumulated debt burden, top officials have said that the fuel debt was as a result of the subsidy policy which was established with the intention to ease the financial burdens of ordinary Ethiopians.
According to the same officials, the government had subsidized fuel although oil imports were made through credits. The ensuing results of this policy came as no surprise as the country’s foreign currency reserve nosedived whilst weakening the government’s debt servicing capacity. Six months ago, the Ethiopian authorities indicated that their foreign reserves had hit record lows and could allow for only four weeks of essential imports.
New economic policies undertaken by the government have sought to scrutinize essential imports and prioritize foreign currency expenditure. So far, these steps as well as the fuel readjustment program have, reportedly, contributed in repairing the foreign currency reserve problem. According to official data from the central bank, the current foreign reserve has risen to 1.5 billion dollars and can adequately ensure six months of essential imports.
It is not clear, however, whether the government’s decision to continue importing fuel on credit basis would affect the positive inroads it has made towards foreign currency reserve recovery. Some analysts believe the current strategy is a case of robbing peter to pay paul. “Importing fuels using hard currencies is unthinkable to the government given the situation of the reserve crisis, so credit is again a must to import fuels,” defended one of the officials. According to him, the government’s capacity to reimburse its debts and at the same time stabilize current macroeconomic deficiencies are prerequisites to finding the necessary credit or foreign financial aids.
Ethiopia currently owes a total of 2.8 billion dollars with fuel taking up a lion’s share of the total debt. To service the country’s foreign debt, the government has budgeted 887,600,000 birr for this fiscal year. At the same time an anticipated 9.5 billion birr in foreign aid is expected to ease its foreign currency reserve challenges. But, pullbacks from donor countries due to the global economic environment has made the government very pessimistic. The letter sent to IMF described the difficult challenges faced by the country. The letter also pledged the government’s commitment towards the stabilization of the macro economic situation. Ethiopia’s application for a loan of 240 million dollars from the IMF’s is still awaiting the board’s approval.