By Amin Kef Sesay
Certainly, the Petroleum Regulatory Agency by a recent public statement wants Government to approve a further increase of the pump price of fuel in the country, giving comparative prices of the substance in other African countries.
Certainly, it makes sense to remove fuel subsidy on the argument that it will reduce Government expenditure and free fiscal space for spending on other things.
Yet what crucially the Government, in taking the decision, should ask itself is: how would further fuel increase affect the economy and particularly the poor who still make up more than half of the population?
From past experience, obviously, an increase in the price of fuel would increase the cost of transportation, increase transport fares as well as increasing the cost of producing and transporting manufactured and agricultural goods.
These price rises would finally be passed on to consumers resulting in inflation which for the poor is already unbearable.
As inflation increases, the cost of borrowing and the cost of capital will automatically tend to increase, which can have a long-term impact as well.
Rising fuel prices also increases import pressures for the Government. This leads deficits to go up, which eventually leads to a fall in value of the Leone.
Increase in fuel price would also lower GDP. Aggregate real household consumption will fall consequent of further increase in the price of petroleum products.
Urban and high income households suffer the most as higher petrol and diesel prices increase household spending both directly or indirectly.
The impact of fuel inflation is more visible in the urban economy.
Significantly, when gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be shipped from place to place.
An increase in the fuel levy from experience has led to households experiencing decreased income, employment and returns to factors used for production. Looking at the production side, firms are affected by fuel prices as their input costs depend on transportation and some petroleum products.
How does an increase in the price of petrol affect producers and consumers?
When the economy is weak, increased petrol prices means it becomes more expensive to move produce and other foods across the country, and that cost is eventually passed onto the consumer.
Also, the Government will bear a huge burden in increased cost of buying fuel for Government owned vehicles.
A subsidy is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the Government or a targeted tax cut.
In economic theory, subsidies can be used to offset market failures and externalities to achieve greater economic efficiency.
Thus, overall, when Government subsidy of fuel is sustained, the economy runs at a lower cost generally allowing producers to produce more goods and services.
It will also have the effect of keeping the cost of food stable, putting on hold increase in transport cost, house rents, etc.
