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Sierra Leone: Fuel subsidies, fuel prices

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Sierra Leone: Fuel subsidies, fuel prices


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Just in case some people don’t know, Sierra Leone does not produce or refine petroleum and therefore mostly dependent upon imports to meet its domestic petroleum requirements. Imported petroleum products are the second largest source of power at approximately 13 per cent.

The government, the agency regulating the sector and the sector players – the oil marketers – reached a decision to revise the price downwards without due regard for demand and supply dynamics – both locally and globally. That was where they got a few things completely wrong.

Locally, I suspect they would have (mis)calculated prospects of the huge quantity of petroleum products in high demand when there was a boom in the extractives sector – the mining companies and related engineering and construction firms – and that it would last longer than it did. The road infrastructure exploits were also getting larger in scale and therefore required huge supply of petroleum products. That prospect for economic growth would later crash because of a combination of factors, among them inefficiency in local revenue generation and management and of course the Ebola outbreak.

Globally, they’d put their bet, almost entirely, on the free-fall of the oil price in the global market without regard for other external factors that come with the low oil price. For example, the decline in oil prices, which began in June 2014, has also not resulted in higher global growth in that year, relative to what was expected before the decline, according to IMF.

The government and related players in the oil markets in Sierra Leone may not have considered the the implications of such a trend on local purchase. This could have been established through what is known as the ‘pass through’ phenomenon. Where does Sierra Leone stand on this? Pass-through is calculated as the absolute change in domestic retail prices [of fuel] divided by the absolute change in international prices [of crude oil], both in domestic currency, over a period.

Most countries in sub-Saharan Africa, including of course Sierra Leone, regulate fuel prices with discretionary adjustments, resulting in a low pass-through to the fall in oil prices. Slightly more than half of African countries regulate fuel prices in a discretionary way, while 40 percent rely on automatic adjustment formulas. Retail prices fell in most countries in the second half of 2014, but at a slower pace than the drop in international prices. In some countries (Angola, Cameroon, Ghana, and Madagascar), domestic prices rose in the context of fuel pricing reforms.

I have seen some IMF staff discussion notes showcasing policy-related analysis and research being developed and published to elicit comments and encourage debate. In one of them title: ‘Global Implications of Lower Oil Prices’ released in July 2015 the government’s position not to effect a pass through mechanism was prudent given my fears of the challenge ahead of the country’s economy. When Nigeria went begging the World Bank and the African Development Bank for a $3.5 billion loan, I reasoned with President Muhammadu Buhari because. He said he was surprised to learn that Nigeria’s huge oil wealth had not been used for investment but rather entirely dedicated to the day-to-day running of the country. That was not sustainable. Sierra Leone is also plagued by that same situation. Sierra Leone is broke right now and certainly can’t afford to lose the Le150 billion ($30 m) and Le133 billion ($26.6 m)it lost in 2014 and 2015 respectively.

Back to the discussion notes.In a number of oil-importing economies, [like Sierra Leone]the IMF staff assumed that “governments or state-owned energy companies will save the oil windfall gains not only initially, as assumed in the simulations, but more permanently”.

Put differently, the oil windfall gains [revenue saved on subsidies cut]“offer authorities an opportunity to help improve their fiscal positions without hurting domestic demand. In fact, without the windfall gains, the positions would have deteriorated, given other shocks”. They argued that the backdrop to that strategy was the deterioration in fiscal positions in many emerging markets and developing economies before the decline in oil prices.

“As macroeconomic vulnerabilities have become more costly with increased capital flow reversal risks in these economies, authorities have sought to reduce such vulnerabilities. Similar considerations apply to state-owned energy companies, which had seen their financial positions deteriorate as they bore the costs of increased energy subsidies in recent years. The implied increase in national savings explains the projected improvements in current account balances in these economies”.

According to the national energy profile of Sierra Leone 2012, imported Petroleum Products are the second largest source of power at approximately 13%. The document observed that petroleum is the most important source of energy for the modern productive Energy Sector (including transportation and private electricity generation).

However, because foreign exchange difficulties had considerably restrained petroleum imports, government had to subsidise. When the country’s GDP grew by an estimated 15 per cent in 2012, mostly driven by an upsurge in iron ore production, the mineral sector accounted for about 71% of total export revenues mainly from exports of diamond, iron ore, and rutile concentrate. The Bank of Sierra Leone in 2013 stated that total export receipts from diamond, iron ore, and rutile concentrate exports amounted to $1.1 billion. Export revenues from the mineral sector accounted for about 70 per cent of total export receipts. All of that is adversely affected right now, leaving government extremely very desperate to save money for its overly ambitious agendas.

While authorities should let the public know that they were badly in need of whatever money they could save from cutting fuel subsidies to run the ever growing government, the oil markets should also explain why they thought low oil price was also bad for business. They did not engage the public in a way to let them know that a free-fall in prices of oil and related products on the world market was not not enough a reason to reduce pump price.

I am saying the Sierra Leone government should never have rushed into reviewing pump prices as a consequence of those externalities that do not resonate here well.Even those analysts, who were positive above more reduction in global oil prices, also feared that “the pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets”. How close is the world to achieving this? Such external factors the government of Sierra Leone obviously didn’t take into consideration, apparently hoping that the free-fall was a windfall.

I know, as per regulation, the Petroleum Unit must have advised, or ill-advised as the case may be, government to review downwards the prices of petroleum products. In case you didn’t know the Unit has a mandate to “manage the responsibility of effective monitoring, supervising and coordinating the petroleum downstream sector of Sierra Leone within a regulated framework”.

By virtue of that portfolio, it serves as the custodian of the petroleum pricing formula, in addition to monitoring and managing pump price reviews. The pricing formulae, according to one of the oil marketers in Freetown, is based on the actual cost of the product to which import duty is added, port charges, demurrage, inspection, freight levy and a storage fee, which is paid to the oil companies for use of their storage facilities.

Let me offer some business advice to the government and its advisors on this matter. They might have flunked it already, but from a business perspective and given the analyses available on how volatile the oil market is, it is my view that government should never have rushed into bringing down the prices of diesel fuel, petrol and kerosene from Le4,500 to Le3,750 in apparent response to the free-fall in global oil prices.

Oil prices may have dropped to as low as US$20 per barrel, but observers have said that a concomitant domestic adjustment to the prices of petroleum products in Sierra Leone would not be prudent at this stage. The government obviously needs some time to recoup its investment in fuel subsidy over the years.

In May 2011President Ernest Bai Koroma, in a nationwide broadcast announcing the reduction in pump price from Le5000 to Le4500, noted that the subsidy requirement increased from Le1.6billion per week in October 2010 to Le 4.72billion per week by March 2011, reaching a subsidy requirement of Le 6billion per week by end April 2011. Let’s just be hypothetical here for purposes of argument and take Le5 billion a week as the average subsidy and multiply that by 52 weeks in one year and you would end up with 260 billion.


Why don’t the government tell its people that the country lacks the capacity to deliver finished fuel products? That it did not have a refinery on its own? That the country imported all such petroleum products which meant that the country was still investing a lot to ensure “effective coordination of national product requirement vis-à-vis funds available to ensure uninterrupted supply of all grades of petroleum products; monitoring of import arrangements and supply; implementation and technical maintenance of strategic petroleum products stocks for Sierra Leone”.

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