{"id":425535,"date":"2011-05-17T11:22:02","date_gmt":"2011-05-17T11:22:02","guid":{"rendered":"http:\/\/www.ghanamma.net\/2011\/05\/17\/the-nations-approach-to-high-fuel-prices-cut-taxes\/"},"modified":"2011-05-17T11:22:02","modified_gmt":"2011-05-17T11:22:02","slug":"the-nations-approach-to-high-fuel-prices-cut-taxes","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2011\/05\/17\/the-nations-approach-to-high-fuel-prices-cut-taxes\/","title":{"rendered":"The Nation’s Approach to High Fuel Prices – Cut Taxes"},"content":{"rendered":"
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The Independent<\/a> (Kampala)<\/p>\n

Magnus Mazimpaka<\/p>\n

13 May 2011<\/p>\n

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While the Ugandan and Kenyan capitals are struggling to cope with the frustrations that have accompanied skyrocketing oil prices, Rwanda is discussing with fuel dealers on how to cut taxes in order to avoid a similar fate.<\/p>\n

The crisis, which has resulted from unrest in many Arab countries, emerged just a few months after Rwanda scrapped its 40 percent subsidy on fuel. The subvention was removed because Rwanda had to align its tax system with other EAC member states. Now that the price of fuel is drastically increasing, economies across the region are negotiating their way through the tough times. In Rwanda, diesel is currently taxed Frw250 per litre, while petrol is charged Frw283. The pump price for both petrol and diesel is at Rwf1, 060.<\/p>\n

However, by cutting tax on fuel, Rwandan fuel dealers will have to reduce or maintain pump prices in order to stabilise inflation. After a tax cut, dealers have to respect a price seal set by government, because even a reduction of Frw1 can translate into billions of francs in savings for consumers.<\/p>\n

However, many analysts are now questioning how Rwanda, with the smallest economy in the region, will be able to absorb such a move. Moreover, what are the economic implications of such a decision?<\/p>\n

Birasa Nyamurinda, a professor of economics at the National University of Rwanda explains that any tax cut affects the government’s revenue. However, Prof. Nyamurinda believes that “shifting, in terms of tax decrease, gives a relief on consumers.”<\/p>\n

In a country where purchasing power is very weak, an increase of just Frw10 ($0.02) on a commodity is seen as a huge increment and usually creates anxiety.<\/p>\n

As a result, Rwanda has a strong consumer protection policy and it’s the government, not the dealers, who set prices through a regulatory agency that consults with players in the industry to set a price seal.<\/p>\n

Moreover, the government has its own reserves which are filled by at least 17 million liters every month. This means the government can influence business trends not only as a regulator but also as a fellow player in the industry, but not as a competitor.<\/p>\n

An analyst in Kigali told The Independent that Rwanda is doing this to strategically position itself in the region. “This move helps Rwanda become competitive in the region,” he says. “Controlling the price of fuel means facilitating production and that also means cutting the cost of doing business. That is a basis of competition for Rwanda.”<\/p>\n

Other analysts, however, warn that the tax cut might burden Rwanda’s economy.<\/p>\n

Regional Fuel Prices<\/strong><\/p>\n

Rwanda: $1.75<\/em><\/p>\n

Tanzania: $1.45<\/em><\/p>\n

Uganda: $1.45<\/em><\/p>\n

Kenya: $1.30<\/em><\/p>\n

But, the Minister of Trade and Industry told The Independent that he is in agreement with the government’s intention. “I don’t want to speculate,” says Francois Kanimba, “but if the government decides to cut the tax on fuel, I will appreciate the move because that means stabilising inflation pressures.”<\/p>\n

In April, inflation in Rwanda was at 4.1 percent, but it has since rapidly swung upwards according to Kanimba. As of this May, it will be up to between five and six percent. This kind of acceleration, he says, “is threatening and disturbing, and of course the fuel price is to blame.”<\/p>\n

As for fears of a backlash from tax cuts, some observers think the government will simply opt for other ways of recovering the revenues lost.<\/p>\n

The biggest challenge to such a move, according to Prof. Nyamurinda, is that if fuel as a commodity contributes the largest portion of government revenues from the total national tax base, it can potentially cause an economic breakdown. “But if fuel is not the largest contributor of revenues, then the government can easily take such a move and relieve the masses from a high price burden,” he says.<\/p>\n

Another consequence of such a decision is how it will impact the government’s control over the market. Economists believe that in a liberalised economy, market liberalisation allows for healthy competition, which is good for customers. However, in isolated scenarios like what is happening now, it is logical for the government to intervene because there is a possibility that fuel dealers will manipulate prices in the market.<\/p>\n

A well placed source in Kigali told The Independent that fuel dealers in Rwanda have an association and they connive to charge a pump price equivalent to the price seal. “Much as it is a liberal market, such market practices are not ideal,” says the source. “If dealers can collude to charge a price seal, it means they have the potential to manipulate prices if they are not regulated.”<\/p>\n

Because there is no element of competition that can bring down prices, Rwanda sets a certain price limit to protect consumers. Observers say that because most politicians feel the bite from fuel prices as well, they cannot sit back and watch fuel dealers take advantage of consumers, which helps explain why there have not yet been any fuel protests in Kigali.<\/p>\n

Frederick Golooba-Mutebi, a senior research fellow at the Institute of Social Research at Kampala’s Makerere University argues that the population’s perception of the Kigali government has also helped to quell outbursts of violence. “Rwandans believe their government always acts in their interest,” he says. “In Rwanda you won’t find one petrol station selling fuel at a different price from another one so the kind of lawlessness you see here [in Uganda] is not there.”<\/p>\n

Moreover, because of the nature of the Rwandan economy, if the government fails to tightly control the economic situation, the effects can even be more devastating than other regional countries.<\/p>\n

First, the country is poor and has no significant natural resources that can boost the economy. It largely depends on donor money and limited tax collection. Although the Rwandan economy is performing well with a seven percent growth record, according to the recent World Bank report, it is not solid enough to handle huge economic pressures that other regional countries are facing.<\/p>\n

Secondly, the private sector in Rwanda is very weak. It is characterized by a weak export structure and as a result it falls to the government to run many businesses. The private sector accounts for a mere 30 percent of the Rwandan economy.<\/p>\n

Although the private sector’s input is inadequate, according to Kanimba, Rwanda is lucky inflation pressures are being handled by increasing and booming economic activities.<\/p>\n

The agricultural sector is performing well at the moment, which has helped stabilize food prices on the market. Nevertheless, analysts warn that Rwanda should not celebrate because the challenges across the borders are contagious. If there is food in Rwanda, and at a favorable price, Rwanda cannot stop neighboring countries from coming to buy food in the country.<\/p>\n

Kanimba is worried this can potentially push up the price food in Rwanda. To deal with such a phenomenon, Kanimba suggests that Rwanda would have to make sure it looks into who benefits from the trade. Would it be the farmers or the middlemen? “The government would have to discuss that matter with stakeholders,” says Kanimba. “The essence of such a discussion would be to ensure our economy continues to stablise.”<\/p>\n

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