South Sudan’s Economy: Is fuel the new dollar?
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By John A. Akec*
I recently asked a young relative what small business he would start
if I were to give him some money. His answer came quickly, with no
hesitation whatsoever: he would be buying and selling fuel (diesel and
petrol) and charcoal. In that order. I was somewhat amazed to know
that charcoal business was that lucrative to be on the same league as
fuel, but was not shocked to hear that diesel and petrol would sell
like hot cake at a premium. And for the last few weeks, it has become
apparent to this writer that many of our citizens living around our
capital city have discovered yet another money-making machine through
buying highly subsidised fuel and selling it on the streets at five
times its original price to make a fortune. And here is how.
Nile Petroleum Corporation, the South Sudan’s national oil operator,
spends about one dollar (or between USD 0.98 to USD 1.05) to purchase
a liter of diesel or petrol and then sells it at a retail price of 21
SSP (20 cent or USD 0.2). Retailers (Nile Petroleum Corporation
included) then sell it to consumers at 22 SSP or so per liter, as from
January 2016. At the beginning of 2016, South Sudan pound exchange
rate against dollar in the parallel market was round 25 SSP to a
dollar. That amounted to subsidies of SSP 23 million a month to supply
the market with 2 million liters in January 2016 alone. As demand
picked up and South Sudan pound exchange value against dollar
continued to deteriorate, the value of subsidies began to increase
exponentially to peak at SSP 500 million for the month September 2016
alone.
Overall, fuel subsidies, according to reliable sources, for 12 months
from January to December 2016 amount to around SSP 3 billion to supply
the market with 112 million liters of fuel. As things stand, and at
current exchange rate, one would estimate that fuel subsidies will
cost the nation some SSP 6 billion next year from January 2017 to
December 2017, assuming exchange rate stays the same, which is
doubtful. If not, it could cost even more to maintain the subsidies in
2017. The minimum projected fuel subsidies for year 2017 is equivalent
to 20 percent of approved budget of the SSP 30 billion for fiscal year
2016/2017. It is the money our government will spend on the premise
that it is helping keep low the prices of transportation services and
other fuel-price sensitive goods.
Looking more critically at current fuel subsidies though, the next
question is who is really benefiting and how the government has been
able to afford such a huge undertaking? The beneficiaries are young
men, women, and children selling fuel on roads’ side, and their
distributors who are pocketing subsidies at most. It explains why fuel
queues are so long at our fuel distribution stations and depots. Many
motorists fill their tanks with diesel or petrol at 22 SSP and sell it
to young street retailers who in turn sell it at more than 100 SSP a
liter, and share the differences as profits. Others would fill
containers and sell the fuel themselves at higher prices. The next
day, many of them are back on the queue to buy more to sell. But at
whose expense? Calls to float the prices of fuel and remove subsidies
as well as opening the market up to private sector providers, it
seems, have fallen on deaf ears.
It is a similar story to how the system of fixed exchange rate was
exploited for a decade before it was finally and partially abolished
in December 2015. Those well connected were able to buy dollars at low
fixed exchange rate from the central bank and made twice or three or
five times the value on the black market rate. It was for that very
reason that many economic activists supported the floating of the
exchange rate so that government can get value for money from its oil
revenues.
By the time the Ministry of Finance finally gave a go ahead to the
central bank to float the exchange rate, monthly income from oil
revenues had already dwindled due to fall of prices of crude oil on
the world markets. An important window of opportunity had been missed,
and a deep economic hole had been dug.
What’s more, the system of auction of dollar at the central bank in
which all the bidders – from the highest, to middle, to the lowest,
won, is seen by this writer and other economists spoken to as not the
best because it is open to price-fixing and, and vulnerable to
internal dealings.
It is small wonder that things had not improved even after switching
to floating exchange rate policy. From this author’s viewpoint, the
policy of floating exchange rate was a sound one. However, the
implementation of the policy, as well as delayed adoption, have left
much to be desired. Besides, rushing to increase salaries of the
members of armed forces by 300 percent without proper cost benefit
analysis has wiped out any gains that could have accrued to the nation
coffers.
The other part of the question that has not been addressed adequately
in this article is how does the government afford to pay for these
huge subsidies? Reliable sources have informed the author that a share
of South Sudan’s crude oil is handed over to a foreign company that
gives South Sudan a certain quantity of refined fuel every month at an
agreed price. Hence, though it appears at the surface that Nile
Petroleum has unlimited ability to sustain the losses month after
month, ad infinitum, it is coming at the expense of reduced oil
revenues to the government of South Sudan. What goes around must come
around, the saying goes.
Finally, the question I need to pose is whether or not these subsides
are worth it? And I fear, they are not. For once, the subsidies are
not reflected on rate of transports either on fairs of matatos
(mini-buses) and boda-bodas (motor cycles). This is because the owners
of mini-buses and boda-bodas still pitch their fairs to reflect the
inflation, even if fuel prices remain fixed officially. It therefore
begs the question whether it is worth it to put our scarce resource to
alleviate the economic burden on our citizens where it makes no real
impact.
In conclusion, the Ministry of Finance and Economic Planning in our
Republic, in its effort to cut expenditure, should consider removing
fuel subsidies completely (the sooner the better), and allow private
companies to supply and sell the fuel to those who need it at
competitive prices which are determined by "market’s invisible hand."
Redirecting resources away from fuel subsidies could help reduce the
deficit in the current budget from 40 percent to about 20 percent. It
will not solve all our economic owes, but will partially assist
towards closing the large gap in our public finances. It will also
help stabilize the exchange rate of South Sudan pound against dollar
as it will increase the oil revenue coming in.
Cynics will describe such a proposal as a politically risky
undertaking to pursue. However, not taking bold measures, such as this
one, to put our public finances in order is simply to delay the
inevitable. For sooner, or later, not doing the right thing, at the
right time, will catch up with our struggling economy. To the
disadvantage of us all.
*The writer is the vice chancellor of University of Juba, South Sudan.
He publishes personal blog at:http://johnakecsouthsudan.blogspot.com/
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