Currency devaluation raises fuel price hike fears

The recent currency devaluation introduced by the National Bank of Ethiopia (NBE) is feared that is will lead to an increase in the price of petroleum products.

The central bank announced 15-percent devaluation of the Birr against the Dollar, which is effective October 11. By adjusting the official exchange rate, the government anticipates encouraging exporters and revive the weakened export earnings.

The 15 percent currency devaluation has shocked economists. Economic researchers fear that the 15 percent devaluation would spike the price of imported fuel and this would trigger another around of inflation.

Alemayehu Geda (PhD), professor of Economics at the Addis Ababa University, told The Reporter that the currency devaluation would boost the price of fuel by at least 15 percent. “The government may opt not to increase the price of fuel immediately. But the 15 percent devaluation would certainly increase the cost of fuel import by at least by 15 percent.”

Alemayehu said that the surge in the price of fuel would increase the transport cost and this would have an impact on the overall inflation rate. “If the price of fuel increases by 15 percent, the price of both imported and domestic products would increase by 30 percent, according to my estimate. If you devalue your currency by one percent, inflation would deepen by two percent. If you devalue the Birr by 15 percent, inflation would increase by 30 percent. That is why we strongly argue that the currency should not be devalued by this much,” Alemayheu said.

Ethiopia, a non-oil producing country, is fully dependent on imported petroleum products. The country annually spends 2.8 billion dollars on imported fuel draining 80 percent of the country’s hard earned foreign currency. In 2018, the Ethiopian Petroleum Supply Enterprise (EPSE) would import 3,820,142 metric tons of various petroleum products. The petroleum import has been growing by more than ten percent yearly.

Tadesse Hailemariam, CEO of EPSE, told The Reporter that the currency devaluation could have an impact on the cost of fuel import. However, Tadesse said that petroleum is a very strategic product whose price is highly regulated by the government. “The government sets fuel prices based the global oil market price. Since the government buys the fuel it can set the price at any time even when there is no currency devaluation. But the government considers many variables when it adjusts the price of fuel.”

Tadesse said the government considers inflation, price index and other circumstances and consults the Central Statistics Agency and Planning Commission. “It is not like other products that you introduce devaluation today and increase the price tomorrow. The government always considers the public’s economic situation. It protects the public.”   

Ethiopia buys refined petroleum products mostly from Kuwait and neighboring Sudan.  With the bilateral agreements signed by the governments of Ethiopia with Sudan and Kuwait the Sudanese and Kuwaiti state oil firms directly supply large sums of petroleum products without tender.

Accordingly, Sudan Petroleum Corporation would supply 40 percent of the benzene demand while the balance would be purchased from international oil traders through an open international tender.

The Kuwaiti state-owned oil giant, Kuwait Petroleum Corporation (KPC), would supply 50 percent of the diesel demand while the remaining would be purchased through a competitive international bid. KPC will also supply 100 percent kerosene and jet fuel for the country.

EPSE is a subscriber of Platts – an acclaimed international oil price data supplier. Based on the daily price update reports it receives, EPSE reckons the monthly average price and remands it to the Ministry of Trade. The Ministry of Trade calculates the price and proposes the monthly price of petroleum products in the local market. When approved by the Council of Ministers the ministry announces the monthly price of fuel to the public.

The Reporter’s attempt to get an official response form the Ministry of Trade was not successful. An official at the Ministry, who declined to be named, said that fuel price setting process is confidential. The Ministry made the last price adjustment on October 5 and the next adjustment is expected to be made on November 4. “Based on the data we receive from EPSE we make some calculations and submit the proposed price adjustments to the Council of Ministers. At this moment we cannot tell you whether or not the price of fuel would increase. It is the Council of Ministers that decides on the matter,” the official said.

For 2018 consumption EPSE plans to buy 408,378 metric tons of Benzene, 2,546,786 metric tons of diesel, 661,790 metric tons of jet fuel, 124,914 metric tons of kerosene, 38,805 metric tons of light fuel oil and 39,470 metric tons of heavy fuel oil. The enterprise has floated a tender last month and currently international oil trading companies are submitting their technical and financial proposals. The bid will be closed on October 31 and results would be announced in November.  The winning company would supply fuel from January-December 2018. Last year’s winner, PetroChina, contract would be terminated in December 2017. 

In their financial proposals oil trading firms offer their overhead cost (premium administration cost) per barrel not the actual price of fuel that it will deliver.

EPSE evaluates the credit sales offer, reputation, product quality, and efficiency of the bidding companies.

Source: The Reporter

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