UNDERSTANDING THE IMPACT OF THE REMOVAL OF FUEL SUBSIDIES ON THE ZAMBIAN ECONOMY Paul Ochola Project Team Member - ACF

Outline of Presentation Introduction Objectives of Investigation Methodology Key Findings Recommendations

Introduction The Government of the Republic of Zambia, in April 2013 made a decision to remove fuel subsidies. Different stakeholders who included Households, Farmers and various Industry participants called on the Government to review its position and restore the fuel subsidy. However, the Government stated that the subsidy was unsustainable and a drain on the Treasury. Specifically, the Government contested that it had already spent over K500 billion, by the time the subsidy was removed in April 2013 and the projected cost for the entire year was K1.166 trillion.

Introduction cont… Another reason indicated as necessitating the move was the ineffectiveness of the subsidy in addressing the challenges of the poor. In this regard, some proponents of the removal of fuel subsidies cite the need to save funds for more targeted interventions as a major reason. There are also neutralists who argue that the subsidy removal was good but ill-timed and propose that the subsidy reform path should have been done in a phased manner.

Introduction cont.. Inevitably, there are also strong arguments against the removal of fuel subsidies which mainly highlight the inflationary effects of the removal of fuel subsidies. However, no empirical assessment has been done to support any of these arguments. It is against this background that Consumer Unity and Trust Society (CUTS) International Lusaka, Agriculture Consultative Forum (ACF), Economics Association of Zambia (EAZ), and Zambian Voice (ZV) was motivated to conduct a research to better assist informing the present discourse on the fuel subsidy removal.

Objectives of Investigation To evaluate the welfare implications of the fuel subsidy reform implemented in Zambia on various sectors and households.

Methodology The study required primary data to estimate the effects at the micro level. A sample of 400 respondents was selected, distributed across households, farmers, wholesalers and firms in the manufacturing and tourism sectors. Four districts in two provinces were targeted two in the urban setting and two in the rural setting. The study also involved qualitative interviews with key sector representatives.

Methodology Cont… The Evaluation involved a “before- after” assessment of the Expenditure on fuel following the removal of the fuel subsidy. Particularly, the study investigates changes in Expenditure, Pricing, Consumption and Production The study also made an attempt to assess the possible impact of the subsidy removal on the poor and the marginalised section of the population

Key Findings A sample of 335 households were interviewed drawn from Lusaka, Kafue, Mongu and Kaoma. 21.2% were from rural areas while 78.8% were from urban areas

Key Findings Cont…. Impact on Household Expenditure.... Before the subsidy removal, the average household monthly expenditure for the respondents was about Kr1, Following the subsidy removal average household expenditure rose by about Kr 429. This implies that on average, a household registered a 30.8% increase in monthly expenditure

Key Findings Cont…. Impact on Household Expenditure..... Average monthly expenditure for rural households increased about 22%. In the urban areas, average monthly expenditure increased by about 34.6%. Thus, the subsidy benefitted both Rural and Urban Households

Key Findings Cont…. Impact on Household Expenditure..... Expenditure to Income Ratio before the removal of the subsidy was only about 61%. Expenditure to Income Ratio after the subsidy removal has risen to about 80%. Thus a loss in savings of about 19% for households can be attributed to the subsidy removal.

Key Findings Cont…. Impact on the Manufacturing Sector.... Survey covered small to medium scale companies in the industrial area of Chinika, Nampundwe and Kafue. About 68% of the surveyed firms were affected by the subsidy removal. whilst the remainder were not affected given that fuel constitutes a very small component of their production costs.

Key Findings Cont…. Impact on the Manufacturing Sector.... Firms recorded a 41% decline in diesel consumption from an average of 109,988 litres in April 2013 to 64,807 litres in July2013. Similarly, petrol consumption declined by 0.09% from a monthly average of 5,751itres in April, 2013 to 5,746 litres in July % of the interviewed firms attributed the reduction in fuel consumption to the fuel price increase.

Key Findings Cont…. Impact on the Tourism Sector On average, 84% of the surveyed tourism players noted that the share of fuel to total expenditures increased from an average of 8% to 10%. Most tourism players cut down on their fuel consumption as players adjusted their cost structure to remain viable. 38% of the tourism players increased the prices of their services by an average of 8%, whilst 62% maintained their price levels.

Key Findings Cont…. Impact on Famers About 80% of the farmers use diesel compared to only 20% that use petrol in their production process. 25% of the farmers using diesel reduced their consumption of the commodity by an average of 40%. 33% of the farmers using diesel reduced their consumption of the commodity by an average of 50%.

Key Findings Cont…. Impact on Famers.... The average cost of fuel as a proportion of the total costs incurred by farmers increased from an average of 21% to 28%. The key drivers of the increase in the cost of production and distribution identified by the farmers were:  The cost of transportation of inputs and produce ;  The cost of seed and fertiliser among other inputs

Key Findings Cont…. Impact on Wholesalers and Retailers Following the removal of the subsidy 60% of the respondents that bought fuel during the period reduced their consumption by an average of 27%. This could imply fewer trips to make orders as well as a reduction in the number of trips undertaken for deliveries. Average expenditure on fuel by the wholesalers and retailers increased from an average of 12% to 18%.

Key Findings Cont…. Impact on Wholesalers and Retailers The main cost drivers identified by the wholesalers and retailers were: i) The cost of running generator sets which provide power for some of the business premises; and ii) Transport costs for deliveries and buying stock

Conclusion There is an urgent need for government to find potential ways of compensating the poor for their loss in income due to the subsidy removal. The measures contained in the 2014 Budget Statement could go a long way in filling this gap. For instance the scale up of the SCT programme is a more targeted measure that could compensate for this loss. However, more could still be done to cushion the adverse effects.

Conclusion It is also not too late for government to engage stakeholders and explain what it intends to do to ensure that the negative effects of the subsidy removal are contained. Thus dialogue with stakeholders is still called for, where government can also try to seek buy-in and cooperation Civil society should take a proactive role in this engagement with Government and lead the communication of the benefits to different stakeholders