Fuel prices: Are we being fleeced?

Last week, the price of fuel knew a substantial increase by nearly 10 per cent. Since then, stakeholders on various platforms have been voicing out that the rise will have a significant impact on the cost of living. Pump prices have been decried as being too expensive for Mauritians as compared to their level of earnings.

Announced by the State Trading Corporation last Tuesday, the price of gasoline rose from Rs 38.85 to Rs 42.70 per litre and that of diesel from Rs 29.50 at Rs 32.45 per litre. To justify this increase, Minister of Trade and Industry, Ashit Gungah, explained that Mauritius has no control over the world price. 

Furthermore, the Minister argued that the Mauritians benefited from over Rs 2.1 billion from the Price Stabilization Account used to maintain petrol prices at the pump and that the Petroleum Pricing Committee must now follow the global market trend. Ashit Gungah pointed out that the gasoline reference price rose from 412 USD to 553 USD. For diesel, the price of the barrel went from $ 41.75 to $ 63.97. “Since June 2016, the situation was difficult but we maintained prices at the pump. However, we came across a situation where we had to make a decision. When funds [from the Price Stabilization Account] run out, we have no choice but to move for an increase,” the Minister said.

On the other hand, the Minister of Energy and Public Services, Ivan Collendavelloo, announced that the rise in fuel prices will have a direct impact on the price of electricity. During the inauguration ceremony of a Small Scale Distributed Photovoltaic System at the Lois Lagesse Centre in Beau-Bassin last Thursday, Minister Collendavelloo said that any increase in petroleum prices should have an impact on the electricity tariff. However, he pointed out that it was too early to elaborate on the increase in the electricity tariff. In view of a negative impact on the cost of living, stakeholders in various sectors have been complaining about an eventual price rise on many products among bread and bus fares.

But is the rise in price justifiable? Economist Arvind Nilmadhub explains that if we look at a free market where forces of demand and supply determine price, then yes, the price of fuel is too high in Mauritius. “The increase was foreseeable since oil producing countries had already decided to cut production as their economy was suffering due to oversupply. In fact, the relevant Mauritian authorities should have started educating the population well before the meeting of the Petroleum Pricing Committee to inform them of the possibility of a price hike,” he reveals.

The economist argues that there is too much tax imposed. “The Build Mauritius Fund and the contribution to the Road Development Authority can be removed. Initially some items included in the price structure of fuel should be decreased and some should be completely eliminated.” (see interview)

Dr Bhavish Jugurnath, Economist: “Contributions should be precisely budgeted”

Is the fuel price hike justified?

The last revision in prices of Mogas and Gasoil was in February 2016 when the retail prices of both were fixed at Rs38.85 and Rs29.50 per litre respectively. Since then, there has been an upward trend in the FOB prices on the world market. Currently as per official sources in the Price Stabilisation Accounts (PSA), there are only Rs 50 million and according to the 2011 Consumer Protection (Price and Supply Control) Act, amended in 2015, the PSA must contain Rs 600 million for gasoline and Rs 900 million for diesel in order to keep fuel prices stable. Officially, this is the reason behind the increase. However, from a technical point of view, I believe a number of factors need to be taken into account.

What are those factors?

A weakening rupee has moderated the domestic impact of lower US dollar-denominated world fuel prices. Moreover, retail prices are calculated based upon a threemonth historical average and a three-month forecast, which means that it takes some time for world prices to feed through to domestic price. The key question in my opinion is the methodology used for computation of the price. Many developing and emerging countries do not fully pass-through increases in international fuel prices to domestic retail prices, with adverse consequences for fuel tax revenues and tax volatility. In a technical report in 2012, the IMF suggested the adoption of an automatic fuel pricing mechanism to help address this problem, and the incorporation of a price smoothing mechanism to ensure pass-through over the medium term but also avoid sharp increases (and decreases) in domestic prices.

Is this increase ripping off Mauritians?

I will not say so as if we look at other countries to name a few. Ghana increased domestic fuel prices by 50 per cent in February 2005. Mozambique increased fuel prices by 38 per cent in 2008. Jordan initiated a gradual reduction of fuel subsidies in 2005, culminating in full price pass-through in February 2008 when fuel prices were increased by 33–76 per cent. Howeve,r what is important those increase also meant an increase in fiscal revenue which were used by these government specifically in targeting effectiveness for instance, school meals, subsidized mass urban transport, cash transfers to vulnerable groups, or subsidies for consumption of water and electricity below a specified threshold which tend to benefit the broader population. Similarly, it is important for the Mauritian government to clearly specify through public information campaign how the money in the Price Stabilisation Accounts are being used with details of projects and it also important that the full extent of subsidies is transparently recorded in the budget.

Will you say that the tax is too high on fuel in Mauritius compared to other foreign countries? Why so according to you?

With the recent fuel price increase, the approximate tax are 35 cents per litre of gasoline and the 40 cents per litre of diesel. If we look at Indian Statistics, the case of Delhi, the share of levies, central excise and VAT account for nearly 48 per cent of the current petrol retail price. According to data from OECD the average gas tax rate among the 34 advanced economies is $2.62 per gallon. In fact, the US gas tax is the second lowest (Mexico is the only country without a gas tax) and has a rate less than half of that of the next highest country, Canada, which has a rate of $1.25 per gallon. So effectively given all countries tax structure are different we cannot really claim that tax is high in Mauritius. In general, I will say a tax is fair if it conforms to the benefit principle and is transparent.

Prices, at different levels, have already risen due to this. Will this have serious impact on Mauritian households? How?

Several industries/sectors could be affected with the rise in the price of gasoline and diesel. The increase could impact on companies such the textile sector as cost of production increases with the use of their machinery and equipment. Companies that handle the delivery of products could also be concerned because they have to transport the products. Finished goods may also increase as transportation is included in production, although the increase is not excessive. As a consequence, inflation could increase.

Would you say that the prices should decrease or should the new tax be completely cut off? Why?

I believe as for any tax, a cost-benefit analysis presented as a calculus of social costs and benefits should be conducted by the government. If fuel taxes paid by consumers lead to economic transfers such as infrastructural development and poverty alleviation then it is socially beneficial but this should be clearly and precisely budgeted otherwise the tax should not be explicitly considered.

The situation around the world

For four weeks in a row, the world average gasoline price has remained at 1 USD per liter. According to figures from the website The world average diesel price also did not experience any changes and it is currently at a level of 0.90 USD per liter. The fuel price stability reflects the conditions on the international crude oil market. The crude oil price has remained around 56 USD per barrel for the past two months. 

On a regional level, the European average gasoline price for the past week was 1.37 USD per liter, marking a slight increase of 0.2%. A similar slight increase was observed in the USA and Asia. Gasoline prices also went up by 0.7% in Africa and by 0.9% in Australia. In Canada and South America, gasoline prices decreased by 0.7% and 0.3% respectively. 

There was an increase in 33 of the 104 reviewed countries, no change in 58 countries, and a decrease in 13 countries. In Peru and Singapore, gasoline prices deceased by more than 1%. Gasoline became more expensive by more than 4% in Kenya, Mauritius, and Swaziland. The largest weekly fuel price change was observed in Mauritius.

Composition of the fuel price structure

According the State Trading Corporation, following the meeting of its Petroleum Pricing Committee, the price of fuel should have increased more than the current 10 per cent. So says a press release issued by the STC. “Based on the new Reference Prices, the retail prices of Mogas and Gas Oil should have been increased by Rs 7.9471 or 20.46% and Rs 7.3818 or 25.02% respectively.” Taking a look at the price structure of diesel and gasoline (see chart below), it can be seen that various taxes and levies account for the majority of the fuel price at the pump. From contributions to the Build Mauritius Fund, to contributions towards the improvement of road infrastructure, Mauritians pay some Rs 7 billion annually within their fuel bill.

Jayen Chellum: “Some feel being ripped-off”

According to the Secretary General of ACIM (Association des Consommateurs de l’île Maurice) the fuel price hike is completely unjustifiable. “Government’s rationale in increasing price is that the Price Stabilisation Account has been depleted. That being the case for anyone close to the technicalities behind the price structure it is clear that the nearly 10% increase is excessive,” utters Jayen Chellum. He states that there is a prevailing feeling of being ‘ripped off’ amongst the general population. 

“Anybody who feels that there has been an unjustifiable hike would certainly feel that they have been ripped off. That is the feeling amongst the population who have been hit by this increase.” Jayen Chellum trusts that taxes in Mauritius are indeed high compared to other countries. “People should know that in the case of unleaded petrol, it is over 60%. Only the other day, the report of the State Trading Corporation mentioned that taxes in many EOCD countries are around 60%,” he says.

Jayen Chellum explains that in order to understand why taxes are high, we need to know the structure of the prices and the various taxes or other means by which the government raises revenue from the scale of petrol products. “There are excise duty and VAT. These taxes are normally applied to most products. However, there are contributions on road development authority, Maurice Ile Durable, on subsidy for flour, rice and LPG, freight to Rodrigues, contributions to road development authority, contribution for storage of petroleum products, contributions to operation cost of STC which we find as ways of “taxing” people which definitely result in a higher price of the petroleum products. All these contributions account for more than 20% which weights significantly in the retail price.”

Commenting on the increase in prices at various levels, Jayen Chellum utters that these increases are totally “unreasonable and which has absolutely nothing with the price increase in petroleum products.” He adds that “there has been up to 15% to 20% increase on roti, dholl puri, and fried cakes, among others. In the past, the sellers of these food products had also increased these eatables when the situation did not warrant any such increase. Over and above, there has been a very irresponsible request of increase in the price of electricity by the Vice Prime Minister and the Minister of Energy and Public Utilities, Ivan Collendavelloo.”

According to Jayen Chellum, hike in heavy oil’s price does not warrant higher electricity prices. He says “it has been such an irrational call for increase which has hed to a follow up by other irresponsible stakeholders. It is said tariff of school vans and the price of bread would go up. “Surprisingly there had never been any decrease in the price of school van tariffs and bread,” he says, whenever fuel prices went down. Jayen Chellum trusts that the government should bring down fuel prices and review taxes. Given that ACIM considers some of these taxes as unreasonable, the association has consulted its lawyers regard legal action.