WINDHOEK – The 35-cent increase in fuel prices that comes into effect tonight at midnight could signal a bad start for households, with the possibility of rising crude oil prices triggering multiple effects of high international food prices, as well as food and transport inflation.
Global markets are already watching out for rising food prices, as food inflation continues in upward movement.
The latest crop forecasts from food-producing countries indicate lower than earlier projections.
Some local economists are already reaching for the alarm bells, pointing out that this could compel the reserve bank to hike the interest rate by as early as June.
Others say while the eventual swell of transport inflation would not be good for consumers, it would not be as bad as that of 2008 when transport inflation was in the double digits.
Another effect would come from various manufacturers and producers who would increase their prices for consumers to factor in the increases in production costs.
“This year is likely going to be a tough year,” says independent economist, Martin Mwinga. “Is this good news for consumers? Certainly not,” affirms, Daniel Motinga, FNB Namibia in-house economist, regarding transport inflation. Fuel price, both petrol and diesel, is going up 35 cent at midnight January 19.
The increases follow the increases of November 2010, when fuel went up by 10 cents. The Ministry of Mines and Energy left the prices unchanged in subsequent month, but this came with great subsidy to the under recovery in the local market.
Under-recovery is a situation where the reigning petroleum prices on the international market are higher than the prices administered in the country. The Ministry of Mines has to pay the shortfall from the National Energy Fund. Economists say past subsidisation of under-recoveries, along with strong expectations of more crude oil price increases are acceptable motives for the Ministry of Mines and Energy to decide on the 35-cent increase.
“The ministry has no choice,” says Mwinga, supporting the ministry’s argument that the global crude oil market has been in a volatile state since the last two months of 2010.
Motinga says preliminary calculations show transport inflation shooting up from 0.4 percent, recorded in December 2010, to a gigantic 2.7 percent this month.
This would bring average transport inflation during the entire 2011 to 4.6 percent compared to an average 0.3 percent recorded last year.
Monthly transport inflation is expected to surpass 5 percent by August.
“This is partly due to base effects kicking because of the subdued inflation pressure in 2010 but mostly because of oil price pressure translating into higher transport inflation,” he says.
Yet, while this is all not good for consumers, the figures are not going to be as high as 12.9 percent which Namibia recorded in 2008.
Hence, pointed out Motinga, this year’s average transport inflation would not be that terribly high.
“This time around, we are also forecasting a more gradual transmission of fuel prices to transport inflation as we expect the exchange to only weaken from the second half of 2011,” says Motinga.
United Nations’ Food and Agricultural Organization (FAO), earlier said food price inflation shot up significantly during the second half of 2010. FAO’s composite food price index for November is almost at the pre-crisis height of 2008. FAO attributed the upward pressure on food prices to several factors, including worsening outlook for crops in key producing countries. This is likely to put pressure on reserve levels and may result in tighter global demand and supply conditions in 2011.
The upside is that unlike in 2008 food crisis, there is now an uptake in global supply of major food, hence food prices would not increase beyond levels experienced during that crisis.
Worldwide crude oil future prices have been rising steadily since mid-December fuelled by fears of supply constraints, expectations of a larger economic growth, along with recent uncertainty over oil production disruptions related to weather conditions in the US and Europe. Crude oil prices have now touched the US$100 per barrel mark, levels last experienced in early 2008.
The increase is despite the appreciation of the Namibian currency against the US currency exchange rate.
“At present, the world is faced with a demand-driven and a supply-constrained system in the oil market. The crude oil prices are being determined and driven by expectations of continuing economic growth driving the demand for oil high and fear of future supply disruptions due to political unrests in the world’s crude oil rich region,” is how the Mines and Energy Ministry motivates the impending fuel price hike.
