Tuesday, February 18, 2014

CfSC January Urban Basic Needs Basket : Soaring fuel prices undermining living conditions

The Centre for Social Concern (CfSC) is alarmed by the rate at which fuel prices are increasing in Malawi and the apparent lack of policy intervention to cushion the poor households from the likely adverse effects of such price volatilities.

It is an established tenet that the rise in the pump price of fuel results in an increase in the general cost of living. According to the International Monetary Fund (IMF, 2008), “Rising food and fuel prices both have adverse effects on poverty; however, for the direct poverty impact, the main concerns typically relate to the higher cost of food especially for the urban poor”.

While the risks of increased food insecurity may be more pronounced in urban areas, where people rely exclusively on markets; they are of particular significance in rural areas, too, where in the case of Malawi about 80 percent of the population reside and where a large percentage of poor rural households are net-buyers of food.

Poor consumers are negatively affected by high and volatile prices which also affect producers and other value chain stakeholders. In Malawi, smallholder producers have not benefited from high prices because output price increases are rarely transmitted to the farm level, while increases in input prices are passed on fully and quickly.

It is already evident that many smallholder farmers, who constitute the large majority of Malawi’s agricultural producers, are unable to respond to food price hikes with increased production due to a lack of access to financing facilities, agricultural inputs and markets. As a result, they find themselves struggling in their effort to feed their families.

Worse still, most poor urban consumers do not produce food, so increased food prices reduce their initial real income. For the urban poor who spend a large share of their income on food, shifting to less nutritious food or reducing food intake could be the main coping mechanisms. As a result of lower calorie intake and reduced consumption of vitamins and minerals, undernourishment and micronutrient deficiencies increase.

Intake of less food over a longer period can cause permanent reductions in a child’s health and nutritional well-being. Higher food prices may also reduce spending on non-food items such as education and health (FAO/SOFI, 2012). There is also the risk that in the face of sustained high prices and lack of measures to assist these vulnerable populations, there will be an irreversible impact on human development, particularly for women and children.

Thus, it is evident that the increasing prices for fuel and food products present a difficult policy challenge for Malawi government and does merit policy redress. CfSC believes that addressing the issue of volatile and high oil prices calls for a holistic approach; both the short- and long-term dimensions of the likely economic and social impacts must be addressed.

In this regard, the short-term considerations include how to manage the immediate impact of higher oil prices. CfSC is aware that fuel in Malawi is saddled with a number of levies. Reducing these levies can lead to domestic fuel prices increasing by less than world prices. With the revelations of massive plunder of public resources that goes on in Malawi, CfSC is convinced that the loss in terms of potential tax revenues which such a measure would bring about can easily be recouped by bolstering the public resource management. Governments can adjust the mix of ad-valorem and specific taxes to mitigate the impact of increasing world prices.

One of the bottlenecks in the fuel supply chain in Malawi emanates from limited stocking facilities for fuel products. CfSC commends the Malawi Government for thinking of rehabilitating fuel storage facilities at Chipoka in Salima and in Mchinji. CfSC further calls on Malawi government to increase the capacity of storage facilities by constructing more and stocking them up appropriately.

CfSC is cognizant of the challenges that ESCOM faces in generating and supplying electricity. The crucial role that ESCOM plays in the economy cannot be overemphasized. Further, CfSC recommends the utility ESCOM’s initiatives, such as the introduction of prepaid meters that aim at improving service delivery and enhancing transparency in the manner customers are charged. The recent increase in power generation is also a step in the right direction.

Having said that CfSC is of the view that attention must be paid to a broad range of consequences on the economy as a whole when considering tariffs. Above all, tariff charges must be equitable and just. In view of this, CfSC recommends that ESCOM proposes tariffs rates, especially for residences, which are not out of reach for most Malawians and ones that will not adversely raise the cost of living. The current ESCOM electricity tariffs are outrageously expensive and not in tune with the prevalent income of most Malawians.

For example, the recent study titled “Kunyumbakutu Lero Tagona Ndi Njala! Malawi Employment Act (2000) Monitoring and Salary Survey” (CfSC, 2014) reveals the prevailing incomes for most employed Malawians – most of which fall below the urban basic needs basket. Taking into account all respondents, on average, an employed respondent within the categories interviewed was taking home MK44, 000 as a monthly take home wage.

This ranged from a low of MK3, 000 to a high of MK380, 000. Compared to the recent cost of living data, the average income for most of employed Malawians is way below the basic needs basket.

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