Ethiopia continues gradual lifting of fuel subsidies amid rising living costs

Tuesday October 03 2023

Cars seen in a traffic gridlock in Addis Ababa, Ethiopia on July 6, 2022. PHOTO | AFP


The Ethiopian government has announced a new fuel retail price adjustment as the gradual lifting of fuel subsidies compounded the soaring cost of living in the country.

The Ethiopia Ministry of Trade and Regional Integration (MoTRI) said Friday that the latest price hike would see gasoline prices rise to ETB77.65 ($1.41) per litre from the previous ETB74.85 ($1.36).

According to the new fuel retail price adjustment, the price of a litre of diesel has jumped to ETB79.75 ($1.45) from ETB76.34 ($1.38). This is the second price increase of fuel within one month as MoTRI announced one litre of diesel price rise from ETB67.30 ($1.11) to Br76.34on August 29.

The latest fuel retail price adjustment sees the price of gasoline and diesel more than double as compared to last year. For context, in May last year, the price of gasoline was ETB31.74 per litre, while diesel was sold at ETB28.98 per litre. The price has now reached ETB77.65 and ETB79.75, respectively.

The Ethiopian government blamed the rising global oil prices for its decision to institute the price hikes. Noting that the international fuel price has been showing an increase since the end of June, the ministry said the decision to increase the retail prices is made to reflect the current international fuel market.

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The Ethiopian government previously said it had spent in excess of ETB100 billion ($1.81 billion) on fuel subsidies for the 2021/2022 Ethiopian fiscal year that ended in July 2022. The government warned that the huge sum of fuel subsidies, aimed at curbing the soaring cost of living, was hugely impacting the country's economy. The phenomenon eventually triggered the government's decision to gradually lift fuel subsidies.

Experts, however, argued that while the huge sum of fuel subsidies has been exerting unwanted financial pressure the country's economy, it plays a significant role in terms of controlling inflation and mitigating the economic impact on the daily life of citizens. 

Costantinos Bt Costantinos, a professor of public policy at the Addis Ababa University in Ethiopia, told Xinhua in a recent interview that the gradual removal of fuel subsidies would have positive macroeconomic implications albeit its challenges.

He said the move would free up financial resources for other sectors of the economy, increase employment, reduce the budget deficit and generate a budget surplus, curb corruption and fuel smuggling to neighbouring countries and crimes associated with fuel subsidy payments, increase competition and reduce government borrowing and pressure on the exchange rate.

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"It will also lead to accurate pricing that reflects actual conditions in the international market for crude oil," the expert said.

"On the flip side, fuel subsidy removal may decrease economic growth in the short term, increase inflation and thereby poverty, increase the prices of petroleum products and, thereby, increase transport costs of fertilisers to farmers and agricultural products to consumers and loss of jobs in the informal sector."

Costantinos underscored the need to implement prudent economic measures that address the unwanted economic pressure that arises from the country's surging fuel expenditure and give due emphasis to the economic condition of Ethiopians and the country's economy at large.

"On the microeconomic side, the government should carefully gauge the bearing of fuel subsidy removal on individuals and businesses and provide safety-net economic relief programs to forestall the adverse effect on individuals and firms," he said.

Tewodros Beshah, a self-employed who leads a family of five in Addis Ababa, Ethiopia's capital, said the continued fuel price hike is one major factor in the soaring cost of living.

Read: The double-edged sword of Africa’s rising petrol price

"With the continued fuel price hike, more and more Ethiopians are opting for taxis and other alternatives rather than driving a car. Transportation cost has also significantly increased with the cost of fuel," he said.

As Africa's second most populous nation grappled with the sharp increase in basic items, the fuel price hike has further exacerbated the existing cost of living. Amid the pressing challenges, the National Bank of Ethiopia (NBE) said it would undertake monetary policy measures that would reduce the inflation rate and its adverse impacts on society. 

Noting inflation in Ethiopia has negatively impacted the social and economic spheres, NBE Governor Mamo Mihretu associated the increase in inflation with supply limitation, increase in cost of manufacturing, conflicts in parts of the country, increase in price of goods such as fertiliser, as well as the surge in cost of fuel and transport, among others.

Mihretu emphasised the need to take critical measures to lower the country's inflation rate, which include enhancing the supply of agricultural products, undertaking structural change in transportation, logistics and trade competitiveness as well as implementing pertinent monetary policy.