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
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
in
Key Findings

A sample of 335 households were interviewed drawn
from Lusaka, Kafue, Mongu and Kaoma.
Ka oma
26%
Mongu
26%

Lusa ka
25%
Ka fue
23%
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 Kr1,391.51.

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 2013.

26% 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