Subsidy Example,Inflation,Problems and Solutions by Kampamba Shula

Mealie Meal subsidy example

A lot of people have been having trouble understanding the subsidy in simple terms so I decided to break the ice here with a clear example.

A farmer has two sons and a brother. Every day he wakes up before everyone and goes into the field to work. Before he leaves, he gives his brother money for house essentials and transport for the sons to school.

The two sons go to different schools. One son is called “Biggie” and the other is called “Smalls”. Sometimes the money for house essentials and transport is not enough and one of the sons has to walk to school instead of using transport, Smalls usually walks while Biggie takes transport. Smalls ends ups missing some of his classes because he is usually late.

Exam time comes and Biggie passes while Smalls fails .The farmer asks the teacher why this is so and the teacher tells him that Smalls misses some his classes and comes late. He goes home and finds out that Smalls misses classes because transport is not enough some times.

This is what the farmer chooses to do. He removes the money he usually includes for transport so that both sons walk to school. He saves this money and goes into town to buy both sons quality textbooks.

At the next exam both sons pass with good marks.

Now in this story the Farmer is the Zambian Government, the Brother is the Food and Reserve Agency (FRA).The two sons Biggie and Smalls are The Big Millers and Small Millers respectively. The transport money is the subsidy which sometimes only goes to the Big Millers. The teacher is the economist and the textbook is the expenditure that Zambian Government wants to use to build universities and schools and hospitals.

This is not an accurate example but is the closest by comparison.

Subsidy Explanation

After the recent subsidy removal by the Zambian Government there has been massive speculation that general prices in the country will go up and by extension Inflation will go up.

Now this article addresses those concerns with Inflation data from the last 5 months.

Just so we are all on the same page firstly what is Inflation??

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services (Abel & Bernanke, 2005).

The term "inflation" originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today use the term "inflation" to refer to a rise in the price level. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which may also for clarity be called 'price inflation' (Bryan, October 15 1997).

The Inflation rate is calculated as the change in the consumer price index. The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer" (Mankiw, 2002).

We must now look at the fixed basket of Goods and services and their weights in the consumer price index to find out the effect of the removal of subsidies in Mealie Meal.

Now according to the JCTI Basic food item basket which comprises of Foods like Mealie Meal, Cooking Oil, beans, beef, eggs, Kapenta, tomatoes, onions, vegetables  and other essentials.

Mealie Meal

Mealie Meal accounts for 14 % of the basic food item basket. A 7 % change in the price of Mealie Meal would have a 1% change in the basic food basket.

In September 2011, the Government of Zambia started heavily subsidizing the price of maize held by the Food Reserve Agency (FRA) to maize millers. The expectation was that, by receiving maize at subsidized prices, millers would pass along the subsidy to Zambian consumers in the form of lower retail maize meal prices (Jayne, September 2012).

 Retail maize meal prices have remained virtually constant since September 2011. These findings indicate that very little of the treasury costs incurred in providing FRA grain to millers at below-market prices have benefited urban consumers

THE Millers Association of Zambia (MAZ) says the removal of the subsidy on maize does not necessarily mean that prices of mealie-meal will go up.

MAZ president Allan Sakala says the removal of the subsidy will provide a favourable competition in the milling sector and will create a positive impact on the prices of mealie-meal.

Assuming all things remaining equal the removal of subsidies will not change the price Mealie Meal by any significant margin.

Fuel Subsidy

The Fuel subsidy is however a different matter altogether.

This is a graph of Inflation since the beginning of the year. My calculations lead to an inference that the effect of a 15% percent fuel increase will lead to a possible 1/10 or 1/5 of a percentage point. In other words the Inflation might go up from 6.5 up to 6.7% in the short term.

In the more medium term, that is, later in the year however Inflation might spike up further as the poor harvest of 2012/2013 comes into price effect as well as the effects of expected inflation and as I worry built in inflation.

The reasons for this are as follows using the JCTI basic family basket expenditure. First and foremost the Fuel increase will directly affect the cost of production. This will create an incentive for companies to pass that on to their consumers as a higher price, this may be done gradually or immediately but the eventual effect will see more relatively price inelastic goods absorb the price increases.

An example of a price inelastic good is Mealie Meal. Price elasticity refers to the change in demand of a good given a change in its price. Mealie meal is relatively price inelastic because a change in its price will not change its demand by any significant margin. This is for the reason that if the price of Mealie Meal goes up, people will still buy Mealie Meal.

Secondly, transport costs across the board will go up after the 15% increase. The translation of this to a general price increase will depend upon the type of goods sold and the distance covered to get them to their required destination.

Thirdly and most worryingly is what is called in economics as Built in Inflation. In simple terms what people expect Inflation or general prices to be in the near future also matters, If they expect prices to increase this will have repercussions.

Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover inflation.

The Built in Inflation I speak of will come into effect in September 2013.Let me explain why.

Government has increased salaries for civil servants with some getting as high as 200 percent effective September 1, 2013 (Lusaka Times, 2013).The windfall follows the successful conclusion of negotiations between Government and the Civil Servants and Allied Workers Union of Zambia (CSAWUZ).

Other benefits in the 2013 collective bargaining include the introduction of the health personnel shift allowance at 15 percent of basic salaries for nurses and other paramedics. The commuted night-duty allowance has been pegged at7%.

Transport and housing allowances have been maintained at the existing rates of 10 and 20% of basic salaries respectively. But given the Government’s recent hike in fuel, workers have valid grounds on which to demand their transport allowances be adjusted to absorb the Price hike, this I fear could cause the Vicious circle.

Solutions

Eleanor Roosevelt said "It is better to light a candle than to curse the darkness". I do not aim to attack the Zambian Government; all I wish to do is give solutions to problems.

Problem 1

High price of Fuel due to in Zambia compared to other countries due to losses in

•          Feedstock Procurement to Dar es Salaam

•          Comparison of CIF Dar es Salaam prices paid by GRZ in 2008 & 2009 with reference (spot) prices shows over-payment. ‘The total “overcharge” vs good international practice was…..US$ 93 million over the two years or 12.5% of total CIF costs 

Solution 1

An agreement is signed to purchase fuel (oil) using futures and options.

What is a Future?

A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration

What is an option?

An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract

Why will this work?

Because the Zambian Government has been procuring Fuel (Oil) at spot rates, in other words they have been paying for what the price of fuel is at the time. This created a 5% loss compared to other countries that use OMC at this stage.

 Fuel prices change every day and month, Options and futures reduce the risk of loss to such volatility.

References

Abel, A., & Bernanke, B. (2005). Macroeconomics (5th ed.). In A. Abel, & B. Bernanke, Macroeconomics (5th ed.). Pearson.

Bryan, M. F. (October 15 1997). On the Origin and Evolution of the Word 'Inflation. In M. F. Bryan, On the Origin and Evolution of the Word 'Inflation. Federal Bank Of Cleveland.

Lusaka Times. (2013, March 27). Civil servants get pay rise. Retrieved May 22, 2013, from Lusaka Times: http://www.lusakatimes.com/2013/03/27/civil-servants-get-pay-rise/

Mankiw, N. G. (2002). Macroeconomics (5th ed.). . In N. G. Mankiw, Macroeconomics (5th ed.). Worth.

Jayne, A. N. (September 2012). Is the Government of Zambia’s Subsidy to Maize Millers. Lusaka Zambia: Indaba Agricultural Policy Research Institute (IAPRI).

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Mealie Meal Subsidy removal analysed by Kampamba Shula

The Government of the Republic of Zambia has resolved to remove the subsidy on Mealie meal.

Agriculture and Livestock Minister Bob Sichinga has announced that cabinet has approved the removal of Maize subsidies He said if the current subsidy was to be maintained, it would mean FRA would continue to be in a loss making position and for it to survive it had to stop depending on Government to support such subsidies. Mr Sichinga said currently the FRA had been buying maize at KR65 and selling it to millers at KR60, with a resultant loss of KR5 for every 50 kg bag sold or KR100 per tonne. He said the FRA would this farming season purchase 500, 000 tonnes of maize and any maize that would be left after the private sector buys the maize from the farmers (Lusaka Times, 2013).
In 2010 and 2011, Zambia achieved record maize harvests of 2,795,483 and 3,020,380 metric tons respectively (Nkonde et al. 2011). Towards the year of elections (2011), the FRA purchased roughly 1.5 million metric tons of maize that it could not fully store, mainly due to inadequate storage facilities. Further, the state could not sell its surplus maize profitably, either in the region or in international markets due to the high price at which it purchased maize locally (Mason and Myers 2011). Moreover, regional transport capacity constraints have limited the volumes that Zambia could export even at a financial loss. Hence, in mid- 2011, and leading into national elections later in the year, the country faced the dilemma of how to offload the large and partially deteriorating maize stocks from the 2010 harvest to make room for incoming maize purchases from the 2011 harvest. Starting in September 2011, the government via FRA offloaded maize to millers at US$140 per metric tonne (roughly 35,000 kwacha per 50kg bag). After accounting for the FRA’s marketing costs and storage losses on top of the 65,000 kwacha per 50kg bag purchase price, it is likely that the FRA lost at least 85,000 kwacha ($340 per tonne) on every bag traded during this period. Further, the government continued to subsidize maize exports within the SADC region at a loss despite the country having to incur high production costs. Thus, while the FRA was spending K65,000 (roughly US$260 per metric tonne) to purchase maize from farmers and incurring additional marketing and storage costs of at least $100 per tonne, it was selling the same maize to other countries within the region at a cost of not more than US$170 per tonne (Lusaka Times 2012).
In September 2011, the Government of Zambia started heavily subsidizing the price of maize held by the Food Reserve Agency (FRA) to maize millers. The expectation was that, by receiving maize at subsidized prices, millers would pass along the subsidy to Zambian consumers in the form of lower retail maize meal prices (Jayne, September 2012).
Over the eleven-year period from 2000 to 2011, inflation-adjusted retail prices for breakfast meal have declined. However, after the subsidy was conferred to millers in September 2011, the mill-to-retail marketing margins have increased significantly. Retail maize meal prices have remained virtually constant since September 2011. These findings indicate that very little of the treasury costs incurred in providing FRA grain to millers at below-market prices have benefited urban consumers.
Moreover, the FRA maize subsidies are only conferred to some millers, not all of the maize millers in Zambia. Millers that did not receive the FRA subsidized maize, in particular the informal and small/medium-scale millers were greatly disadvantaged because they could not acquire maize grain at as low a price as millers receiving subsidized maize from the FRA. This has led to an unbalanced playing field between the millers who benefited from the FRA subsidized maize grain and those who did not. Such an un-level playing field will negatively affect the future competitiveness and market structure of Zambia’s maize milling industry.
Policy Implications
First, because the FRA maize subsidies to millers have so far not been transmitted to Zambian consumers, policy makers might reconsider the policy of providing maize to selected millers at highly subsidized prices, if the aim of doing so is to reduce the price of maize meal to consumers. Second, selective subsidies to particular millers disadvantage other millers plus many informal small-scale millers who are not able to receive the subsidy. Over time, this is likely to entrench the market share of the selected millers having access to subsidized maize supplies, force non-selected millers out of business, and adversely affect the degree of competitiveness within the milling industry. Third, for the Government to achieve its goal of lower maize meal prices to help poor urban consumers, policies should be considered that encourage rather than disadvantage the informal and small/medium-scale food millers and retailers, on whom a large share of Zambian consumers rely.
Conclusions
Research findings agree very well with Chapoto and Jayne (2006) as well as Kuteya and Jayne (2011) that maize meal prices in real terms have been declining over time. However, the rate at which these prices were decreasing after state intervention was less than that of maize grain. As such, the impact of this costly move was not felt by consumers. The mill-to-retail market margins increased tremendously immediately after FRA offloaded maize grain to commercial millers at 400 kwacha per kilogram. These maize grain subsidies which drained the state treasury appear to have benefited large millers alone since the move did not reduce mealie meal prices at the same rate as maize grain from FRA. If government’s objective from these subsidies was also to reduce maize meal prices for the benefit of consumers, it does not appear to be supported by the econometric model results (Jayne, September 2012).
Maize subsidies are perceived as government’s indirect support to commercial millers. But it is a well-documented fact that even small millers (hammer mills) play a major role in ensuring competition in the grain milling industry in the country. Therefore, if the playing field is not leveled, their activities are hampered by selective subsidies and as a result lessening competition in the grain milling industry. The end results are high marketing margins between wholesale maize grain and breakfast meal retail prices. The foregone analysis indicates that selective subsidies conferred to certain players in the market do not necessarily have desired consequences when the market is not fully competitive. If the market were competitive, then subsidies conferred to millers would be passed along fully to consumers, which appear not to be the case in Zambia. Subsidies to maize millers have instead proved to be a drain on the government treasury without trickling down anticipated benefits to intended beneficiaries – urban consumers in this case.


References

Jayne, A. N. (September 2012). Is the Government of Zambia’s Subsidy to Maize Millers. Lusaka Zambia: Indaba Agricultural Policy Research Institute (IAPRI).
Lusaka Times. (2013, May 15). Mealie Meal prices set to go up as Government announces removal of Maize subsidies. Retrieved May 16, 2013, from Lusaka Times: http://www.lusakatimes.com/2013/05/15/mealie-prices-set-to-go-up-as-government-announces-removal-of-maize-subsidies/
Nkonde, C., N.M. Mason, N.J. Sitko, and T.S. Jayne. 2011. Who Gained and Who Lost from
Zambia’s 2010 Maize Marketing Policies? FSRP Working Paper No. 49. Lusaka: Food
Security Research Project.
Mason, M.N. and J.R. Myers. 2011. The Effects of the Food Reserve Agency on Maize
Market Prices in Zambia: Are There Threshold Nonlinearities? FSRP Working Paper
No. 60. Lusaka: Food Security Research Project.
Chapoto, A. and T.S. Jayne. 2006. Trends in Breakfast Meal and Maize Marketing Margins
in Zambia. FSRP Policy Synthesis No. 14. Lusaka: Food Security Research Project.
Kuteya, A.N. and T.S. Jayne. 2011. Trends in Maize Grain, Roller, and Breakfast Meal
Prices in Zambia. FSRP Policy Synthesis No. 47. Lusaka: Food Security Research
Project.

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High Fuel Price & Refinery Industry in Zambia Analysed by Kampamba Shula

The Zambian government last week announced that fuel prices will go up by 21% after removing the subsidies. The removal of subsidies is a good theoretical move but I must disagree in the execution of it.

Now most people would ask how come I don’t like the removal of the subsidy even though conventional economics says subsidies bring about inefficiencies. Let’s get one thing straight, the subsidy should have never been there in the first place Zambia does not produce any oil. But if you look at the comparisons Zambia’s price of fuel remains substantially higher than other countries that also do not have any oil, so where is THE problem, we must find THAT problem and solve THAT problem.

But given the fact that the subsidy was in place, you don’t wake up one morning and suddenly remove it like that, it is bad execution. Watch how and where Economeka differs with the Energy Minister.

Energy Minister: FUEL prices have been hiked by an average KR1.69 per litre following the government’s decision to scrap fuel subsidy which had kept the local pump prices unchanged for almost two years. Energy minister Yamfwa Mukanga told journalists in Lusaka last week that the price for a litre of diesel has been adjusted upwards by KR1.63 while that of petrol has gone up by KR1.75.This means that a litre of petrol which initially was costing KR8.16 will now fetch KR9.91 while a litre of diesel which was costing KR7.50 will now cost KR9.13.A litre of kerosene will now be fetching KR1.68 more than it used to.

According to Mukanga, the fuel subsidy has been a huge drain on government coffers.

Economeka: Indeed the subsidy has been a drain on government coffers we totally agree. No argument there.

Energy Minister: Last year, the government spent KR754 million on fuel subsidies, an amount equivalent to 70 per cent of the total health sector budget minus personal emoluments. The government has already spent KR1,195 million on fuel subsidies in the first and second quarter of this year, Yamfwa said, adding that the fuel subsidies, which were introduced by the MMD government to cushion the poor and vulnerable in society, have not benefited the ordinary people.

“Current evidence suggests that the poor have benefited the least from this measure,” he said.

“It is key consumers of fuel – the mining industries and urban dwellers that are able to own their vehicles – that have [instead] benefited the most from this measure. In view of this, it is inevitable that the fuel subsidy is removed and fuel prices adjusted effective midnight, 30th April 2013.”

Economeka: Now this where I choose to disagree with the Honorable Minister. To mining industries and urban dwellers the change in fuel price is minimal and can be easily absorbed. But for the ordinary Zambian this is taking money right out of their pockets. Fuel is a sensitive product. It affects the pricing of so many other products across the board. The same poor people you refer to in your evidence are the ones who are going to feel the pinch of this fuel hike, ordinary people won’t even be bothered that much.

Energy Minister: “In addition, taxes on fuel will in future be reflected in absolute and not percentage terms as a way to mitigate increases in the price of fuel. This measure, however, requires changes in the law and will therefore be considered at the next sitting of parliament.”

Economeka: this is the biggest problem we have with the removal of the subsidy. We don’t refute the need to remove the subsidy, but in an effort to cushion the public from its effects, would it not have been prudent to first get the taxes on fuel to be reflected in absolute and not percentage terms first (effectively reducing the price of fuel), then remove the subsidy bringing it back to equilibrium levels. We estimate few people would have noticed the change.

We at Economeka firmly believe there are structural problems that need to be dealt with first. Our Colleagues at the Zambian Economist (www.zambian-economist.com) outlined this 3 step plan. 

STEP 1 : remove subsidies on fuel prices and stop the rampant and retrogressive waste of resources there (which disproportionately benefits urban folk) - DONE.

STEP 2: return Indeni to profit making levels and increase investment, as well as normalising supply of fuel across the country - BEING DONE.

We have seen many wonderful statements which have being made by Ministry of Mines and Energy that has signalled significant progress in this area.  For example, the 10 million litres Lusaka-West Fuel storage terminal is now operational. The Ministry of Energy says Government has embarked on the construction of other storage facilities in Mongu, Mpika and Solwezi to increase the number of delivery Fuel points in the country. That excellent development is critical in stabilising oil supply across the country in the short term.

It was also announced that Indeni Petroleum Refinery will start declaring dividends to its sole shareholder, GRZ, for the first time in 20 years. Government has run Indeni since Total SA pulled out in 2009. Last year, Indeni’s Managing Director Maybin Noole stated that Indeni had posted profits amounting to KR80 million in 2010 and KR54 million in 2011. Of course Indeni needs this money but the process of declaring dividends is vital in ensuring transparency and public accountability - something we have lacked in the past. It shows that change is happening in this area.

Other sectors also appear to benefiting from the new shift in this area. It was recently announced that we are expected to produce at least 100,000 cubic litres of bitumen-based fuel per day once the manufacturing plant currently under rehabilitation at Indeni Petroleum Refinery starts operating. 75 per cent of rehabilitation works had so far been completed and it will be ready to produce bitumen in August or thereabouts. The plant had been non-operational for the past 10 years but will soon roar to life.

This is good news. The government has invested US$20 million for Bitumen production. The huge quantities of bitumen are needed to complete the Link Zambia 8000 and pave Zambia 2000 road projects. It is allegedly currently costing Government US$1,200 to import a cubic litre of bitumen from South Africa and the Middle East. The plant is a huge leap forward.

These and many other positive changes underline the determination make progress under Step 2 that requires wide support from ordinary Zambians if this sector is to improve. Without public support change will not be possible. But change also requires bold leadership and it is clear that the Ministry of Mines and Energy is making important strides and ministers must be commended for their boldness.  

STEP 3: reform the wholesale fuel supply system consisting of fuel imports, transportation, and processing. This supply system is dominated by a vertically integrated government monopoly consisting of Tazama Pipelines Limited, the Indeni Petroleum Refinery Company Ltd., and the Ndola Fuel Terminal.

Because there's no competition, this system suffers from operational and structural inefficiencies, therefore high costs, the burden of which is shared by ordinary Zambian consumers. (and previously by taxpayers through subsidies which were meant to keep fuel costs low but have now thankfully been removed). The energy regulator (ERB) is unable to control costs effectively. Indeed, it cannot without sorting out the fuel supply system.

Part of the solution to the supply chain issues is to remove the 25% import duties on petroleum finished products so that prices can be reduced across board. The duty exists largely to protect Indeni. Indeni of course needs protection because Government is not just interested in stable fuel prices but also to ensure a uniform price across the country (Mukanga, 2013).

The Problems

•             Why are costs so high?

•             What is the Role of Government

•             TAZAMA / Indeni not competitive & dependent on tariff protection

•             Costs & security risks of relying solely on TAZAMA / Indeni

•             Case for liberalisation / import of finished products by OMCs

Why are Fuel costs so high in Zambia?

Fuel is high because of Inefficiencies in:

Feedstock Procurement to Dar es Salaam

Comparison of CIF Dar es Salaam prices paid by GRZ in 2008 & 2009 with reference (spot) prices shows over-payment

‘The total “overcharge” vs good international practice was…..US$ 93 million over the two years’ (Matthews 2010) , or 12.5% of total CIF costs 

TAZAMA pipeline is the only supply of Oil in the country. Inefficiencies along this mode of transportation are protected traits of a monopoly.

Indeni

Indeni refinery has a limited capacity of 1.1 million tons a year. ‘Economies of scale are particularly important for refining…..As a basic rule of thumb, a refinery needs to have a processing capacity of at least … 5 million tons a year… to be economic in a liberalized market.  ….A sub-economic-scale refinery is unlikely to be able to compete with product imports from large and efficiently run refineries’ (Kojima et al, 2010)

Distribution

·         Distribution throughout Zambia by OMCs from a single point, Indeni, increases transport costs and supply risks

·         Chipata is 900 km from Ndola, but only 140 km from Lilongwe

·         Fuel costs are lower in Malawi

·         Can Eastern Province obtain supplies more cheaply through Malawi?

Monopoly

·         TAZAMA / Indeni is a monopoly supplier

·         Monopolies usually have higher costs & prices than competitive markets

Government Involvement

·         No market failure – OMCs will supply

·         Most governments in region leave fuel supply to OMCs

·         Paying for feedstock can disrupt budget releases to conventional public services

·         Fiscal loss / unbudgeted subsidy of US$ 90 million in 2009

Cost of Production

The Private Sector Development Association (PSDA) has said the recent fuel hike, coupled with the imminent upward adjustment of electricity tariffs, will impact negatively on investment in the country.

Association chairperson Yusuf Dodia said this was because the cost of doing business is likely to go up in all sectors of the country’s economy. Mr. Dodia told ZANIS in an interview  that because of these developments, it will be difficult to stimulate the growth of the economy. “Our biggest worry is that prices of fuel and electricity are going up. This means that the cost of doing business in whatever sector will go up,” he said. He said the expected rise in the cost of production might cause Zambia to be less competitive than her neighbouring countries as the local products will be more expensive than the imported goods (Lusaka Voice, 2013).

And a Lusaka based economist Trevor Simumba has advised government to consult stakeholders each time it wants to effect a new policy. Mr. Simumba said it was important for government to get the input of various stakeholders on its policy pronouncements so that such policies have the reflection of all interested parties. Mr. Simumba said the removal of fuel subsidies will impact negatively on consumers  as the prices of basic commodities will go up. He said the very poor people that government said were not benefiting from the subsidies will be the same that will feel the pinch of the increase (Lusaka Voice, 2013).

Solution to the cost of Fuel

A recent parliamentary report on the state of petroleum industry in Zambia is embedded below. It notes that :

"....petroleum products in Zambia, which are the highest in the region, could be cheaper....fuel products are being kept superficially high due to impediments in the petroleum sector which include issues of policy, planning, recapitalisation, procurement and taxation...".

The problems facing oil supply in Zambia are the same problems facing maize marketing. Inefficient government involvement in systems where its role should be purely to maintain strategic reserves and leave the rest to market forces, underpinned by appropriate favourable taxation framework (Mukanga, 2013)

The Solutions

·         Pump prices must be reduced by cutting costs not taxes.

·         GRZ Could sell its shares in Indeni and remove the protection

·         Distribution sources need to be diversified to reduce transport costs. Each province can get oil from its nearest country ie. North western from Angola and Eastern from Malawi.

·         Liberalisation can reduce pump prices & increase reliability without hurting GRZ revenue

·         Removing Indeni’s tariff protection & encouraging OMCs to import finished products directly means

·         Improved efficiency from competition

·         Lower transport costs, as provinces are served from nearest port (eg Eastern - Nacala, Lusaka – Beira, Northern – Dar)

·         End of nationwide shortages

·         No further public investment (except storage), so GRZ can focus on public services 

 Bibliography

Lusaka Voice. (2013, May 2). Lusaka Voice. Retrieved May 6, 2013, from PSDA worried about fuel price hike: http://lusakavoice.com/2013/05/02/psda-worried-about-fuel-price-hike/

Mukanga, C. (2013, May 3). Zambian Economist. Retrieved March 6, 2013, from Bold Leadership on Fuel Prices: http://www.zambian-economist.com/2013/05/bold-leadership-on-fuel-prices.html

Kojima et al, (2010) Economies of Scale for Refining

Mathews ( 2010) . International Oil Refinery Practice

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China's Economy First Quarter Analysis by Kampamba Shula

China's economic recovery unexpectedly stumbled in the first three months of 2013 with slowing factory output and investment spending forcing analysts to start slashing full-year forecasts despite official insistence that the outlook was favorable.

Growth in GDP dropped to 7.7% year-on-year, down from 7.9% in the fourth quarter of 2012. That’s below the consensus forecast of 8% growth from a Wall Street Journal survey of economists, and raises fears that the recovery at the end of last year is already losing steam.

The market remains far ahead of the government’s estimates, which still has Chinese GDP growth hovering closer to 7.5% for the next couple of years (Rapoza, 2013).

The pace of sequential growth continued to be the subject of controversy. Based on the National Bureau of Statistics data, the annualized quarter-on-quarter growth rate came in at 6.6%, down from 8.2% in the fourth quarter of 2012. But investment bank economists continued to publish their own calculations. Louis Kuijs, China economist at RBS, put sequential growth at 6.1%, down from 9.5% at the end of 2012 (Orlik, 2013).

One of the few bright spots in the data: evidence that the rebalancing of China’s economy is underway. Domestic consumption contributed 4.3 percentage points to China’s growth in the first quarter, compared to a 2.3 percentage point contribution from investment, said National Bureau of Statistics spokesman Sheng Laiyun. “Now we can say consumption has become the major driver of growth,” he said. Seasonal effects might also be at work – the first quarter is typically strong for consumption.

The Federal Reserve Bank of San Francisco took some of the fun out of looking at China’s alternative indicators, concluding that they told roughly the same story as the official data . But for what it’s worth, new Premier Li Keqiang’s preferred measures of growth – bank loans, electricity consumption, and rail freight — continued to present a less favorable picture. Electricity consumption registered shocking 1.9% year-on-year growth in March.

China’s government wants domestic consumption to do more of the work of driving growth. But retail cash registers in the first quarter showed little signs of ringing faster. Growth in retail sales dipped to 12.6% year-on-year in March, a marked slowdown from 15.2% at the end of 2012.

One possible factor is the government’s crackdown on official banqueting and excess. That’s difficult to quantify, but a sharp deceleration in spending at restaurants – which grew just 8.7% year on year in March – gives the theory some credibility. Century Plaza Hotel, a four-star hotel in the southern export hotspot of Shenzhen, is one that saw feast turn to famine in 2012. Zhang Jing, board secretary, said she saw no improvements in the first quarter. “It’s definitely inseparable from the current economic and policy situation,” she said.

China’s labor markets continued to tell a positive story. The ratio of labor demand to labor supply rose to 1.1 in the first quarter, up from 1.08 at the end of 2012 and a record high. Strong hiring is a sign China’s firms have a positive outlook and are taking on more workers (in Chinese).

Tight labor markets should also mean rising wages, supporting high consumption. But the evidence on wages in the first quarter was mixed. Average pay packets for migrant workers rose at a respectable 12.1% rate year-on-year. But average disposable income for urbanites rose just 6.7% in real terms, down from 9.6% in 2012 and dipping below the growth rate of the economy.

At the start of the year, exports appeared to be a bright spot in the data, with growth touching 25% year-on-year in January. But that moderated to 10% in March, and inconsistencies in the data between China and major trade partners suggested the real growth rate could be even lower.

Reports of surging exports to Hong Kong, at the same time as Hong Kong recorded only modest gains in imports from China, suggested something was amiss – perhaps factories exaggerating sales to claim tax rebates or avoid capital controls.

Li Zhongjian, head of Tungfong Lighter in Zhejiang’s Wenzhou, was feeling the burn, with overseas sales down 33% year-on-year in the first quarter. “The labor cost is a big problem for us, it’s really hard to operate at the moment,” he said.

China’s trade imbalances showed signs of rising again. The trade surplus for the first quarter came in at $43.5 billion, up substantially from $1.1 billion in the same period last year. The latest current account data from China’s State Administration of Foreign Exchange points in the same direction.

After a revision to the historical data, China’s current account surplus as a share of GDP troughed at 1.9% in 2011, and rose to 2.3% in 2012 (pdf in Chinese). That’s only a small increase, and leaves the current account surplus at a moderate level. But it also supports the argument that the yuan remains some distance from fair value (Orlik, 2013).

The People’s Bank of China was more active in the markets, keeping the yuan within a narrow band against the dollar. Appreciation of China’s currency slowed to an annualized rate of 1.1% in March, down from 3.5% in December. A larger trade surplus combined with a slower rate of yuan appreciation threatened to raise political tensions with the U.S.

A big part of the reason for resilient growth is surging credit. Bank loans and other forms of finance came in at 6.1 trillion yuan in the first quarter, a record high. Moves by the People’s Bank of China to drain liquidity from the markets from the start of February appear to have had little impact, with a large part of the surge in credit coming in March.

That allayed fears of a sharp downturn. But it raised fears of higher inflation and a burgeoning credit bubble. China’s consumer price index remained muted, with a 2.1% year-on-year increase in March. But with increases in money supply growth hitting a heady 15.7%, and wages also rising fast, price pressure remains a risk.

So far monetary policy has remained essentially on hold, with no change in bench mark interest rates or pronounced attempts to drain liquidity from the financial system. With growth disappointing, it’s difficult to see Beijing making early moves to tighten policy. But in an inflationary environment, the scope to keep the lending taps open to buoy growth is also limited (Rapoza, 2013).

Evidence of a second successive quarter of rising year-on-year growth will further reinforce the view of investors that China's government has successfully engineered a recovery from 2012's 13-year low of 7.8 percent that is gaining traction.

Meanwhile with the annual rate of consumer inflation expected to ease to 2.4 percent from February's 10-month high of 3.2 percent, the urgency for policymakers to begin tightening monetary conditions at an early stage in the recovery cycle is reduced.

"We estimate GDP grew at a faster year-on-year pace of 8.1 percent in Q1," analysts at China International Capital Corp (CICC) wrote in a note to clients, outlining their calls for the March data cycle.

That is above the 8.0 percent consensus of 19 economists polled by Reuters and is driven largely by expectations of a stronger than anticipated contribution to growth of real estate sales.

CICC analysts calculate that property sales will contribute about 1 percentage point more to growth in Q1 than in Q4 last year, offsetting slowing growth in wholesale, retail and other industries.

Retail sales growth has been curtailed in recent months since the government launched an internal austerity drive at the end of last year, designed to cut down excessive banqueting and gift-giving that is often linked to corruption.

Economists in the Reuters poll expect retail sales to have expanded by 12.5 percent in March, slightly higher than the 12.3 percent rate seen in the combined January-February period, but still around 2-3 percentage points lower than typically seen through 2012.

Fixed asset investment, closely tied to real estate transactions, has seen a gentle upswing since around the middle of last year when China's Communist Party government decided to take action to underpin economic growth hit by faltering demand for the country's exports. Gross exports account for around a third of economic output in China and a drop off in orders as the United States and the European Union - the country's two biggest customers - dealt with their own economic problems was felt through the Chinese factory sector. Fixed asset investment is forecast to have expanded at an annual pace of 21.3 percent year-to-date in March, a whisker higher than the 21.2 percent pace in the first two months of 2013.The downside risks to economic growth, however, are similarly tied to real estate, investment in which was worth 13.8 percent of GDP in 2012 and directly impacts around 40 other business sectors in the economy. Rising real estate prices, alongside rising fixed asset investment, have sparked concerns that home costs could start to spiral out of control and lead the government to declare that a raft of measures to calm frothy prices must be strictly enforced. That has led investors to start fretting that tighter property policies could constrain the overall economy (Reuters, 2013).

That is a significant risk given that construction was the main driving force behind a rise in the fast-growing services sector of the economy in March, according to a survey of purchasing managers. The real estate crackdown was one of the key reasons cited by Bank of America/Merrill Lynch in late March when it cut its Q1 annual growth forecast to 7.9 percent from 8.3 percent." At present we see more downside than upside risk to our 7.9 percent year-on-year Q1 forecast," the bank wrote in a note to clients, outlining its March data forecasts.

 The Deduction

Most of China's growth going forward will be from a stronger domestic demand.Construction and real estate are big drivers of this movement.But there is another side to this coin.Banks are lending out money at unprecedented levels which could be creating inflationary pressures but judging from the numbers that should not be a worry.What should however be looked into is a possible credit bubble in the housing market which could lead to housing prices to spiral out of control.

Its true what investors fear that tighter property controls could constrain the economy, but on the other hand loose controls could increase the chances of a bubble, something which neither investors nor the Government want.

Bibliography

Orlik, T. (2013, April 15). China Real time report China’s Economy: The First Quarter. Retrieved April 2013, 16, from Wall Street Journal: http://blogs.wsj.com/chinarealtime/2013/04/15/chinas-economy-the-first-quarter-2/

Rapoza, K. (2013, April 15). China's Economy Underperforms In First Quarter, But Locals Rake In More Yuans. Retrieved April 16, 2013, from Forbes : http://www.forbes.com/sites/kenrapoza/2013/04/15/chinas-economy-underperforms-in-first-quarter-but-locals-rake-in-more-yuans/

Reuters. (2013, April 3). Reuters. Retrieved May 6, 2013, from www.reuters.com: http://www.reuters.com/article/2013/04/03/us-china-economy-gdp-idUSBRE9320DA20130403

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