One of the biggest events of the past year has been the almost 100pc increase in world oil prices. It would surely be deemed the ‘commodity of the year’. Though its effects have varied across the diverse economies of the world, no nation has escaped its heavy influences on both the private and public sectors.

Positive reports on African continental economic growth can be misleading as the top oil producers such as Angola and Sudan have skewed the average and hid disappointing data from slow movers. Iran has continued its defiance of the Western hegemony backed by the fourth largest supply of black gold and the rising Russian power governed by the Kremlin has flexed its muscles with energy influence over the European bloc.
 

The oil companies too are not complaining. The world’s largest companies, United States (US) Exxon-Mobil and British Shell have reaped windfall profits of 36 billon dollars and 27.5 billon dollars respectively. They represent the largest ever recorded in these two mammoth economies. Many states and big businesses are rejoicing in near triple-digit fossil fuel prices.
 

The picture is not so rosy in Ethiopia. The heavily subsidised input into almost every production process is sadly not proven to be contained in the soils of the diverse terrain. Though seven companies are actively exploring oil in various regions on suspicions that proximity to the Sudan basin, Puntland fields and geological connections with the Middle East seem too meaningful to be mere coincidences and should yield economically viable deposits, that bright scenario is still yet to come.
 

Rather the current situation supply chain seems to leave no one happy. On the government’s part it is struggling to stay afloat with massive fuel subsidies that distort the market, drain almost 90pc of the country’s foreign currency reserves and perpetuate a paternalistic mentality that has remained in tact through three diverse and loosely defined systems of governance; monarchy, socialism and democracy. This precarious policy choice cannot continue indefinitely.
 

The public is no more happy with the prevailing system where it gets some of the cheapest fuel in the world. Compare the new perceived high price of 9.61 Br per litre of benzene to the equivalent of around 20 Br in the United Kingdom (UK).  Ethiopians even pay under the Saudi (number one oil producing country) price of the equivalent of about 11 Br per litre.
 

But the general populace is not up in arms because they are suspicious of the sustainability of a programme of the state Petroleum Enterprise subsidies that is ultimately funded by their tax money and siphons funds from the government budget that should rather be used for public infrastructure development that helps business development. Judging from the general mood last week after fuel prices rose, the public rather seems to feel cheated by a government that has created a state of dependence on its paternalistic subsidies.

Neither are business interests erupting with signs of pleasure over the government’s move to bring fuel prices closer into line with the free market rates. Rather than rejoicing in the freed budget that can work towards easing transport difficulties, business has become accustomed to the cheap fuel to the point of addiction.
 

Government subsidies have been so drastic that even oil producing nations were flying their planes into Bole International Airport a couple of years ago to refuel their jets. Why a government with notoriously low tax collection capacity that purports to act in the interests of some of the poorest people in the world to achieve income growth would feel good about subsidising the jet fuel for Saudi Air or Lufthansa defies economic logic.
 

COMPLAINTS MISSING THE MARK

For all the uproar caused by the government’s much-needed increase in fuel prices, a sober analysis of the bigger picture has eluded public outlets. While the general populace should not be expected to understand the nuances of macroeconomics and is ordinarily more concerned about the visible prices posted at fuelling stations, other supposedly more analytical segments of the country have been similarly irresponsible in analysis.
 

Newspaper editorials, economists and opposition political parties have come out against the price hike. EUDP-Medhin has taken the occasion to defy a supposedly liberal party platform in favour of jabbing at the ruling party’s decision. Given the dearth of quality media and the perpetual tendency of politicians to relish in the opportunity to grab public support for populist issues even against better judgement or alleged philosophical leanings, it is not surprising that they have not gotten past the surface of the issue and dug into the core of the problem revealed in the symptom of anger over the higher bill at the pump.

But for economists to be similarly shallow on the issue is deeply troubling. There are definite reasons to criticise the government’s fuel policies. The price increment, the first since August 2006, has come too late. After an almost 50-dollar per barrel increase in the price the government is getting its oil it is a wonder that subsidies have not collapsed yet.
 

The delay in adjusting prices calls into question the government’s ability to responsibly manage its budget. No private company would wait so long to adjust prices if its inputs to production were soaring out of control. Unfortunately, the government’s attempts to control the economy in an overly centralised manner falls victim to being notoriously slow to act, deepening market distortions to a point where repairs are elusive and painful.

The few economists who have come out on the issue seem content with the status quo and rely more on the correct judgement that fuel price increases will add to inflation than any assessment of second degree effects or a broad depiction of the current economic regime.

Energy costs are unique in that they are involved in almost any production process and price hikes affect just about every good and service the economy provides. In many cases, targeted subsidies or tax breaks can be valuable for developing countries. The size of the subsidy and commodities it affects should always be questioned though.

The size of benzene subsides, used predominately by those who can afford personal vehicles, should be questioned against the kerosene used for cooking by all but in greater volumes by the masses of low and middle income earners and diesel used for the big trucks that transport goods across the country. Little analysis has been directed at the size of the increments considering the distribution effects but has rather been characterised as blanket condemnations.

A more detailed discussion of the possible boost to exporters a depreciating currency may grant them involving well studied elasticities is also in order. But the public commentators seem now to reflect a deeply engrained mentality that relies on the government to fix problems.

SIGN OF SKEWED MENTALITY

In economic terms, the government’s subsidies and control of too many markets, including telecom and power, create distortions in prices. Past the sometimes real and at other times perceived decrease in end use prices, the structure of whole sectors can become dependent on subsidies. Private and public companies function above the break even point only because of subsidies and investment in production processes takes take into account the artificially lowered price of inputs.

In essence, the whole economy becomes dependent on subsidies that are meant to be temporary aids to development. When the time comes to rescind them, the effect is overly painful and can wreak macroeconomic havoc.
 

But the socialist mentality that pervades Ethiopia does not concern itself with this hard truth. It is content to put the burden on the shoulders of an under-resourced government and complain when the regime in power attempts to bring its policies into a more sensible realm.

Ethiopia’s development is critically tied to the degree and speed that it liberalises its economies. The hindrances of bureaucracy and sluggishness of public companies on the balance far outweigh their public benefits. When the doors are opened to competition the results for growth will be remarkable. It is a shame that the reaction to a price hike in fuel demonstrates how difficult this will be.