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Increases in the price of fuel and electricity could accelerate inflation

Increases in the price of fuel and electricity could accelerate inflation

By Josef Kefas Sheehama.

The sharp rises in the cost of fuel and electricity will hurt everyone in Namibia, but the unemployed and lower class will be hit the hardest.

The hike in fuel prices by N$0.70 per litre for petrol and N$0.40 per litre for diesel that takes effect on 02 May 2024, is giving consumers and businesses in Namibia a headache. The continuous supply-side refinery disruptions that are raising crude oil prices globally and exacerbating market uncertainty are the causes of this increase. In addition, the Namibia Power Corporation’s tariff will be adjusted by 8% by the Electricity Control Board (ECB) for the 2024–2025 fiscal year, which runs from July 2025 to June 2026. The Middle East’s and Russia’s escalating geopolitical tensions are feeding concerns about supply. The impending rise in inflation and worries about the pace of the economic recovery are being exacerbated by this.

Therefore, price adjustments are crucial for maintaining stability, but they should be used with caution due to possible economic effects. Oil price increases can stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them.

The lives of citizens are affected by rising fuel and electricity costs because these increases cause inflation to rise. It influences the cost of other necessities. Price increases have had a negative impact on the value of necessities like food and medication, among other items. A rise in energy costs may result in lower incomes, fewer jobs, and lower returns on production inputs for households. From a production perspective, companies are impacted by the cost of fuel and electricity because these inputs are necessary for transportation and electricity usage. As stated in the Nampower Integrated report, Nampower imported 100 MW from ESKOM (South Africa), 180 MW from ZESCO (Zambia), and 80 MW from ZPC (Zimbabwe).

Namibia imported 59% of its total electricity consumption by the end of the 2023 fiscal year. This indicates a high percentage of outsourcing from neighbouring nations. Hence, the burden that the price increase places on Namibians is exacerbated by the consequences of import costs. Rising energy costs compel companies to reevaluate their workforce reduction strategies and conduct stress tests on wage increases that will materially affect their cash flow. Such decisions will have significant effects on Nampower revenue as well as the overall economy of Namibia. The demand for electricity, and the amount of supply needed to meet that demand will all be impacted if businesses decide to postpone, cancel, or even close down their plants.

Moreover, when energy prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be transported from place to place or that use fuel as a major input such as mining, agriculture, and construction industries. Elevated energy costs typically translate into higher production costs for enterprises, mirroring the increased costs associated with household activities. Because inflation affects the costs faced by the majority of households and businesses, you can anticipate a spike in inflation rates in response to increases in the price of fuel and electricity.

Raising the repo rate is a reaction to rising inflation, which also prompts commercial banks to raise their rates. Rising crude oil prices amidst escalating fears created by the conflict in Ukraine, the Middle East and the OPEC+ decisions to cut production are the main reasons for the increase in Namibian fuel prices.

Additionally, because of this lack of electricity production and reliance on imports, I firmly believe that electricity prices will continue to rise. Furthermore, these kinds of issues are unavoidable if the production of electricity is not bolstered by alternative renewable energy sources. Green hydrogen is expected to present significant economic prospects. In today’s world, energy is not only considered to be a production input but is also regarded as a strategic commodity that constitutes the basis for international relations and shapes the world economy and politics.

Due to the rapid depletion of oil reserves with each passing day, it is thought that this problem can be mitigated in the short term and completely solved in the long term, provided alternative energy sources are mobilized. For Namibia’s economy to expand and flourish, it is essential to have access to economical and efficient energy. The ability to afford electricity is a fundamental necessity and a significant part of a household’s consumption basket, and it has an impact on people’s welfare and quality of life.

Despite the current state of affairs, Namibia still has hope for the future. Oil has been found in Namibia by exploration companies, and with the potential for investors to begin this economic transformation, we will witness a decrease in fuel prices as well as stable electricity because, in the long run, electricity will be abundant from renewable sources. Exploration and production activities will open the door to thousands of well-paying jobs for Namibians, not to mention the opportunities for building local capacity and technology sharing that come with the presence of international oil companies. It has the potential to improve local communities and help establish the right kind of infrastructure. The discovery is set to usher in a wave of new investment across the entire energy value chain.

This discovery will significantly improve energy security in a nation that relies heavily on petroleum imports. The development of a consistent domestic energy supply will prove critical for the country’s economy while reducing imports from neighboring countries.

To this end, oil prices are surging over the risk of conflict and OPEC+. Considering that the tariff increase is greater than the rate of inflation, pressure is expected to be applied to future inflation and, consequently, to the prices of goods and services.


About The Author

Josef Sheehama

Josef Kefas Sheehama has more than 21 years banking experience serving as Manager Credit, Branch Manager and now Centralize Credit Head Office at Bank Windhoek. He holds a Certified Associate Institute Bankers CAIB (SA), Associate Institute Bankers AIB(SA), Chartered Banking Professional CHBP (SA), B Com Banking, B Com Law, Postgraduate Islamic Finance and Banking, MBA and an LLB degree. Also founder of church since 2009. He is an independent Economics and Business Researcher. Authored more than 100 articles in Economics and Business. Served on Northwest University panel (Green Hydrogen). His MBA thesis published by the International Journal of Current Research (Exploring sustainable economic challenges and opportunities).