Berna Namata
12 June 2011
Nairobi — Rising food and fuel prices have prompted Kigali to slash fuel tax to mitigate their impact on the economy and cushion against external shocks.
In the new financial year, the government intends to reduce taxes on fuel to a price of Rwf100 ($0.161) per litre for both petrol and gasoil from Rwf283 ($0.47) and Rwf250 ($0.41) respectively. Presenting his second budget to parliament on June 8, Finance Minister John Rwangobwa said addressing the threat posed by rising food and fuel prices to economic stability would be a key objective of policy in the new financial year.
The theme of this years budget is Ensuring Food Security and Price Stability while Maintaining Sustainable Growth.
Overall, Rwanda’s fiscal expenditure is projected to rise by 7.6 per cent in the new financial year, as the government seeks to reduce its fiscal deficit over the next three years, while reducing dependence on foreign grants.
Total expenditure and net lending is planned to increase from Rwf988.1 billion (about $1.65 billion) in 2010/2011 to Rwf1,062.8 trillion ($1.825 billion).
“The current global economic and financial situation looks uncertain with several macroeconomic risks. Of particular importance are the volatilities concerning oil prices, which are related to geopolitical uncertainty as well as increases of prices of other commodities including food items,” he said.
He added: “Our ability to cope with the spillover effects of these global developments, particularly on food supply and general price levels, will remain the key objectives.”
Fuel prices in Rwanda have risen dramatically since last July, when the government scrapped its 40 per cent subsidy on fuel prices, making fuel in Rwanda the most expensive in the region.
The subsidy was removed to align the country with its East African Community counterparts, who were applying a specific fuel tax system as opposed to its ad-valorem system, where fuel was taxed according to value.
Average pump prices for both petrol and diesel at Rwf1060 ($1.793) per litre in the country are much higher than the regional averages of Rwf839 ($1.419) per litre for petrol and Rwf816 ($1.380) per litre for diesel.
This is due to the fact that Rwanda’s petroleum tax rates for petrol and diesel at Rwf 283 ($0.478) and Rwf250 ($0.423) per litre respectively are about 60 per cent and about 232 per cent respectively higher than the regional averages of Rwf167.3 ($0.823) and Rwf 107.9 (0.182)per litre for petrol and diesel respectively.
“This situation is not only untenable but is also a major factor in transport costs, which in turn put pressure on our domestic inflation,” the minister said.
He added that the tax reduction on fuel is expected to maintain inflation in the 2011/2012 fiscal year at the projected 7.5 per cent by end of December.
Rwanda imports about 17 million litres of oil every month for both domestic and industrial consumption.
“Price shocks are likely to lead to higher inflation and not only threaten food security but also our macroeconomic stability. We need to sharpen our ability to deal with any eventuality,” Mr Rwangobwa said.
He also mentioned that the country has felt the pinch of rising prices with inflation reaching five per cent at the end of April, compared with 0.2 per cent at the end of December 2010.
Higher food and transport costs pushed up the inflation rate in urban centres for the sixth consecutive month, and in April inflation was 4.98 per cent.
Rwanda’s overall inflation rate, which has a higher weighting for food, surged more than five percentage points to 3.05 per cent in April from -2.03 per cent in March.
According to the World Bank and International Monetary Fund, the economy is projected to grow by 7 per cent this year from 7.5 per cent in 2010, though the outlook remains dependent on effects of increasing fuel and food prices. “This year is already proving to be a difficult year for our economy,” the Minister said.
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Rwanda Slashes Fuel Tax to Contain Inflation