South Africa to Cut Fuel Levy to Ease Impact of Rising Prices

(Bloomberg) -- South Africa will reduce its general fuel levy for two months and sell part of its strategic oil reserves to mitigate against the impact of rising crude prices stemming from Russia's invasion of Ukraine.

The duty imposed on each liter of fuel will be reduced by almost 40% from April 6 until May 31, Finance Minister Enoch Godongwana told lawmakers on Thursday. The measure means the retail prices of 95-octane gasoline and the wholesale cost of diesel will rise by less than Central Energy Fund data suggests they should.

“The intention of the temporary reduction of the general fuel levy is to support a phasing in the fuel price increases that we are expecting in the short term,” Godongwana said. “This will go some way in assisting South Africans to adjust to the new reality.”

The 1.50-rand (10-U.S. cents) per-liter reduction in the general levy will provide some respite for motorists and commuters who had to contend with an increase of about 40% in domestic fuel prices last year. The concession is unlikely to pose an immediate risk to public finances.

The measure will result in foregone tax revenue of 6 billion rand, all of which will be recouped through a sale of strategic oil reserves due to take place in the fiscal year starting Friday, Godongwana said. The duty is the fourth-biggest revenue line item in the budget, contributing more than 75 billion collected in the 2021 fiscal year. While Godongwana stressed the measure is temporary, efforts to pull back short-term support such as a special Covid-19 welfare payment have been unsuccessful.

The government regulates fuel prices, which include a tax used to finance a fund to compensate accident victims, along with other levies that make up about a third of what consumers pay. In February, the National Treasury kept all fuel taxes unchanged for the first time since 1990.

Additional measures to contain costs including a reduction in the basic fuel price nd the scrapping of a levy on 95-octane unleaded fuel sold inland, according to Godongwana. A cap on the price of 93-octane fuel will be introduced from June, he said.

Fuel has an almost 5% weighting in South Africa's inflation basket, meaning Godongwana's intervention could help ease price pressures. Last week, the South African Reserve Bank projected that headline consumer prices will peak at 6.2% in the second quarter, well above the 4.5% midpoint point of its target range at which it prefers to anchor expectations, and signaled it will raise raise borrowing costs more aggressively through 2024.