Liberia: What Petrol Price Hike Means for Liberia

... The increase in petrol price, which the Government of Liberia attributed to “external factors,”   will drag on the economy, impacting everything from transportation to consumer spending and the cost of goods and services across the country.

It was only a matter of time before the ripple effects of Russia’s full-scale invasion of Ukraine would be felt on the Liberia economy.

And just 13th days into the war, rumors of petroleum shortage sent prices sky-high. And as the Weah administration refuted the rumors of shortage, in the same breath they released a circular announcing a whopping 26% increase in the price of gasoline (32% for Diesel), blaming it on “the international prevailing market rate.”

While the increase might be the result of external factors, it has already resulted in the cost of transport and utility costs, including electricity – putting the country in danger of massive inflation – hampering Liberia’s economic growth rate projection of 5.2 percent from 2022–to 2025. 

The impacts could be dire — touching everything from transportation to consumer spending to costs of goods and services across the country. High petroleum prices will eventually land on the shoulders of Liberian consumers, many of whom live on US$1 or less per day, exacerbating some form of income and or food insecurity and vulnerability.

A joint statement, signed by the Minister of Commerce and Industry, Mawine Diggs, and the Managing Director of the Liberia Petroleum Refining Company, Marie Urey Coleman, disclosed that  “the prices of gasoline and fuel oil have been adjusted by US$1.16, and US$1.47 respectively.

“These changes are based on the international prevailing market rate and the exchange rate, which falls in line with the government’s commitment to making products available and affordable at all times,” the joint statement said.

With such an announcement, the government has now set the wholesale price of gas at US$5.48 and the retail (pump) price at US$5.66. As for fuel, the wholesale price is US$5.82, while the pump price is US$6.00. This means that filling up a gasoline car that takes 10 gallons now costs nearly US$57; more than what was paid just about a week ago, at the price of US$45.  For diesel vehicles, the price is even higher.

According to an IMF staff report, volume 2021, the vast majority of Liberia's economically active population (EAP) is expected to grow from 1.6 million to nearly 2 million in 2023; and with most of them informally employed, the issue of petrol (energy) is an indispensable input in their lives. 

About 35 percent of Liberian households make their living predominantly through agricultural-related activities, which could be badly affected due to an increase in transportation costs as a result of a spike in petrol prices. Farm produce will come at a premium due to the costs of transport and storage.

In the informal sector, 65 percent of whom are wage earners, work for private employers in the service sector (LISGIS 2016). About 20 percent work for the government and 15 per work for nonprofit organizations. A higher proportion of women fall into the lower-earning work categories. So with the current increase, consumers’ discretionary spending will reduce, costing severe knock-on effects on the broader economy, leading to inflation that the government has fought so high to contain in the past.

“The increase in petroleum prices means inflation will grow globally, and locally, it will affect Liberia. The cost of most of our imports will also rise, which will transfer to the domestic crisis,” says Vandalark Patricks, an emerging Liberian policy expert. “Liberia is integrated into the global economy. So when the world sneezes, Liberia will catch a cold.”

Patricks added that the immediate global implications from the fallout of the Ukraine War will be higher inflation, lower growth and some disruption to financial markets as deeper sanctions take hold.

Even the International Monetary Fund (IMF) has warned that while the situation in Ukraine remains highly fluid and the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious.

“Price shocks will have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses,” the IMF said in a statement last week. “Should the conflict escalate, the economic damage would be all the more devastating. In many countries, the crisis is creating an adverse shock to both inflation and activity, amid already elevated price pressures.”

Given this context, a prolonged Russian-Ukraine conflict will cause further economic dislocations to Liberia as an increase in petrol price in the past has been one of the key drivers of inflation. It would mean businesses spending more on transporting goods from place to place — making it more expensive for households.   Also, the increase in petrol prices means a large share of Liberian households’ budgets are likely to be spent on it, which leaves less to spend on other goods and services, competing intensely with food.

The drop in petrol price worldwide in 2020 allowed Liberia to experience some easing of petrol prices, a frequent driver of inflationary pressures. Before then, inflation reached a peak of 31.3% in 2019; but declined significantly in 2020 and 2021, and is now down to a single digit.

Liberia’s primary source of energy is petroleum and, with Russia being a major producer of such commodities, market concerns about the war have resulted in disruption of supply chains that have caused commodity prices to soar. Just yesterday, Al Jazeera reported that the price of oil jumped to US$139 a barrel at one point internationally, the highest level for almost 14 years. Meanwhile, wholesale gas prices for next-day delivery more than doubled. And while sanctions on Russia don’t directly target the country’s oil exports, the global oil market is rattled by fears that Russia’s oil production could be throttled. 

Long before the Ukraine war, the macroeconomic outlook for the fiscal year 2022, made available by Liberia’s Ministry of Finance and Development Planning (MFDP), assumed that high levels of uncertainty around the evolution of the COVID-19 and its likely impact on external demand and global and domestic supply chains; and unaddressed vulnerabilities in the financial sector could undermine the economic recovery of 5.2 percent over the years from 2022 to 2025, increase poverty, and weaken Liberia's fiscal and external balances.

But the uncertainty is no longer COVID-19, but a war that has resulted in disruption on supply chains, causing commodity prices to soar and fuelling market turmoil that the price of many everyday items from food to petrol and heating, already rising at their fastest rates in 30 years, could be pushed higher.

And if inflation were to hit Liberia now, it could hit the country hard as it lacks enough funds to create the fiscal space needed to support a resilient recovery since policy options for increasing fiscal space are based on debt sustainability, external assistance in debt relief, debt service suspension, debt restructuring, and concessional loans, according to the MFDP budget circular document for the fiscal year 2022 budget.  

However, the government stands some chance of maintaining its current single-digit inflation mark, with stronger macroeconomic policy, which tightens monetary and fiscal policies, and the ensuing lower aggregate demand pressures, helping to ease the self-reinforcing cycle of depreciation-inflation observed in 2018 to 2019.

But the task is a heavy one, as the President of the Liberian Bank for Development and Investment (LBDI), John B.S. Davies, III, warned Liberians to be prepared for the unexpected, where the price of oil will rapidly increase on the global market, in case of, for example, the war in Ukraine.

“When the price of oil goes up on the global market, there is no doubt that the price of goods and services in Liberia will go up. Let us start to prepare ourselves. We’re embracing ourselves for an interesting and unpredictable future,” Davies revealed recently during his keynote address at the seventh convention of the Rubber Plantations Association of Liberia.