As of February 2024, diesel prices in Zambia stand at a record high of ZMW 29.96 per liter, or around USD 1.13 per liter based on current exchange rates. This price level represents a substantial increase from the 10-year historical average of ZMW 14.86 per liter recorded between 2014 and 2024. With diesel being a crucial input across transportation, mining, agriculture, and other key economic sectors, these elevated prices have significant impacts on both business profitability and the cost of living for ordinary Zambians.

Over the past decade, diesel prices in Zambia have been on a steady upward trajectory, rising from lows of around ZMW 7.83 per liter in early 2015 to the current record levels. As highlighted in Figure 1 below, prices have undergone periodic spikes during this period, including most recently in October 2023, when the price shot up to ZMW 29.96 per liter, the highest ever recorded.

Diesel Prices
Diesel Prices

This upward march has been driven by a combination of rising global crude oil prices, a depreciating Kwacha exchange rate making imports more expensive, the removal of fuel subsidies, and taxes imposed by the Zambian government.

Global Oil Markets and OPEC+ Largely Shape Local Prices

As a net importer of all its petroleum products, Zambia is heavily exposed to global oil price movements and OPEC+ supply decisions. During periods when global crude prices spike or OPEC+ cuts production, this feeds directly into higher local diesel prices as Zambia’s suppliers pass on the increased costs.

For example, in October 2023, global oil prices shot above $100 per barrel after OPEC+ announced a 2 million barrel per day production cut. This supply-side shock on international markets spread rapidly to Zambia, causing local diesel prices to jump over 15% to record highs by the end of that month.

Kwacha Depreciation Magnifies Import Costs

At the same time, the gradual depreciation of the Kwacha against major global currencies like the US Dollar has magnified the impact of rising global oil prices. With oil traded internationally in USD, a weaker Kwacha exchange rate inflates the local currency cost of all imported petroleum products.

The Kwacha-Dollar exchange rate has deteriorated from around ZMW 5 in 2014 to over ZMW 17 in early 2024. This 70%+ devaluation over the past decade has drastically inflated the Kwacha cost of global crude oil and diesel imports, providing a major impetus behind diesel price rises.

Fuel Subsidy Cuts and Tax Changes Drive Prices Up

Domestic policy choices by the Zambian government regarding fuel subsidies and taxes have also contributed to pushing retail diesel prices higher in recent years.

  • Subsidy Cuts: The removal of fuel subsidies between 2020 and 2022 added over ZMW 4 per liter to retail diesel prices, with subsidies having previously cushioned consumers from global oil price spikes.
  • Excise Duty: The imposition of a 20% excise duty on petroleum products from January 2023 has added over ZMW 5 per liter to diesel prices.
  • Sales Tax: In 2024, sales tax was raised from 16% to 19%, which further increased prices by over ZMW 1 per liter.

Without these tax increases and subsidy removal decisions, retail diesel prices would likely be at least ZMW 10 per liter lower based on current global oil price levels.

Wider Economic Impacts: Transportation, Agriculture, Mining, and Inflation

These elevated diesel prices in Zambia are having significant follow-on impacts across multiple sectors of the economy.

  • Transportation: Diesel is the lifeblood of the transportation industry, so higher prices severely squeeze profit margins for trucking companies, bus operators, and drivers. Many transporters have raised fares, hurting consumers.
  • Agriculture: Many farmers rely on diesel-powered machinery and irrigation pumps, so production costs have surged, with possible negative impacts on food prices and security.
  • Mining: Diesel vehicles and machinery are ubiquitous in Zambia’s mining industry, so the rising fuel cost burden has hurt profitability and may discourage new investment.
  • Inflation: Higher diesel prices contribute to business cost pressures across the entire supply chain. This is feeding into Zambia’s inflation rate, which hit 26% in December 2023, further eroding consumer purchasing power.

Policy Considerations Around Fuel Prices

In response to public pressure over high fuel prices, Zambian policymakers face difficult decisions on how to shield consumers without imperiling fiscal sustainability.

  • Price Controls: Some groups have called for reintroducing price caps or limits to smooth price volatility, but this could disincentivize suppliers and lead to shortages.
  • Subsidies: Bringing back selective fuel subsidies could alleviate cost of living impacts, but it risks blowing out the budget deficit again.
  • Tax Relief: Cutting excise duties could modestly lower prices for consumers but reduce government revenues that fund wider expenditures.
  • FX Intervention: Defending the Kwacha exchange rate could indirectly lower fuel import costs but drain limited foreign reserves.

Navigating these complex trade-offs around fuel prices while balancing fiscal priorities and economic development needs will be an ongoing challenge for policymakers.

Conclusion

In summary, diesel prices in Zambia have risen substantially over the past decade due to a mix of global oil market shifts, currency depreciation pressures, changes to domestic fuel taxes, and subsidy schemes. Current prices are at record high levels, driving up business costs and the general cost of living. Ongoing volatility in global oil markets will continue to expose Zambia to external price shocks, given its 100% import dependency. This presents complex policy trade-offs for the Zambian government as it tries to balance fiscal imperatives with shielding consumers from the economic pain of high fuel prices.

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