The Government's subsidies on some products or services are not permanent and are meant to tame price hikes in order to lower costs for consumers, the Minister of Finance and Economic Planning has said.
Uzziel Ndajijimana was responding to a question during the post-budget press conference held at the Ministry's headquarters in Kigali on June 30.
The question was based on the International Monetary Fund (IMF)'s recommendation of June 23, that Rwandan authorities should focus on increasing the coverage and benefits of existing social protection programmes in a targeted manner and phase out fuel subsidies.
These subsidies were introduced to cushion citizens against adverse effects of Covid-19 and spill over effects of the Russia-Ukraine war.
The subsidies cover fuel, fertiliser and public transport.
The recommendation to phase our subsidies was made after the IMF Executive Board completed the sixth review of the Policy Coordination Instrument for Rwanda on June 22.
IMF said that rising inflationary pressures, exacerbated by rising commodity prices, are compounding the policy challenges of balancing economic recovery with maintaining price stability.
Unless there are changes in the commodity global supply, Minister Ndagijimana said that inflation - or overall increase in prices of goods and services - is projected at 9.5 percent in 2022 due to the ongoing Russia-Ukraine that increased global commodity prices.
"Inflation is a global issue, even in developed countries," he said.
In 2021, the inflation rate remained low during the first nine months with an average of 0.7 percent, largely driven by low food prices thanks to good harvest.
The Minister indicated that there are external factors on which the country has no control, including the imported inflation or rise of imported goods prices, indicating that subsidy is one of the actions to tackle that.
Not a permanent measure
"Subsidies are not a permanent measure; it is a temporary measure to respond to price shocks that we are experiencing today. Not doing so results in more problems for everyone or consumers, or the economy as a whole. So, it is a good thing to do," he said, pointing out that the increase in fuel prices, for instance, results in the rise in costs of other goods and services.
"Of course, they will be phased out as the trend in international prices is reversed, and we hope that this may happen soon. But as long as we have a hike in international prices of this level we have today, subsidies are absolutely necessary," he said.
Fuel subsidies
Since May 2021, the Government has been subsidising fuel pump prices in order to avoid a situation where they would be too high and have a big negative impact on Rwandans.
In two months - June and July - the Government is subsidise fuel costs with over Rwf14 billion.
Thanks to this financial support, the price of a litre of diesel is bought at Rwf1,503 instead of Rwf1,719, while that of petrol is Rwf1,460 instead of Rwf1,676.
This brings the total Government subsidies to fuel to about Rwf44 billion since May last year, as it has provided about Rwf30 billion support until early June this year, according to information from the Ministry of Infrastructure.
Fertiliser and seed subsidies
To support the crop intensification programme (CIP), the Government allocated funds amounting to Rwf36 billion to help farmers get relatively affordable fertilisers and seeds in the 2022-2023 fiscal year. This allocation is against the required Rwf56.8 billion, implying a gap of Rwf20.8 billion. However, the Government said the gap might be addressed during the budget revision.
Because of the unusual increase in fertiliser prices at the international market, and in an effort to continue facilitating farmers to access such input at relatively affordable prices, the Government increased its subsidy contribution to the chemical fertiliser costs in January this year.
An increase in subsidy is reflected at least in the three most commonly used fertilisers by farmers in the country - namely diammonium phosphate (DAP), NPK (nitrogen, phosphorus and potassium) 17: 17: 17, and urea.
For instance, for NPK, the Government provides Rwf475 a kilogramme in financial support to the farmer after the fertiliser price hike.
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As such, a farmer only pays Rwf882 per a kilogramme of NPK instead of Rwf1,357.
To support the crop intensification programme (CIP), the Government allocated funds amounting to Rwf36 billion to help farmers get relatively affordable fertilisers and seeds in the 2022-2023 fiscal year. This allocation is against the required Rwf56.8 billion, implying a gap of Rwf25.8 billion. However, the Government said the gap might be addressed during the budget revision.
The targeted activities under this project include distributing over 3,430 tonnes of quality seeds, 50,179 tonnes of fertilisers amid the rising costs of this farm input, as well as 37,736 tonnes of lime with Government subsidy, according to data from the Ministry of Agriculture and Animal Resources.
"If we do not put in subsidies on fertilisers, prices would be too high for farmers, hence reducing fertiliser uptake and ultimately agricultural production, yet we want to increase it further," Ndagijimana said.
