Motorists could continue feeling pain at the pumps for longer despite intervention by the government to slash the fuel levy and cushion consumers from higher increases in
fuel prices.
This week, the National Treasury announced a R3-a-litre reduction in the fuel levy to lessen the blow on motorists, consumers and the economy of a sharp spike in oil prices driven by tensions between the US and Iran. Oil prices went on a surge once again after US President Donald Trump reiterated earlier threats to hit Iran “extremely hard” in the coming weeks, and failed to give concrete details on how the war will end.
Brent crude briefly surged past $109 a barrel and stock markets around the world tumbled, following Trump’s address from the White House.
This has led to economists warnings South Africans to brace themselves further fuel hikes, contending that Treasury will not be able to maintain the fuel levy relief much longer.
According to the Budget Review, around R96.5-billion in fuel levy receipts was collected for the 2025/26 financial year.
On Tuesday, finance minister Enoch Godongwana announced that Treasury would take a R6-billion hit this month after slashing the fuel levy to protect motorists from even steeper hikes, which would have an adverse effect on food prices and inflation.
This reduced the general fuel levy for petrol from R4.10 per litre to R1.10 per litre, while the general fuel levy for diesel was slashed from R3.93 per litre to R0.93 per litre for one month. He said the relief measure will be evaluated on a month-to-month basis.
Maintaining it for the rest of the fiscal year would cost the fiscus over R70-billion, money that has to be clawed back.
Sanisha Packirisamy, economist at Momentum Group, told Sunday World that while the government can afford the initial relief, it is likely to reduce the support in the coming months, a move that could prolong financial pressure on households and businesses.
“Government’s fiscal position is in a healthier space than it was during the last fuel levy relief in Q3 2022 [the] Russia invasion of Ukraine. There are funds available in the contingency reserve, healthy corporate tax revenues and the option of cutting back on expenditure projects to fund this relief.
She explained that a phased reduction is the most fiscally sustainable path, emphasising that the government may fund a smaller relief in May, which she estimates to be half of the current relief. In June, she said, government might offer half of what was offered in May.
This means between May and June, the fuel levy could be adjusted upwards by R2,25c.
Packirisamy said the current relief is manageable in the short term and unlikely to significantly alter the budget deficit.
If government continues to lower the relief, it would be unlikely that the revenue shortfall would force it to increase borrowing to cover the shortfall.
She said government still has options to avoid increasing borrowing, particularly if the relief is scaled down. However, the longer-term picture remains uncertain as oil prices may either remain elevated and pressure mounts to maintain the relief, this would mean the state’s fiscal position comes under strain.
“If oil prices are maintained at current levels and pressure rises on government to continue providing relief on the fuel levy, this would lower the overall revenue received and threaten the country’s fiscal consolidation path. But in this scenario, it is likely that the Reserve Bank would react to higher inflation by raising interest rates, and the burden to lower inflation would be shared by both monetary and fiscal policy.”
In contrast, Nedbank chief economist Isaac Matshego said oil prices are predicted to go down towards the end of May, which would tamper the shock and reduce the likelihood of further fuel price increases.
He also downplayed the fiscal risk, saying the estimated R6-billion monthly cost is lower compared with overall monthly fuel levy collections. He suggested that if pressure persist, government would have options such as adjusting spending or borrowing, although he views prolonged high prices as unlikely.
Bobby Ramagwede, CEO of the Automobile Association, called on government to cut all fuel levies, saying this would offer consumers more relief at the pumps. “In time of the crisis it would be expected of the state to use more extreme measures to shelter both the consumers and the economy at large. This R3 reduction in the general fuel levy only constitutes less than 50% reduction in the total tax applicable to petrol and diesel.
“There is an opportunity here for the state to reconsider their position going forward by further reducing the taxes to further alleviate the burden on the consumer, but also prolong the period in which they provide this relief,” he said.
Ramagwede said in effort to cover the revenue shortfall, government should look at cutting down on expenditure by targeting wasteful, irregular and non-essential spending to improve efficiency.
Cutting down on expenditure reduces the risk of higher taxes later, protects fiscal sustainability and helps avoid increasing public debt, he added.
- The South African government reduced the fuel levy by R3 per litre to ease the impact of rising oil prices driven by US-Iran tensions, resulting in a R6-billion revenue hit for Treasury this month.
- The fuel levy cut reduces petrol levy from R4.10 to R1.10 per litre, and diesel levy from R3.93 to R0.93 per litre, but this relief is temporary and to be reassessed monthly.
- Economists warn the relief cannot be sustained long-term as maintaining it could cost over R70 billion and strain the fiscal position, potentially leading to phased reductions in coming months.
- Some experts predict oil prices may drop by end of May, easing fuel price pressures, while others urge deeper levy cuts and government spending reductions to better protect consumers.
- Prolonged high oil prices and continued levy relief could strain fiscal consolidation efforts and prompt both monetary and fiscal policy responses, including possible interest rate hikes by the Reserve Bank.
