Fuel Reduction Effects, Delays Pass-through Cost Impacts

Zambia’s fuel pricing framework operates on a cost-plus model anchored on import parity pricing system, with several other components being treated as fixed or conditionally rigid, including obligatory taxes, insurance, storage and regulated margins.

Within this structure, the exchange rate remains the most influential component and volatile variable.

While the model is considered theoretically symmetric, its real-world transmission is usually not.

So, exchange rate depreciation is passed through immediately to fuel price linked items, with production costs rapidly and forcefully being driven by immediate increases in landed fuel costs, higher replacement risk and heightened uncertainty in operational and investment planning.

This uncertainty accelerates repricing across the economy, making the depreciation pass-through effects bear both quicker and more pronounced impacts.

Conversely, exchange rate appreciation tends to transmit slowly and incompletely.

Existing inventories priced at weaker exchange rates, rigid cost components and risk-averse pricing behaviour dampen and delay downward adjustments.

The result is an asymmetric outcome where negative currency shocks are transmitted almost instantly, while positive shocks are absorbed gradually, if at all.

In effect, the fuel pricing model is symmetric on paper but asymmetric in practice, with uncertainty and expectations ensuring that exchange rate weakness is priced in faster than exchange rate strength.

This dynamic has important implications for inflation management, cost-of-living pressures, and the credibility of price adjustments in periods of currency strength.