THE 15 per cent hike on petroleum products casts a serious cloud of doubt on the survival of the manufacturing sector locally and internationally, Zambia Association of Manufacturers (ZAM) has observed.

ZAM chairman Chance Kabaghe said the hike on petroleum products would make it difficult for local manufacturers to stand all the shocks in the very short to medium term.

Kabaghe said the 15 per cent fuel hike was definitely an additional cost to the production process in the manufacturing industry.

Kabaghe said the fuel price hike was ill-timed as it came on the backdrop of the just-ended difficult year of 2009 which was characterised by an unstable exchange rate during the global financial crisis and the persistent electricity blackouts, prolonged fuel shortages countrywide, factors which all hurt the manufacturing sector's growth.

"Energy as a whole has been the highest cost component in our sector and therefore a hike such as this one will not only make our products more expensive on the domestic market but will also make us more uncompetitive at the regional and international market," Kabaghe said. "At the peak of the crisis, end of 2008 and first half of 2009, most manufacturers had lost business as demand for their products went down. Consequently, they ended up with huge stock piles of raw materials as a result of reduced production."

Kabaghe said the sharp increase in fuel was not in conformity with the government pronouncements of enhancing growth through competitiveness and diversification as this year's national budget stated.

"…The manufacturing industry will not be able to stand all these shocks in a very short period of time," he said. "As an association we would have preferred hikes in smaller doses because the 15 per cent addition at once will exacerbate the already troubled industry in Zambia."

Kabaghe said while the manufacturing sector appreciated the serious problems the country experienced with the rise in oil prices on the international market, the government should realise that the country was in the process of recovering from the global economic crisis.

And Lusaka business consultant Dr Bwalya Ng'andu doubted the country's ability to maintain the annual inflation rate in single digit attained last year due to an increase in fuel and electricity tariffs.

The Energy Regulation Board (ERB) recently announced a 15 per cent adjustment in fuel prices, which the public has vehemently opposed.

The country ended 2009 with a single digit inflation rate of 9.9 per cent which government hoped would set the economic platform for 2010.

Inflation results in consumers having to pay more for goods and services as the purchasing power of the currency gets eroded.

The cost of borrowing also becomes higher as the productive sector and individuals have to pay higher interest rates to access funds.

A higher inflation rate also decreases returns on investments in that fixed bank deposits and mutual fund returns yield low returns or even negative returns for persons who seek monthly returns from their investments.

In an interview, Dr Ng'andu said the effects of increasing fuel prices on an economy were obvious because the commodity was needed for all economic activities.

Government hopes to attain a seven per cent Gross Domestic Product (GDP) and if possible reduce on the current inflation rate.

But the Bank of Zambia (BoZ) said the inflationary pressures that would be created by the fuel and electricity increment would be mitigated by the relative stability in the exchange rate of the kwacha against major foreign currencies and its continued implementation of appropriate monetary policy to counter these pressures.

"When you increase the cost of fuel, it is automatic that transport costs will go up, end products from the manufacturing sector will increase and food prices will also go up," said Dr Ng'andu who is also Lantern Solutions Limited managing consultant. "The Consumer Price Index always affects the inflation rate of the country and when food commodities go up it follows that inflation levels will also increase."

Dr Ng'andu said the energy sector would this year pose a challenge to the country's attainment of most economic targets because both fuel and electricity would have been increased further.

"Last year, ERB allowed Zesco Limited to increase its electricity tariffs, a move which will again happen this year," said Dr Ng'andu. "Once electricity tariffs are increased for this year, the manufacturing and agriculture sectors will be adversely affected hence consumers will have to pay for the increase in production costs."