eBusiness Weekly
Clive Mphambela
Is the demand for fuel being driven by economic uses or is there an element that says, our pump prices for fuel are now too low? Towards the latter part of 2017 year, the Government, recognising the importance of petroleum fuels in the economy, announced a reduction in the excise duties on fuel, which was soon followed by a fall in the pump prices of petroleum fuels across the country.
This was indeed a welcome development, widely celebrated by both industry and consumers of fuel.
Since then, demand for fuel has crept up steadily, and use patterns seem to suggest that demand for fuel will continue to rise, putting pressure on foreign exchange requirements.
While we celebrated the rising demand for fuel, partially driven by local economic factors as economic activity picked up, economists also pointed out to the Government that, the low fuel price could also be attracting consumers from outside our borders.
Therefore, there was a sharp need to carefully analyse the real impact, of the structurally low fuel prices and here are a few reasons why it was and it is still important to take a closer look at the demand dynamics in the fuel sector.
According to reports, Zimbabwe’s fuel consumption rose a massive 24 percentage points to 752 million litres for the six month period January to June last year. It is further reported that the country consumed another 480 million more litres of petrol and diesel in the months between June and November last year compared to the same period in 2017.
This represents a massive 77 percent jump in consumption that’s has led to an additional foreign currency requirement of more than US$200 million.
The big question is, why has fuel demand risen so high and so fast?
Suffice to say, fuel is critical in the production process and the surge in business confidence that resulted from the ushering in of the new political order in November 2017 did contribute to the rise in demand.
For industrial and commercial entities this would translate into increased demand for diesel, in response to higher production and commercial activity.
However, this is increasingly becoming only part of the story.
Industrial and commercial activities account for over 60 percent of diesel consumption in the country. Diesel usage is up 17 percent in the year to June 2018.
However, while this is eminently positive, petrol consumption has gone up some 44 percent. This suggests that a lot of the pressure on fuel imports is actually consumptive rather than production oriented.
One just needs to see the state of congestion on our roads these days, despite the fuel shortages. It is not good for the roads, it is not good for the environment from an emissions viewpoint, and it is not good for the economy from a foreign currency perspective.
Clearly there is need for a policy intervention, and I hazard to say, it involves the Government considering strongly a substantial increase in the fuel price.
The steady rise in fuel consumption has pushed the RBZ to continue increasing foreign currency allocations for fuel imports, which the RBZ Governor Dr John Mangudya said are now upwards of $20 million a week.
The Governor last year had announced plans to ramp up forex allocations to over $100 million a month by November 2018 to meet festive season demand. This has been a tall order.
However, what we need to ask ourselves is: how much of this “demand for fuel is also being fuelled by arbitrage opportunities being created especially by the existence of the black market for foreign exchange”.
Is our fuel price, at between $1,23 per litre of diesel and $1,44 per litre for petrol optimal? In simple terms a litre of diesel at $1,23, discounted at the real exchange rate of 75 percent works out to $0,70 per litre.
Similarly, a person who sells his dollars for 175 percent and converts them to electronic money effectively pays in real dollars, 80 cents per litre for petrol. Amazing!!!
To further understand my fears, I will draw a bit on history.
During 2004 to 2009, when we were having challenges with fuel, it was very profitable for regional transport companies to fuel up in Zimbabwe, after “burning” foreign exchange of the black market.
In short I am suggesting that it is now possible for consumers from outside our borders to access our relatively cheaper fuel, after translation into local money. This could be putting additional pressure on our pumps, and creating the need for the RBZ governor to lower his foot harder on the pedal to catch up with demand. But can we sustain this?
I strongly suggest that whilst fuel costs are an important variable in the in the economy, at this moment in our history, keeping the cost of fuel very low should not be a major priority.
What we should be more worried about is the fact that as a country, we are importing all our fuel and for that we are using real Nostro dollars.
Low domestic pump prices in an environment where we have real foreign currency availability issues seems to me like shooting off the mark. Sustaining the low price of fuel to me will not address the fundamental issues of ensuring that fuel remains available in a sustainable way in the long term.
That requires us to focus not just on the domestic costs but the regional and international dynamics as well.
We also need to understand that demand for fuel is likely to continue to increase as the “real price” differential increases between our local prices and regional peers.
This will enhance demand for foreign exchange, and this needs to be balanced off against the rising cost of acquiring foreign exchange on the real market.
The official market is dry and the foreign payments pipeline continues to increase. This to me presents real challenges in the near term.
Further to this, the cost of foregone production as people spend hours and days in fuel lines creates a desperate need for Government to consider a fuel price review. Or at the very least, fuel prices should be pegged in the currency that we use to procure them. The price mechanism is the best and most efficient way rationing fuel.
The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer is associated with.
