eBusiness Weekly
Golden Sibanda
Captains of industry and economists say Government should move swiftly to devise and implement mechanisms on how tax compliant businesses will benefit from rebates on excise duty to counter a potential price spiral, following the recent increase in the prices of fuel, while exhorting the policy makers to institute deeper reforms to stabilise the economy.
This comes after President Mnangagwa last week announced increases in prices of fuel to $3,31 per litre of petrol from an average $1,38 and $3,11 per litre of diesel from about $1,32, as part of efforts to bring Zimbabwe’s fuel prices in line with regional trends.
Government further quickly announced measures to prevent possible cost push price hikes caused by the higher fuel prices.
Harare economist Brains Muchemwa, said while the Government had delivered a masterstroke through recent measures to deal with the crisis in the fuel sector, it should go further and institute widespread reforms to ensure it deals with the majority of unsustainable subsidies burdening Treasury and the exporters.
He said the reforms needed to bring stability in the economy, including liberalising the exchange rate and letting the market independently allocate foreign currencies would be painful at first, but remained critical if the economy is to achieve efficiencies, earn market confidence and achieve economic stability.
“While it is commendable that the Government has increased fuel prices in order to reduce the subsidies on the exporters and state, it is more important for the policy makers to undertake comprehensive reforms at once to wean off unsustainable subsidies that eventually result in citizens having to pay these subsidies through high future inflation,” Muchemwa said in an interview.
“Granted, the reforms will trigger price increases that will hit hard on the most vulnerable. But at the end of the day these are necessary reforms to create an environment that will allow the economy to create and maintain jobs and reduce income inequalities,” Muchemwa said.
Captains of industry and analysts who spoke to Business Weekly this week also said the measures instituted by Government in the fuel industry were a painful but necessary reaction to curtail unscrupulous practices in the industry, which were costing Zimbabwe dearly, but called for the swift implementation of key economic reforms (including currency) to resolve problems facing the economy.
The Reserve Bank continues to allocate foreign currency to dealers and maintains the official exchange rate, which has averaged 340 percent between the US dollar and local tender (RTGS and bond notes), since the new legislation prescribing harsh penalties on illegal traders took effect, fixed at 1 to 1 last year.
Finance and Economic Development Minister Professor Mthuli Ncube on Sunday night announced that part of the measures to cushion consumers by preventing general price increases included refunds of excise duty on fuel consumed by registered businesses in mining, manufacturing, agriculture and transport sectors.
The beneficiaries must, however, furnish the evidence that the fuel was used for approved purposes, for which excise duty relief has been provided for in terms of the law and must not have hiked prices following the recent official fuel prices increases. Minister Mthuli said the beneficiaries of rebates should also be tax compliant and be members of registered business members groups.
The cocktail of interventions by Government are contained in two statutory instruments Petroleum (Petroleum Products Pricing) Regulations 2019, announced by Energy and Power Development Minister Joram Gumbo and Customs and Excise Duty (Tariff Amendment) Notice, 2019 announced by Minister Mthuli.
Industrialists and economists say the two legislations will eliminate pricing arbitrage opportunities through high excise duty (45 cents to $2,31 per litre of petrol and 40 cents to $2,05 per litre of diesel or paraffin), as they constituted nearly 90 percent of the fuel price hike effected by Government this week, making it less profitable to buy and resale outside Zimbabwe.
Government has, however, taken a cautious approach to economic reforms amid concern that a big bang approach, such as floating the exchange rate as called for by both industry and economists, could hurt the economy and drive price inflation.
With grossly discounted prices for local fuels, local and foreigners took advantage, bought the local fuel using local currency and offloading it on foreign parallel markets for hard currency. Even foreign truckers found it cheaper to fill up in Zimbabwe for a fraction of their allocated hard currency fuel budgets.
Government has also come up with an appropriate fuel pricing model, which entails the full on board (FOB) price for fuel imports, taxes and levies, administration costs, distribution costs plus a healthy profit margin for dealers. The pricing for fuel will be determined on a weekly basis with penalties to be meted on offenders selling fuel outside prescribed regulatory limits.
Due to currency issues, the demand for of fuel in Zimbabwe jumped over 70 percent over the 6 months to November 2018 after becoming grossly discounted relative to prices obtaining elsewhere in the region, creating price arbitrage opportunities where the fuel was either smuggled out for resale, sold in USD or at steep prices.
The sharp increase in fuel, especially diesel, did not reflect in corresponding increased economic activity, given diesel is mostly used in industry and commercial activity.
The arbitrage practices were, however, despite the fact most fuel dealers got foreign currency allocations from the Reserve Bank of Zimbabwe at an exchange rate of to 1 between the US dollar and rapid transfer gross settlement (RTGS).
This was also despite the fact that Zimbabwe, a net fuel importer, needs huge amounts of foreign currency on a monthly basis to import the precious commodity, a situation which had become unsustainable given that Government does not have sufficient stocks of the requisite hard currency to satisfy the huge “appetite” for fuel.
Confederation of Zimbabwe Industries (CZI) president Sifelani Jabangwe, said that while some prices already reflected the higher cost of fuel, which some businesses had resorted to procuring from parallel markets, swift action on implementation of the interventions by Government, will curtail further fuel induced price hikes through multiplier effect.
“The rebate is the one that needs to be activated almost immediately to ensure that that there can be price stability. It definitely can work, but the issue is that the mechanism to achieve stability must be activated now. We need to agree on how Kombis and everybody else can access the rebate so that the pricing can be incorporated.
“What we have been experiencing over the last weeks is that the product has not been available. People have been resorting to the black market and people have been buying it (fuel) in US dollars. As such, some prices have already reflected these price increases, but when you look at the fuel situation, you question whether its not available as a result of supply issues; probably not.
“In the second half of 2018, the report that we have is that there was a 70 percent jump in fuel imported into the economy and yet the availability issue did not improve. But what we know is that the fuel, when you look at it, for anyone it was about 40 US cents, given the prevailing (parallel rate) market situation.
“So, even for the person with a little car going across the border into Zambia with a 50 litre or 40 litre fuel tank, they could go and sell (on external black markets) 30 litres and make about US$20 from one trip and we had more people doing that and even bulk buyers doing that; so the motivation was so huge.
“Even for fuel station owners, they actually made more money if they went and sold in US dollars (outside Zimbabwe) rather than wait for 20 000 cars to buy 10 litre volumes of fuel each and this was all because of an arbitrage opportunity that had been created by the issue around pricing,” Jabangwe said.
Former University of Zimbabwe economics lecturer and Government (Finance Ministry) advisor Professor Ashok Chakravati, said the measures taken by Government would work given the ministry of industry was already on record admitting that there was significant price disparity between local fuel prices and prices in the region.
“There was a lot of smuggling and arbitrage and increased demand for fuel. So it was inevitable that we bring about some equilibrium between the price of fuel in neighbouring countries and Zimbabwe. However, my submission is a bit different and I have spoken about it before, I think it is not good enough to deal with the fuel situation only.
“I think we have to liberalise the foreign exchange rate. We need to create an interbank foreign exchange market in which exports can sell to importers and then we can establish a proper exchange rate between the RTGS and the US dollar; so that is what I believe will bring price stability in the long term,” he said.
Professor Chakravati said recent data from the Reserve Bank showed that foreign currency holdings in the banking sector had increased over the last few months, but the owners were not prepared to release them to anyone at the fixed exchange rate of 1 to 1 given that they would be viable as their own costs had increased.
