Why ED raised fuel prices : Zimbabwe

There are a number of speculative reasons advanced as to why the government of Zimbabwe raised fuel prices last week and the possible effects it has both on the economy and fuel availability. Following a protracted 6 day long fuel blues across the country and limited supply, government moved to announce a 250% increase in the price of the precious imported commodity. The shortages of fuel basically stems from government’s inability to import supplies due to limited forex. As at November 2018, Zimbabwe imported $6.3 million dollars worth of fuel a day which equates to $185 million in total for the respective month.

This figure has grown sharply from $75million a month in January of 2017 a gain of 246% within 22 months. Authorities have however failed to account for the 1200% growth in demand from a 2016 demand level of 1 million litres to 13.58 million litres as at November 2018. The growth has been loosely translated as a growth in consumption and RBZ was quick to attribute it to the growth in production. However as the recent past months have shown there are several other reasons that have inspired the growth including a view that it follows from the growth in money supply which has generally stimulated aggregate demand in the economy and with fuel as a basic factor of production, demand had to rise.

Despite these underlying factors, the rate of growth in demand by any measure was a bit on the steep side given the general rate of growth in GDP, or production in the economy estimated at about 12% before inflation adjustment. In October, the Central Bank alleged that foreign truckers were taking advantage of the parallel exchange rate to buy fuel at a low rate in Zimbabwe. The Bank went on to institute a legislation to charge foreign truckers fuel purchase in forex.

The measure however did not yield the desired goal as the net import for diesel and petrol went up by 30% and 26% respectively between October and November. Another 4th factor feeding into the growth in demand was the “Queen Bee Factor”. A cartel running the fuel sector is alleged to be manipulating allocation by overstating purchases and supplying below allocation with the difference representing an externalization taking advantage of the 1:1 exchange rate between the RTGS which is used for local fuel purchase and the USD, allocated for fuel importation.

A combination of these factors militated to spur demand or “demand” to the current levels. On the supply side, deficit in trade which has been perennial and stood at -$2.4 billion as at November 2018 coming from a full year deficit of -$1.8 in 2017 has no helped matters. Fuel alone accounts for 30% of total imports coming from a contribution of 20% a year ago. The import level as at November was at its highest since dollarization mainly driven by fuel imports. Although exports, a source of forex, has been growing, the growth has been slow and the net remains widely negative. A sharp dearth in fourth quarter 2018 gold exports is also alarming given that the commodity is the top export contributor. The weak BOP and rising money supply with makes it difficult for government to satisfy imports demand as has been the case. What is even more constraining is the fixed exchange rate of 1:1.

On raising fuel price, the President said the move was meant to address fuel usage which has been compounded by illegal forex exchange and fuel dealings. The immediate effect is that of lowering demand of fuel given that incomes have already been eroded by between 60% to 70% through inflation and the 2% tax. Average prices as at November rose by 31% year on year according to official statistics. By raising the exchange rate there is a view that the President was closing the subsidy gap between the unofficial exchange rate of 1:3.5 and the official 1:1 exchange rate. A price hike of 250% would peg the exchange rate at 1:2.5. the move however does not help improve supply but constrain demand, which is undesirable. This is so because there is no open market for US dollars in Zimbabwe. Only the central bank manages allocation at a rate of 1:1.

If sincere government should have let market forces determine the price or peg the price in USD holding price constant. Retailers were clamoring for pricing in USD so is the broader market. Bar the technicalities, government should have floated the exchange rate as is the case in Nigeria to improve both forex availability and imported supplies. So why did government avoid these noble options. Government of Zim no longer want the USD or multicurrency regime, it now wants a local currency. Mthuli has already hinted that within 12 months, a Zim dollar will be operational. So by avoiding pricing of fuel in US dollar government is sending a clear signal on policy direction.

Why the Zim dollar? Government is convinced that as long as it manages its expenditure, with little to no excesses it may be able to stabilize a new currency. This is why Mthuli has been very resolute in denying doctors a salary increase and now the broader civil service. He only offered a 10%, which is within the 2019 budget. Seeing the growing pressure from the civil service and the growth in demand for fuel, government devised a double baralled short term solution, which is to raise the price of fuel, 68% of which is in the form of tax.

So 68% of total monthly consumption goes to government assuming consumption remains at 144 million litres as was the case in November, government could generate close to $1 billion from fuel tax in 2019. The move however has adverse ramifications in the near short term. So essentially government is raising tax money on top of the 2% to allow for additional revenue to meet its workers demands. Government workers are asking a 1200% increase in salaries. Government will now likely table a revised offer in the range of 100% to be covered largely from the fuel tax hoping for temporary reprieve.

This option will however result in a temporary calm in terms of civil unrest, at least in the short term. It will also allow for spend within revenue given the additional taxes from fuel. However the fuel price hike will ignite a sharp surge in prices, in a second round of price blitz following the October one and this time it is likely to be more severe. This will render both salary increases and fuel price increases obsolete and short due to inflation and exchange rate disparities as the local currency equivalents lose value against the USD. There will be limited goodwill from rebate beneficiaries in selected sectors meaning prices will regardless soar resulting in a full blown crisis.

– Equity Axis News

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Equity Axis is an online financial media service platform focused on African markets offering real-time stock quotes, news, analysis and data.

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