In the latest cabinet sitting, government resolved to waiver fuel import restrictions and allow companies operating in the mining and agriculture sectors to import own fuel for operational use. Fuel supply challenges have grappled Zimbabwe since 2016 only to heighten since then and by January 2018 the widening gap had become untenable. The real challenge has not been that supply has gone down but that demand has significantly gone up thus outstripping supply and creating a market disequilibrium. This imbalance has thus not only persisted but widened over the years and given the import nature of the commodity its scarcity has been in line with forex availability or its unavailability.

This piece looks at the recent fuel price increase, its consequence and impact. It further reviews the linkages between aggregate demand in the economy, money supply and forex pricing. On the outset it is this writer’s persuasion that the January fuel price increase was without rationale. The ongoing fuel crisis has roots in forex market disequilibrium which developed due to government’s fixed exchange rate policy between the USD and the RTGS/Bond. While it would have been much easier to maintain the parity on holding certain fundamentals such as money supply in close check, government instead went on to drive money supply growth through private sector borrowings. The BOP likewise worsened in 2018.

These borrowings meant growth in liquidity in the market, increased demand and in turn increased forex demand to import either finished or raw materials to satisfy the said demand. So if we assume for a start that in 2016 for every 1 USD there were 2 RTGS dollars in the systems, it meant convertibility was quicker and swifter, however as the ratio worsen say 1:10 in favour of USD, it means convertibility of RTGS to dollars becomes difficult. Companies were making super toplines because of increased demand and production demand was increasing and hence the queue for forex lengthened at the RBZ. While the above is a simple hypothetical example it represents the true mechanics of the accruing forex crisis in Zimbabwe.

Practically money supply grew from $4 billion in 2014 to $10 billion in 2018, a growth of 150%. This growth was driven by government’s failure to align its fiscus and partly government bailout of distressed entities through ZAMCO which widened the deficit from $1.5 billion in 2016 to $2.8 billion in 2018. So in all this government was paying for fuel and converting RTGS balances at 1:1 in order to source the gasoline and as money supply increased, demand for the liquid also sharply increased further compounded by arbitrage as the commodity became relatively cheaper and unscrupulous behavior by some players in the sector.

What was worrying more was that the country’s forex earning ability was also diminishing at the same time. This was so because earners of forex, notably miners whose receipts would forcibly be discounted to market on being taken at 1:1 began lowering production to preserve value. Others began to resort to side marketing. For remittances normal channels were being avoided to corner lower exchange rate. So these factors meant the government could not restore equilibrium in the fuel market and any other import reliant sector.

What could government have done?

The choices present at that respective time were to either fully redollarise or officially dedollaarise and either way follow up with the removals of controls in the fuel market this would have relieved government of the pressure of sourcing forex to subsidise the product and ensured restoration of equilibrium but with some short run inflation. Government however did not do either rather it instituted a price increase of 150% in local money terms without altering the currency regime. The folly in this move is that it does not guarantee equilibrium nor does it improve supplies. In the short term it may only however help reduce demand. Government argued that the increase was in line with the black market and parallel exchange rate or meant to counter same by closing the gap. There is no proven way in the history of economics of closing the exchange rate gap outside of improving forex receipts, rationing money supply growth and stabilizing local production. The parallel exchange rate is likewise a function of these fundamentals plus speculation.

Increasing the price in local money terms only guaranteed inflationary pressure and not restoration of equilibrium. Now let’s suppose the parallel exchange rate worsens from the position where it was in January, it also means there is pressure on government to readjust upwards the price so as to close the gap. Or from another angle it becomes non-viable for retailers to trade at the pegged rate as profit margin gets wiped off. Essentially increasing the price in RTGS would not solve the crisis but create a temporary impression of rebalancing especially if there is clear pressure for worsening of the exchange rate.

The only inflation mitigating measure promulgated by government at the point of price increase was the fuel rebate to a select number of players in the productive sector namely, miners, producers and those in agriculture but it had no effect on supply rebalancing. On the net this writer concludes that the move to increase fuel price in RTGS without the necessary measures to contain or at least clarify exchange rate and currency issues was void. Infact it only helped increase government’s revenue while worsening the suffering of the masses. If we assume that the collected flows would minimize government’s exposure to forex risk we would have erred because RTGS then was converted 1:1 so even if government collected more in taxes from fuel, that money could not buy the desired dollars in the open market because Zimbabwe was without an official exchange.

The partial deregulation of the fuel market

The latest move to allow for a select number of players in the productive sector to import fuel is again double barreled. Whereas the said players can now timeously execute production mandates, it also means their cost functions are exposed. The costs of importing the fuel will drive the overall operating expenses up and consequently result in an increase in the price of the goods sold by those entities. These companies would no longer access the rebate and would have to absorb or pass on the full cost to the consumer, thus the rebate impact would be overridden. There is also the aspect of manipulation of the process by some players who may channel the fuel to the black market and thus sustain the industry. It remains to be seen how various of the measures play out, but what is evidently clear at this point is that the fuel price increase initiated in January was not meant to solve the crisis but to temporarily reduce demand while at the same time boosting the drenched government coffers.

-Equity Axis News