Flawed policies bleed fuel pumps dry

Vincent Kahiya


FUEL accounts for 10% of Zimbabwe’s foreign currency requirements. Because of its centrality in the economy and the huge foreign currency allocation for imports, it is important for government to implement poli

cies that ensure fuel adds real value to the economy.


There is a direct corelation between fuel usage and economic activity in the country. The brief period of growth between 1996 and 1999 witnessed a rapid rise in fuel consumption due to the expansion of agriculture and industry.


For example, in 1999 annual diesel consumption was 1,05 million tonnes compared to 450 000 tonnes in 2000. The figure has continued to fall.


Consumption this year is expected to be less that 250 000 tonnes. The period of high consumption was when the country was producing enough foreign currency to import fuel.


But as foreign currency started to dry up in sympathy with a failing economy weighed down by damaging agrarian policies, there was no deliberate policy to realign fuel policy to new economic fundamentals. It remained business as usual, with government suppressing price increases even if it meant importing huge volumes and selling the fuel at a loss.


There is talk of realignment and new policies today but the damage that has been inflicted on industry is debilitating.


Zimbabwe is in the throes of its worst fuel crisis in living memory with no solution in site. The government and the central bank have been quick to attribute the shortages to the foreign currency crunch and to a lesser extent to sanctions imposed by the West. It is without doubt that Zimbabwe as a landlocked country needs to dedicate huge resources to import fuel.


But the current problems which mirror the state of the economy are also a culmination of poor energy strategies since the formation of the National Oil Company of Zimbabwe (Noczim) in 1983 — taking over from the Zimbabwe Oil Procurement Consortium which was blamed for the shortages of the early 1980s.


Government’s appetite to control the sector gave birth to Noczim and with it a raft of defective policies which have contributed immensely to the current crisis in the oil sector.


Zimbabwe has some of the best
fuel-handling and storage infrastructure in the region but has arguably the most incoherent policies on fuel procurement. The country has enough facilities to store reserves amounting to over a year’s supply of fuel.


The storage capacity at the Mabvuku plant commissioned in 1996 is 460 million litres. There is huge storage capacity at Birmingham Road in Harare, in Gweru and Bulawayo.


The International Energy Agency says a strategic crude oil stockpile level equivalent to 90 days’ import requirements is appropriate for its member countries. In Kenya, for example, it is mandatory under an act of parliament to keep reserves of over 30 days.


There has not been a deliberate policy by the government to ensure that the country builds reserves in times of plenty. In fact, between 1986 and 1997 government charged a levy on the pump price on the understanding that the money would be used to purchase fuel reserves. This never happened as the levy, like a myriad taxes collected by government, was diverted elsewhere.


In this case it was used to service the expanding Noczim debt — a direct product of a pricing structure which had no relationship to off-shore prices, exchange rate movements and inflation. The ever-increasing Noczim debt and viability problems in the sector brought pressure to bear on government to effect a pricing structure that responded to movements on the oil prices on the international market, the weakening of the local currency and inflation.


The MoU between the government and industry mooted in the 1990s was never implemented. The issues of raising the prices of fuel became a cumbersome bureaucratic mangle in which recommendations from industry were taken to Noczim, which took them to the relevant minister. The minister would then take the issue to cabinet where approval was not automatic. Price adjustments eventually announced in most instances lagged behind the volatile situation in the economy and on international markets.


The thinking of government has been that availing cheap fuel to industry is a form of subsidy which would enable them to produce cheaper goods and sharpen their competitive edge on the international market. Reserve Bank governor Gideon Gono in May tried to bolster this theory in defence of the fuel subsidy.


“A comparative analysis of Zimbabwe’s fuel prices, and other energy costs, as well as relative cost of borrowing in relation to inflation, clearly indicate that as a country, we are highly subsidising our producers to levels where they should produce competitively,” he said.


Exporters would be the last ones to agree that they can produce competitively in this environment. The net effect of this was apparent in the size of the Noczim debt. Then a new dimension provided more weight to the debt.


As foreign currency reserves continued to dwindle, the government entered a world of fantasy where it was buying foreign currency on the black market to import fuel but used the official rate parity for the pump price. It was not sound policy that the government was a player on the black market. This was poor economics which increased Noczim’s foreign and local debt.


The parastatal’s foreign debt currently stands at about US$80 million and is growing. The local debt is also growing. Attempts to counter this by factoring Noczim amortisation levies and charges into pump
prices have not helped the situation either.


The sector has remained unviable for local and foreign investors. The flirtation with the idea of indigenising the sector just before the turn of the millennium created anarchy which the government had not anticipated.


Government issued scores of licences to new operators, most of whom had no capacity or interest in running fuel dealerships. These became citadels of corruption in which scarce foreign currency went to waste.


Industry players say the government has not learnt anything from its past mistakes. The pump price increases announced earlier in the month have no bearing on availability of the product.


In an environment where there is no foreign currency, direct foreign imports are the answer. The government has given the green light for this to happen but it will not relent on the pricing structure.


Most individual importers are without doubt sourcing foreign currency on the informal foreign currency market. They are expected to sell their products at gazetted prices of about $10 000 a litre. They will not oblige, hence the varied black market prices of the commodity ranging from $30 000 to $100 000 a litre.


If the country were to receive a huge cash injection now, shortages would disappear but viability in the sector would not be guaranteed and the Noczim debt would continue to balloon.


The government has said it will soon table in parliament a Petroleum Bill. There is also fresh talk of deregulation and opening up the sector. All this could be an exercise in futility if proposed measures fail to address the issue of pricing.