HomeBusiness DigestZimbabwe bound to stay trapped in fuel price spiral

Zimbabwe bound to stay trapped in fuel price spiral

Eric Chiriga

ZIMBABWE could be trapped in a fuel price spiral as neither an improvement in the exchange rate nor a significant decline in international crude oil price i

s anywhere near the horizon.

Analysts said movements in the oil price and exchange rate are having a significant impact on the commodity’s price in the country — and the Zimbabwe dollar — the world’s weakest and worst performing currency, was adding its weight to the fuel price hikes.

Fuel is now only available on a quasi-official market and the black market where private players import after having accessed foreign currency on the parallel market.

This has had the effect of directly influencing the price of fuel because of the sharp depreciation of the local unit on the parallel market.

An increase in the international oil price, now trading at an average of US$70 per barrel, had increased the foreign currency requirement for any fuel import orders.

International fuel prices had hovered around US$25 to US$30 per barrel, but an invasion of Iraq two years ago and uncertainty over supplies due to instability in the Middle East have pushed the oil prices to record highs.

Fuel prices on the semi-official market, mainly consisting of authorised dealers importing under the direct imports arrangement, have shot up to between $450 000 and $500 000 per litre, from around $280 000 per litre, within a space of less than a month.

The black market prices are around $500 000 and $650 000 per litre.

On the official market, which is supplied by Noczim and servicing mainly government and quasi-government institutions as well as farmers, fuel is selling for around $48 000.

Evidently, this amounts to a very huge subsidy by the government, already battling a huge budget deficit six months away from the end of the current fiscal year.

The price of fuel on the semi-official market was at around $100 000 per litre early this year, then increased to between $280 000 and $300 000 per litre in April before briefly coming down to around $185 000 per litre.

The price eventually shot to around $300 000 per litre before settling at current levels.

While the fuel price has maintained an upward trend, the US dollar rate on the parallel market steadily gained against the Zimbabwe dollar.

The US dollar is currently trading at around $400 000 on the thriving parallel foreign currency market against an official market rate of US$1:101 195.

Local companies and other importers are currently sourcing foreign currency from the parallel market as the official market has failed to attract meaningful receipts because of an unattractive rate.

David Mupamhadzi, group economist with the Zimbabwe Allied Banking Group (ZABG), said the parallel market was having a significant influence on the price of fuel.

“Zimbabwe is an importer of fuel and requires foreign currency (for the imports),” said Mupamhadzi.

Mupamhadzi said any exchange rate movement on the parallel market rate was directly affecting the cost of fuel imports and, consequently, fuel prices in the country.

“Because of the shortage of foreign currency and the parallel market being the major supplier, the behaviour of the rates on the market also has a bearing on the pricing bahaviour,” he said.

Besides the effects of the parallel market activities, Mupamhadzi said the increase in the international oil price now has a significant and direct impact on the local fuel price because of the lack of subsidies.

“In the past, the increase in international oil prices did not have a direct effect on fuel price because of subsidies and the absence of private players,” Mupamhadzi said.

“It was Noczim in the past,” Mupamhadzi said, adding that there are now numerous private players importing fuel but having accessed foreign currency from the parallel market.

Mupamhadzi said there could be no stabilisation of fuel prices in the near future as long as supplies remained constrained.

Supplies were unlikely to improve because of the unavailability of foreign currency, he said.

“The major problem is the supply side. For price stability to be achieved, there should be improvement on the supply side,” he said.

Mupamhadzi said subsidised fuel could stabilise prices but only if the system was implemented efficiently.

Subsidies actually resulted in Noczim, formerly the sole procurer of fuel in the country, suffering a $1 trillion loss.

Farai Dyirakumunda, an analyst with Interfin, said there was a direct relationship between local fuel prices and the international oil price.

“If crude oil prices increase, so should the price of the refined product,” said Dyirakumunda.

He added that the exchange rate had an effect on the fuel price, and this had been worsened by the perpertually depreciating Zimbabwe dollar.

Dyirakumunda said fuel prices were unlikely to stabilise without an improvement in the supply of foreign currency.

“Fuel supplies can only improve after addressing the foreign currency crisis,” he said.

A fortnight ago, government signed a US$50 million fuel deal with BNP Paribas and mining concern Bindura Nickel Corporation, involving mortgaging of minerals but there has been no improvement in supplies.

Certain sectors of government operations like the medical fraternity which have been receiving subsidised fuel from Noczim have had their supplies cut off or reduced, highlighting the depth of the crisis.

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