From fuel interventions to permanent solutions

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Motorists queue to buy petrol in Harare, Zimbabwe, October 8, 2018. REUTERS/Philimon Bulawayo

PersistenceGwanyanya
economist

ECONOMISTS’ assertion of price as a rationing device was recently proved right when officials hiked the price of fuel by 150% to address the acute shortages of the commodity.

Again, their proclamation that competition is healthy was supported by the sharp reduction in commuter fares to their pre-crisis levels following the introduction of a mass public transport system to compete with the commuter omnibuses that ply the local routes.

All these, together with the surfacing of fuel shortages, which the Energy minister flimsily attributed to mere distribution challenges, beg answers as to the appropriateness of the fuel-pricing structure, procurement, as well as the state of our public transport system.

It is common cause that whilst the recent fuel price hike was necessary and inevitable, the increase can easily be overrun by a possible currency (bond note/Real-Time Gross Settlement) depreciation. In the first instance, it is this currency depreciation which saw our fuel price fall from being the most expensive to the cheapest in the region at $1,30-1,40 and US$0,40 cents per litre respectively as exchange rate parity was overtaken by parallel market exchange rate at $1:3,5 bond note/RTGS as the more applicable rate in the broader economy.

However, with potential increase in money supply to meet rising wage demands and possibly some $2,2 billion maturing Treasury Bills (TBs) in 2019, there is still high risk of a further fall in the implied fuel prices.

This simply underscores the need to move towards a direct fuel procurement system, which should be supported by a market-based exchange rate management system.

Fuel challenges in Zimbabwe can be traced to an inefficient foreign currency allocation system that effectively over-subsidises essentials at the expense of generators of foreign currency. Because fuel prices are inextricably linked to the exchange rate, following rapid depreciation of RTGS/bond note in the alternative market, fuel demand as well as its foreign currency allocation almost doubled to 45% from 25% previously.

Given its high dependence on and consumption of foreign currency, the recent fuel price hike could be seen as a missed opportunity to migrate towards a market-based foreign currency allocation system.

This would have been achieved through opening up the industry to private players who would procure their own fuel by sourcing forex from authorised dealers in the market, which entails partial liberalisation of the foreign currency market. These fuel dealers would be allowed to price their commodity at commercially viable RTGS prices, which allows for more efficient price discovery.

To cushion the economy from the general price increases, we can decide to continue with the current rebate system by amending it to be more inclusive and reflective of the informalisation nature of the Zimbabwe economy.

Currently a significant number of intended beneficiaries do not qualify for the rebate as they are not tax compliant.

The fact that the Zimbabwe Revenue Authority is currently owed about $4 billion in unpaid taxes and penalties bears testimony to this assertion.

As such, stability in prices after the increases in fuel prices cannot be attributed to the efficacy of the tax rebate system but, rather, effective control of money supply growth by Treasury and the Reserve Bank of Zimbabwe, who have not yet issued any new Treasury Bills since October last year. It is also reflective of the fact that prices had already increased ahead of the formal fuel prices hike.

The proposed foreign currency allocation system on fuel has to be extended to other essentials such as medical drugs and electricity for better price discovery, which will inform the new exchange rate to peg the RTGS.

The new exchange rate peg would result in significant improvement in forex availability and exchange rate from a more transparent and less risky foreign exchange market. As highlighted earlier, increasing the excise duty by 450% is not a permanent solution to the fuel pricing challenges as it will only take the depreciation of the local currency to $1:8 RTGS/bond note to go back to the previous prices of $0,40 per litre.

By allowing the demise of the public transport system, the government exposed commuters to the mercy of the private-sector participants, who took advantage of the shortage of the commodity in the market to wantonly escalate their fares, further worsening the cost of living, which concomitantly increased the pressure for wage increments.

Government should have been more proactive to rope in the private sector into the mass public transport provision and avoid the violent uprising that ensued from fuel price increases.

While the revelations that the government is importing 500 buses from Belarus to revive the mass public transport system is comforting, it is important to put in place necessary safeguards to prevent the demise of the public transporter again. This is necessary to contain inflation, which is a precondition to the stability of any currency regime.

It is difficult to achieve private sector-led growth with the current exchange rate management system, which essentially hitched on nostro controls. Business viability is now dependent on access to foreign currency rather than innovation, shrewdness and other distinctive competencies.

It is very difficult to attract private sector investment in such an economy. As such, migration towards a market-based exchange rate management system is now urgent.
That is why the monetary policy statement, which is expected anytime from now, is the only talk in town, as everyone is eager to see how the RTGS will be devalued, which is almost a foregone conclusion now.

Gwanyanya is a banker, financial and economic analyst, as well as founder of Percycon Advisory Services. New Perspective articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES), email: kadenge.zes@gmail.com and cell +263 772 382 852.

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