HomeBusiness DigestEliminate fuel subsidies: Economists

Eliminate fuel subsidies: Economists

GOVERNMENT should eliminate fuel subsidies to ensure sustainability, economic analysts have said.Fuel recently went up with diesel now costing ZW$21,52, while petrol costs ZW$21,77, which is beyond the reach of many motorists.

Melody Chikono

But even at this rate, economists say the countries fuel remain one of the cheapest in the world. The upward adjustment of the interbank exchange rate, which was fixed at ZW$18,42, to ZW$25 to the greenback contributed to the shift in the price of fuel.

This meant that free on board prices of fuel actually declined by 25,7% for diesel and 35,8% for blend, when compared to the previous month.
The exchange rate shift also pushed upwards other major cost drivers, with duty, oil companies and dealers’ margins rising by about 13 US cents per litre for diesel and eight US cents per litre for blend, in total.

Economist Clemence Machadu recently told businessdigest that there is a need to strike a balance that ensures sustainability.“The pricing regime poses two challenges in terms of fostering sustainable demand and an equilibrium market for fuel. Firstly, those who access foreign currency from different sources and change it on the black market for the Zimbabwean dollar, create an excessive demand for fuel, which distorts the fuel equilibrium as shortages then arise.
There are also opportunities for arbitrage as a result of the shortages as well as exchange rate differentials for fuel sellers and buyers, which is why there currently is a thriving black market for fuel,” Machadu said.

“On the other hand, the fuel is also expensive for the majority of the working motoring public that earn their incomes in the Zimbabwean dollar, as one needs about ZW$1 200 on average for a full tank, which is a significant portion on their salary”.

The prices are therefore seen continuing to skyrocket as the parallel market rate goes up till service stations switch to the US dollar pump prices.
Economist and Zimbabwe National Chamber of Commerce chief executive Christopher Mugaga said the price of fuel has to increase to reach some equilibrium adding that government has to stop subsidies as they are an expense to exporters.

“If you see right now more than 60% of fuel is sold through the black market. You won’t find it on pumps but in drums at backyards. That should confirm to you that the official price is already wrong,” Mugaga pointed out.

“Everywhere in the world, fuel is not easily accessible to the ordinary guy. That’s what our government must learn to stop. Subsidies are an unnecessary tax to exporters.”

The economy is projected to decline by at least 8% in 2020 due to the negative impact of Covid-19 on trade, tourism and mining.“The subsidy on fuel was too heavy, I think given the fiscus exposure to Covid-19 expenses, it was reasonable to lift the burden on government through striking off that necessary subsidy,” Mugaga said.

“The importance of fuel has been reduced at this hour due to many factors, which includes end of load shedding, factories and public transport significantly reduced which therefore means its demand has become so elastic and its increase can be avoided by both factories and households.”

However, trade economist Gift Mugano says the fuel increase are government mechanisms to try and relieve pressure as it shifts its attention to combatting Covid-19.

“This means that it will slightly reduce subsidies on the fuel sector forcing importers to cushion themselves marginally through price increases,” Mugano said
Although global prices per barrel have nosedived, he said the economy cannot be governed by conventional theories as it is not a normal economy.
While admitting that there was no logical explanation for fuel increases in Zimbabwe, he said following the demand and supply model, fuel prices should have come down.

“We cannot, however, look at the Zimbabwean situation and apply normal economics. Fuel increase in Zimbabwe has nothing to do with costs drivers,” Mugano said.

“The reality on the ground is that if they wanted to follow economic models, prices of fuel would have gone down because the crude oil per barrel has gone to its lowest in years. Covid-19 could have worked to our advantage. Fuel is subsidised even though government is dodgy about it. There is no way fuel can be less than a dollar. The reason could be government is trying built its coffers on the back that fuel has no substitute.”

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