HomeAnalysisInefficient policies hound ordinary man

Inefficient policies hound ordinary man

Zvikomborero Sibanda
Zimbabweans are getting used to vicious cycles of cost-of-living crises. The prices of crucial products like fuel are rising frequently. Last week, the Zimbabwe Energy Regulatory Authority (Zera) reviewed upwards the maximum pump prices of fuel. A litre of diesel now costs US$1,74 (ZWL499,56) from US$1,71 (ZWL283,87) while that of petrol now costs US$1,68 (ZWL481,02) from US$1,64 (ZWL271,85).

It is, however, now ceremonial for Zera to publish fuel prices in Zimbabwe dollars because the ZWL fuel market is now extinct. The entire fuel sector has fully dollarised as a result of the introduction of the Direct Fuel Import (DFI) scheme by the Reserve Bank of Zimbabwe in 2019 at the peak of fuel shortages in Zimbabwe characterised by long-winding fuel queues.

These are the days when the RBZ’s was insistent about maintaining the unsustainable fixed exchange rate regime (US$1: ZWL1) leading to acute forex shortages as fuel demand outstripped fuel supply.

Under the DFI scheme, importers are allowed to use their free funds (US dollars) to import fuel and trade it in foreign currency. Despite promising to facilitate the importation of fuel to be sold in ZWL, authorities allowed the fuel sector to fully dollarise yet the majority of Zimbabwe’s motoring public, businesses and industries have constrained access to forex.

The ongoing Russia-Ukraine war is fuelling market jitters about a potentially huge supply shock to food and energy markets which will push global prices upwards. With Zimbabwe being a net importer of crude oil, it means that the country is a price taker of these high global prices hence perpetual increase in domestic fuel prices. Russia is one of the largest global producers of crude oil, accounting for about 30% of global crude oil exports.

Due to its invasion of Ukraine, large oil-consuming Western countries like the United States, Canada, and United Kingdom have completely banned the importation of fuel of Russian origin while the European Union, the largest common market in the world, will likely agree on an embargo on Russian oil imports within the coming days.

Before the start of the Russia-Ukraine war on February 24, 2022, the prices of fuel in Zimbabwe were exorbitant, way above the regional average. Last month I indicated in this column that this is because the fuel sector is one of the closed sectors in Zimbabwe monopolised by a few fuel importing companies, which are also large players in the fuel retailing business.

In addition, government fuel taxes and levies, constituting nearly 40% of the pump prices, are adding to the exorbitant price of fuel.

Just like what is happening in the pricing of grains above the market prices by the Grain Marketing Board (GMB), the fuel prices being set by Zera are way above import parity prices. This probably reflects that the energy regulator is captured by vested interests with an unrestrained ability to impose punitive fuel prices under the guise of responding to the negative impacts of the Russia-Ukraine war.

In a bid to reduce fuel import bills and cushion the economy from fuel crises, Zimbabwe introduced a fuel import substitution scheme in 2011 to blend petrol with ethanol.

Since then, the blending ratios have been fluctuating depending on the availability of ethanol in the local market. Green Fuels, a company partly owned by the government, is the sole producer of blending ethanol in Zimbabwe.

After halting petrol blending in January 2022 due to adverse weather conditions such as rains which resulted in inaccessibility of cane fields by machinery, the regulator re-introduced blending on April 25, 2022 at E10 (10% ethanol). The blending ratio has now been increased from E10 to E15.

At the same time, the price of petrol has also jumped by US$0,04. This is surprising because the government had initially promised citizens that prices of blended petrol will decline by US$0,07 as it increases the blending ratio from E10 to E20 by the end of May 2022.

Instead of bringing relief to motorists, commuters, and businesses, the fuel import substitution scheme is actually working against Zimbabwe and its economy.

The ethanol market itself is also a closed sector with little competition hence the high prices of this critical product. By not opening the ethanol sector to outside competition or promoting the participation of more domestic players, the government through Zera is again protecting the vested interests of monopoly capital and the politically connected who are only after abnormal profits not consumer welfare or a sustained growth of the Zimbabwean economy.

For instance, command exchange rate management through the auction system was leading to overvaluation of the ZWL thus promoting rent-seeking behaviours, poor compliance with existing regulations, and round-tripping.

Consequently, with forex demand outstripping forex supply on the auction market and the economy also being largely informal and the central bank and Treasury pushing large tranches of local currency in the economy, the ZWL deteriorated massively against the greenback particularly in the alternative markets thus fuelling price inflation.

Another example of pursuit of populism which is driven by command economics is command agriculture, a scheme that is not transparent as it is largely difficult for one to ascertain the actual cost and beneficiaries of the inputs provided by the state under this scheme.

This is tantamount to a waste of public resources at a time when the government is facing a very limited fiscal space. If one is to reflect on the opportunity cost of this, they would realise that these wasted and abused public funds would be used for the provision of quality and affordable social services as well as safety nets to cushion the vulnerable and marginalised communities.

This is key for stable, inclusive, and sustainable economic growth to be attained in line with ambitions set out in the National Development Strategy 1 (NDS1).

Therefore, to cushion the public and the economy from the negative multiplier effects of rising fuel prices, there is a need for the government to embrace and promote competition — allowing the participation of many players in fuel importation and retailing business as well as the ethanol sector. In other words, the energy regulator should always strive to strike a balance between the affordability of fuel and profit margins of businesses, not the current set-up that is disproportionately tilted towards the latter.

Also, the government should further reduce taxes and levies it is collecting on imported fuel. More so, there is a need for sustainable and investor-friendly policies that promote exploration in the extractive sector.

Had these policies been in place over these years, oil and gas exploration in Muzarabani could have been completed by now and the nation probably in full swing petroleum mining thus reducing dependency on imports.

  • Sibanda is an economist. He is a research associate with ZIMCODD. He is a staunch advocate for inclusive and sustainable development. He writes in his personal capacity. These weekly New Perspectives articles published in the Zimbabwe Independent are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — kadenge.zes@gmail.com or mobile: +263 772 382 852.

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