Government’s subsidies on fuel imports which have seen the central bank allocating the scarce foreign currency to the petroleum industry at par with the local Real Time Gross Settlement (RTGS) dollars has backfired amid revelations that it had created arbitrage opportunities and loopholes, which were eventually feeding the parallel market, Business Times heard this week.
Lines stretching two kilometers or more to fuel up have plagued most parts of the country since last year — despite assurances by government that it had adequate stocks.
The situation worsened yesterday amid speculation Zimbabwe’s fuel price would increase in the coming weeks as the local currency continues to weaken on both the interbank and parallel markets. The weakening of the value of the local currency has rendered useless, ZERA’s (Zimbabwe Energy Regulatory Authority) pricing model as it is largely constituted of taxes and levies.
The 1:1 basis means government is subsidising fuel in its bid to contain the run-away inflation and high cost of living as fuel which retails at ZWL$3.35 for petrol and $3.20 for diesel now costs less than a ZWL dollar against actual fuel cost – less the levies – of US60c. This also renders treasury’s budget surplus, which has mostly come on the back of the fuel excise duty and a 2% transaction tax, academic. According to the Ministry of Finance and Economic Development, government recorded a budget surplus of $102 million in January and $85.5 million in February.
Economists and industry players believe that the parity forex allocation has left a void in the market and some players are capitalising on that opportunity.
“Availing funds at 1:1 to fuel companies is a major mistake and it is high time that RBZ allows the forex market to float and allow the rate to converge. I don’t think RBZ should be participating and from experience we have seen that this allocation system by RBZ has been open to massive corruption and abuse,” said economist and former legislator Eddie Cross.
“It is not that we don’t have foreign currency in the country but it’s just misallocation of funds by RBZ. The central bank should stick to its proper mandate.”
The development comes at a time when Cabinet recently ordered the central to list all companies and individuals that obtained foreign currency from the Reserve Bank of Zimbabwe (RBZ) at 1:1 exchange rate with the bond note in the period October to February.
The list is now in President Emmerson Mnangagwa’s office.
Removing subsidies will mean increasing the price to consumers of petrol, diesel and other petroleum products, a development that could immediately trigger a new wave of prices.
Already, prices are trending upwards with latest official figures showing that annual inflation for the month of March quickened to 66,8 percent. At introduction of the United States dollar in 2009, inflation was at single digit figures.
Well placed sources told Business Times that the fuel price issue is under review to reflect current market conditions. The sources said that government was still studying all elements that feed into the fuel pricing structure amid indications that the blending ratio will also be reviewed upwards as Green Fuel, the sole supplier has indicated that it has enough stocks. The current blending ratio is at 10%.
“Government right now is discussing all components of the fuel price including the issue to do with ethanol in terms of its pricing and the blending ratio. It is most likely that the 1:1 fuel allocation will fall away within the coming few weeks.”
Joram Gumbo, Energy and Power Development Minister, said his ministry has procured enough fuel for the economy and all other logistics were left for monetary authorities. “I have brought the required fuel for the whole week (20 million litres of diesel and petrol) but what’s left is for Reserve Bank of Zimbabwe and Finance and Economic Development Ministry to allocate foreign currency for the release of fuel from Msasa,” Gumbo said.
“I procure fuel from different suppliers in the Middle East through bonds but the release of fuel depends on how much forex RBZ has for fuel dealers. As to what amount and at what rate they use to allocate, I think this rests upon Mangudya,” added Gumbo
Eddington Mazambani, Zimbabwe Regulatory Authority acting chief executive said the current fuel prices show that fuel is still sold at 1:1 to contain price hikes.
“I can’t tell you the actual rate as to which price fuel is imported at, but what I know is that at current price of ZWL$3,35 per litre, fuel is heavily subsidised. If it wasn’t for that the fuel prices would have gone up,” Mazambani said.
Zimbabwe now consumes three million litres of diesel a day and two million litres of petrol from five million litres of diesel and four million litres of petrol per day.
Confederation of Zimbabwe Industries president Sifelani Jabangwe said fuel is the only commodity which is still getting its forex requirements at parity.
“We had over ZWL$600m worth of balances to purchase foreign currency; unfortunately we couldn’t access it on the interbank forex trading platform due to its inaccessibility and our members are still looking for US dollars on the parallel market.
“Government put fuel at parity to contain inflation and stem the increase in the cost of living but this has created arbitrage opportunities for some who have access to forex at very low prices,” Jabangwe said.
Due to crippling forex shortages, the country’s cost of living has skyrocketed beyond the means leading to the closure of companies. Notable cooking oil companies like Olivine Industries and Surface Wilmar have closed shop due to high cost of business and crippling forex shortages. Basic commodities have risen sharply by thrice or more with 2kg sugar going for ZWL$6 from ZWL$2 in October and 2litre cooking oil to ZWL$13, 50 from ZWL$3, 85 in October.
Edible oils is another critical subsector which is in dire need of forex but is not getting it at parity, instead its letters of credit are floated at interbank rate and premium.
The sector said it plays the same role as fuel and it needs to be prioritised but is not getting the parity forex rate due to the fact that it is not closely linked to the monetary authorities.
Busisa Moyo, Oil Expressers Association of Zimbabwe president said: “Our members are getting letters of credit at interbank rate of 1:3, 3 plus a 50% premium of banks which means we are getting US dollars at 1:4,9 which is termed the effective rate. “The rate is almost the same as the black market but members only apply for it because it is paid within a period of time.”