Zimbabwe’s economy is getting close to the fuel market price after eliminating subsidies which have been in place over the past months, subsidies which helped keep prices low in US$ terms, the International Monetary Fund (IMF) has said.
Despite the erratic supplies, fuel prices have over the last few months rising gradually, tracking movements on the foreign exchange market. Demand for the commodity increased since May as business and domestic consumers of use fuel as an alternative source of energy. Zimbabwe is facing rolling power outages lasting up to 18 hours due to depressed generation at the country’s largest hydro-powered station.
Until May, fuel importers were accessing foreign currency at 1:1 between the RTGS dollar and the greenback despite the central bank dumping the parity in February.
IMF resident representative to Zimbabwe Patrick Imam told Business Times the subsidy was not done in a transparent manner as it was not reflecting in the budget.
“Zimbabwe has subsidised fuel on a large scale in the recent past. This was, however, not done in a transparent manner, as these were not reflected in the budget despite the budget eventually having to pay for it. It was instead done indirectly,” Imam said.
“The central bank, through preferential foreign exchange allocation to fuel importers, helped keep fuel prices low. This quasi-fiscal activity has now started to be addressed, and we are getting close to the market price.”
Since the removal of the fuel subsidy, the price has been on an upward trend will fuel retailing at ZWL$9.01 and ZWL$9.06 per litre for petrol and diesel respectively from ZWL$3.26 and ZWL$3.38 prior to the removal of the subsidy.
Imam said the Fund was not opposed to subsidies as they can be used, for instance, when the government wants to encourage the consumption or production of something that would otherwise be under-supplied by the market such as education.
“In all countries around the world, there is a strong belief in the importance of having an educated population, both for its own sake because there is an intrinsic value in being educated, but also because an educated workforce imposes a positive externality on the
country,” he said.
He said when Malawi removed all primary school fees, enrollment went up from 2 million children to 3 million over 6 years and the enrollment gap between the rich and the poor closed.
Imam said there were also bad reasons to subsidise, for instance, when it happens for political reasons and that from society’s point of view are not necessarily desirable or efficient.
“Think of the Common Agricultural Policy as practiced in Europe in the 1980s. European farmers were able to extract large subsidies, because they mattered politically. The result of this policy was that it imposed a huge cost on European consumers, but especially on farmers around the world who saw on oversupply of products such as milk depressing international prices,” he said adding that there are subsidies used to keep loss-making State-owned enterprises that are not viable alive.
“Think of all the airlines over the African continent that are recapitalised every few years. It’s politically easier to keep a State-owned enterprise alive than face a vocal group of unemployed individuals.”