19 May 2019

Zimbabwe Should Fully Liberalise the Petroleum Industry

opinion

It has become apparent that the Zimbabwean government is failing to sustain its fuel subsidy in the economy due to foreign currency shortages. The rationale for such a subsidy has been to bring price stability to the market thereby managing inflation, to prevent the local economy from re-dollarizing and give the Reserve Bank of Zimbabwe (RBZ) control over offshore (Nostro) transactions and subsequent foreign currency allocations to local importers.

The availability of fuel in the local market has virtually been a nightmare for motorists and producers since October 2018, though the problems largely started in mid-2016 when RBZ assumed the foreign currency allocation role. According to data from Zimbabwe Revenue Authority (ZIMRA), the country consumed 1.06 billion litres of diesel and 570.12 million litres of petrol in 2018, worth US$1.12 billion. This means that average consumption per month was 70.2 million litres for diesel and 47.5 million litres for petrol.

In March 2019, the government partially liberalized the petroleum sector by allowing bulk fuel consumers with free funds to import their own fuel. The move allows the mining sector, transport industry and large corporates to procure fuel directly so as to ease pressure on the apex bank. The move has not helped much as local fuel is still relatively cheaper at an average of 65 cents per litre in US dollar terms when the black market rates are used. The importers still find it cheaper to buy it locally and save their hard earned foreign currency for other critical imports such as raw materials and spares. Moreover fuel shortages are a direct result of high foreign currency demand to the RBZ versus limited supplies from exports.

The Zimbabwean government amended Statutory Instrument (SI) 171 in 2015 to allow members of the public to import up to 2 000 litres of fuel per month for personal use. However, the legal instrument was revoked two years later through SI 122 of 2017, which stipulated that only companies licensed under Section 29 of the Petroleum Act were allowed to import fuel. The Zimbabwe Energy Regulatory Authority (ZERA) has licensed 73 downstream petroleum marketing companies to date with Puma Energy, Total, Zuva, Engen, Trek and Glow Petroleum being the largest. Close to 90% of Zimbabwe's fuel is imported via the Feruka pipeline from Beira to Harare, while 10% is imported via road. Bulk of the fuel imported in Zimbabwe is supplied by Glencore (Jersey registered company based in Switzerland) and Trafigura (Singapore registered, Swiss based as well) while the Kuwait based Independent Petroleum Group (IPG), Engen and Total chip in to augment supplies from time to time. The government recently blocked a proposal by a South African based Mining, Oil and Gas Services company (MOGS) to construct a 550km fuel pipeline from Beira to Harare worth US$1 billion. The pipeline would have been the second in the country, however the government argued that the sector is oversubscribed and has no space for new players.

The 150% fuel price hike in January and the introduction of the foreign exchange interbank market in February 2019 has resulted in a decline in local fuel consumption. Consumption of diesel has now gone down to about 3 million litres while petrol consumption has also declined to about 2 million per day. Before that, the market was gobbling over 4.7 million litres of diesel and 3.8 million litres of petrol per day with a significant portion of that fuel being smuggled out to Zambia, DRC and Malawi.

Though the RBZ intervention in allocating of foreign currency for fuel imports seemed justified mainly in managing inflation in the local market, the intervention is causing more harm than good. The central bank is burning the midnight oil trying to secure offshore facilities or credit lines to finance fuel imports when the horses have already bolted on inflation and economic recession. High foreign currency surrender schemes are akin to robbing the goose that is laying the foreign currency eggs thereby stifling supplies from strategic producers such as Gold, Platinum and Nickel miners and tobacco farmers. On the ground, fuel is no longer the primary determinant for product pricing. The black market foreign currency exchange rates now rule the market and the economy is virtually self-dollarizing. Prices in most retail outlets (big and small) may be indexed in RTGS but it does not need a rocket scientist to figure out that the realistic price is the US Dollar price. Most retailers closely follow black market rates and adjust prices as and when rates change in the black market. The reality is that the central bank has no capacity to oil the market with sufficient foreign currency and fuel shortages will persist as long as the bank plays a central role in the importation of the precious commodity. Allocating more foreign currency for fuel imports means that other strategic imports such as medicines, electricity, grain (maize and wheat) and water treatment chemicals suffer.

The government now needs a holistic long term approach to petroleum imports where licensed private petroleum companies should be allowed to import their own fuel while the government can import its own fuel for strategic reserves, own consumption and any other subsidy programs through the National Oil Infrastructure Company of Zimbabwe (NOICZ). Such fuel subsidies can be given to strategic exporters in mining, agriculture and manufacturing to boost their operations and grow exports. In essence those who lay the eggs that bring foreign currency should be rewarded and protected. Currently the government collects RTGS $2.05 (60 cents) per litre from diesel and RTGS $2.11 (62.5 cents) per litre for petrol if the prevailing interbank rate is used. To ensure the commodity is affordable to the consumers, the government can scrap the Petroleum Importers Levy priced at 4 US cents per litre and reduce excise duty on diesel from the 33 to 23 US cents and petrol from 38.5 to 28.5 US cents per litre to ensure that the landing price of the product is cheaper. The government would also need to follow up in breaking oligopolistic tendencies in the local petroleum industry and gazette retail pump prices below $1.00 per litre for diesel and $1.10 per litre for Petrol in line with other SADC countries. Petroleum companies should be allowed to price their product in a basket of currencies like all other local producers which allows them to replenish their stock profitably. Fuel supplies will stabilize and demand for the commodity will scale back to normal levels in line with economic activity.

In order to manage pump prices, NOIC Zimbabwe can charge reasonable fees for local importers who use the Feruka pipeline. The importers would therefore avoid road haulage which can inflate pump price and cause logistical delays in the market. A liberalized petroleum sector ensures consistent fuel availability for production purposes as petroleum companies compete to move the product, which keeps the economy stable. Consistency in fuel availability is also key in bringing confidence in the economy. Liberalization in the petroleum sector can save the government millions in foreign currency that can be channeled towards importing fuel for its strategic reserves and critical public goods such as electricity, medicine and water treatment chemicals among other. It will help weed out corruption in petrol retailing where retailers sit on the commodity for speculative tendencies or feed the black market.

Above all, liberalization will weed out corruption in foreign currency allocation largely blamed for dictating black market rates. Foreign currency allocation for fuel and other consumptive goods is not the mandate for the central bank. The bank has to stay close to its dictates and not shield the blame for fuel shortages, decline in mining production or shortage of any consumer goods in the market. The central bank has been exposed by fuel shortages and it cannot sustainably fund fuel imports with dwindling foreign export receipts. Consequentially, strategic producers are scaling down on formal market supplies in response to the sub-economic foreign currency surrender requirements.

Zimbabwe generates more foreign currency than other SADC countries who do not face the same fuel shortages even though they boast of larger vehicle populations or better economic output. The intermittent fuel shortages paint a wrong picture of economic boom when in actual fact the economy is going into recession.

Maintenance of a central role by the central bank in fuel procurement increases public debt for the government in a sector where the private players ought to play a central role in stabilizing supplies. Maintaining subsidies on fuel does not bring confidence to the local currency in as much as it can no longer stabilize inflation rates. Confidence in the local currency and subsequent stability on product prices is now a question of reforms on the part of government.

Victor Bhoroma is business and economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ).

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