Zimbabwe: Contextualising Zim's Fuel Price Increases

analysis

It is a default of the Zimbabwean psyche to feel disenfranchised when local conditions are deemed to be less favourable than those at play in the world at large.

This "feeling" is oftentimes unsubstantiated and thus lacks an empirical basis. The recent fuel price adjustment has reignited this feeling.

The figure above reveals an interesting trend, one which will most likely recur in the short term.

There have been monthly fuel price reviews on the fifth of every month since January 2021.

The net effect has been a 7.31% increase in the price of Diesel 50, and a 10.74% surge in that of Blend E10 between January 5 and April 5, 2021.

The prevailing interbank exchange rate is applied to the free on board (FOB) price of fuel, including duty and levies, to establish the landed cost.

To curtail arbitrage opportunities presented by the prospect of misclassifying one for the other, the following diesel and petrol duty and levies were synchronized by the Finance minister Mthuli Ncube in his 2021 budget speech:

Petroleum importers' levy at US$0,05 per litre.

Excise at US$0,30 per litre

Carbon tax.

Zinara road levy.

Noczim debt redemption.

Strategic reserve.

Due to mandatory blending requirements, the cost of ethanol is integrated into the price of petrol.

Oil marketing company (OMC) and dealer margins are then factored in to arrive at the maximum pump price.

The Department of Energy in South Africa has published fuel price adjustments effective April 7, 2021.

The inland cost of unleaded petrol (Inland 95) will increase 16,55% from 14,86 rand in January 2021 to the imminent 17,32 rand (effective April 7, 2021), whilst the Inland cost of 0,05% sulphur diesel will surge 13,62% from 13 rand to 14,77 rand over the same period.

According to the energy department, the two significant variables in the fuel pricing model in that country are international petroleum costs and foreign exchange rate movements.

Additionally, proclamations by the Finance minister Tito Mboweni, in his budget speech on February 25, 2021 to the effect that the Fuel and Road Accident Fund levies on both petrol and diesel would increase on April 7, 2021 will have a weighty bearing on the soon to be felt pinch at the pump.

The world view

Covid-19 disrupted global travel for the greater part of 2020.

Travel restrictions implemented and enforced on an unprecedented global scale decimated the aviation industry and significantly reduced inland travel.

The foregoing implied a massive reduction in demand for fuel, and by implication, crude oil.

On April 20, 2020, the price of West Texas Intermediate crude dropped by almost 300%, and traded at a negative US$37 per barrel.

Because oil is extracted in a sophisticated process, one which is unthinkably expensive to halt, the process kept churning out product for which there was minimal demand.

Stocks thus piled up.

Storage fast became a constraint, and the negative price was thus an incentive for the oil to be absorbed by the refiners, to defray storage costs on the producers' side.

Travel restrictions were relaxed as the year progressed, and Brent crude oil closed 2020 at US$51,80 per barrel and has since surged 19,98% to US$62,15 as at April 5, 2021.

Back home

The chief underlying cost of freight and distribution is fuel.

The ramifications of an increase in the price of fuel will certainly lead to cost-push inflation.

The retailer's conundrum:

Retailers are faced with two equally unenviable prospects. Option one, to increase prices and pass the burden on to the consumer.

This will likely lead to a reduction in volumes and footfall, in the absence of commensurate reviews to purchasing power.

Whilst trading may remain at a profitable level, that is, revenue at above break-even levels, the loss of customers, however, marginal, may present an undesirable reduction in a key viability and competitiveness metric.

Option two, to absorb some of the price increases, through margin reduction.

Contingent upon the behaviour of competitors, this may maintain volumes, and perhaps grow footfall.

This strategy, however, requires meticulous attention to below the line costs, to ensure they are in sync with the reduced margin and avoid sliding into a loss-making position.

The welfare question

How soon do salaries have to be reviewed to ensure employees do not significantly lose purchasing power? Immediately, the employees might respond.

Gradually, management may suggest, to ensure the increase is priced into revenue.

Whichever path will be taken, there is need for engagement between management and staff to avoid a deterioration of the industrial relations environment to a point of hostility.

Communication is essential whenever such situations present.

Furthermore, the public must take cognisant of the fact that government is committed to fighting inflation as evidenced by the 10% year-end inflation target.

This means, even though headline inflation may increase because of the direct effects of fuel price correction, core inflation and inflation expectations must remain contained.

In the end, the effects of this fuel price volatility will never be as large as conventional wisdom would suggest.

Outlook

If brent crude oil price correction persists to pre-Covid-19 highs of US$75,23 observed on October 2, 2018, then we may be in for regular uncomfortable notifications from energy regulators.

The current crude oil price (US$62,15 per barrel) is at a 21,04% discount to the said high.

However, in light of the background and context shared in the article, the price movements ought to be viewed as price corrections and should thus not be a reason to lament the emerging trend.

Strategic thinking caps need to be worn by captains of industry to ensure this price correction is effected smoothly, without disrupting volume momentum, and/or scuttling customer loyalty.

Government also, on the other hand, must review fuel pricing model to ease pressure on consumers who are battling to stay financially afloat.

Paison Tazvivinga is a development economist. He may be reached on ptazvy@gmail.com.

Vusa Ncube is a financial analyst and a keen student of the world. He may be reached on vusavellah@gmail.com.

These weekly "Insights" articles are coordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe.

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