eBusiness Weekly
BusinessWeekly Last Word
The Government in general, and Minister of Finance and Economic Development Mthuli Ncube in particular, have been learning a lot about the deviousness and creativity of Zimbabweans as they battle to provide subsidies on essential goods or services.
Up until about 14 months ago, subsidies were quasi-fiscal, that is provided by the Reserve Bank of Zimbabwe manipulating foreign currency allocations or the money supply. So we had fuel importers allocated cheap foreign currency; we had the GMB financed to provide cheap grain to millers and others although buying this from farmers at a higher price or importing it using the special cheap forex allocations.
As part of the major reforms planned by Minister Ncube and accepted by the Government, this system had to end. For a start most of Zimbabwe’s inherited financial woes were driven by the Government insisting that the RBZ carried the can, something that is rightly condemned by every right-thinking economist and every international financial institution.
So it was agreed that subsidies move to the Treasury, are budgeted and are accounted for in the Government’s accounts.
The second problem with the subsidies that the Second Republic inherited is that they were totally untargeted. The rich benefited more than the poor, in fact, since the rich tended to buy or use more of the subsidised products. The GMB subsidy on wheat, for example, made both bread and chocolate eclairs cheaper and below their real cost. The GMB subsidy on maize made fancy refined products as well as roller meal cheaper. The subsidy on fuels almost certainly benefited the Merc owner more than the kombi passenger.
The third problem was that they were open to cheating. Fuel was so cheap in Zimbabwe in real terms that by the end of 2018 at least half the fuel being imported was being illegally exported and sold in neighbouring black markets. That, at least, is the only explanation for the doubling in apparent consumption during 2018.
In the world of maize, there were the smart criminals buying maize from the GMB at the special price, going round the corner and putting it into new bags, and then driving back into the GMB depot to sell it as “something just off the farm” at a higher price.
The fourth problem were other market distortions. There was a real danger that partial reforms, or tackling reforms in the wrong way, could make it uneconomic for farmers to grow the food in the first place. Added to this was the lack of incentive to control, or even monitor, waste. Fuel was so cheap that people could waste it. Certain foods were cheap that people could buy more than needed or cook more than they needed and throw away the left overs. Even bakers would bake more bread than they could conceivably sell in order to grab market share.
So Prof Ncube plotted his changes and sold them. Fuel was the first to be tackled. Excise duty was raised dramatically to bring retail prices into line with the real cost while the forex allocation system was changed, later, as part of the reforms that led to the interbank forex market.
This raised the price of fuel significantly, and hit the poor hard in the dramatic rise in kombi fares. The Government decided to introduce a targeted subsidy by subsidising Zupco services and, at the same time, allowed Zupco to franchise its operations.
This has been the most successful subsidy, that is if the test is combating cheating, targeting the poor and avoiding market distortions. Cheating is almost impossible. Passengers buy their tickets as they board and surrender them as they leave, so no one can arbitrage.
Thanks to Zimbabwean cultural perceptions, most car owners would rather starve than take a bus. It is different in, say, Europe where even the very rich use the trains, metros and buses. But the numbers of middle and upper income Zimbabweans ready and willing to queue for Zupco buses is very low, and however rational they might regard themselves they are considered eccentric by most.
Markets were distorted to an extent, but largely positively. Although Zupco can handle only a minority of the business on offer, the mere fact that the service exists has forced private operators to be very careful on pricing. Kombi fares came down when Zupco was restarted.
Having ended subsidies on wheat, soya beans and maize by agreeing with the RBZ to stop quasi-fiscal fooling around, the Government then decided to reintroduce subsidies under proper rules for essential foods.
The test run was roller meal. Targeting was thought to be automatic. Roller meal is regarded as the “poor man’s food” with the better off preferring more highly refined products. Market distortions were eliminated through having the subsidy paid directly to millers at the final production and distribution stage.
Cheating was to be barred by putting in place careful controls, registrations and checks so that the subsidy was only paid for roller meal actually milled, put in bags and sent to shops. Putting in place the controls needed new bureaucracy involving at least two ministries, so there was a delay, but everyone wanted to get it right so the system could be extended to bread and cooking oil.
Within a fortnight it was obvious that the Government had missed one major consideration, the artfulness of the average Zimbabwean when it comes to arbitrage. Many involved in the black market cannot spell that word, but they understand the concept instinctively. Roller meal supplies quickly concentrated in the black market rather than in the kitchens of the poor.
Supermarkets co-operated by limiting customers to one bag each, but many other shops sold the bulk of their supplies outside the back door, in bulk. Even in the supermarkets whole families would sleep outside the doors and race in getting their one bag each, possibly tipped off on expected deliveries by a relative or neighbour on the staff.
The result was that the subsidy, instead of helping the poor, was being paid, indirectly, to the black market operators. In one sense this was theft, that is the black market operators were stealing the taxes of the productive firms and individuals and giving zero value in return. While it would be fascinating to run a test case with the resulting appeals through the courts to see if the laws on theft could be extended to such cases, this probably will not happen. But the result was exactly the same as if the black market operators had stepped into a Zimra office clutching assault rifles and emptying the tills.
So now the Government, on Minister Ncube’s recommendation, is switching to coupons. This does target the real poor, and eliminates the CEO and her lawyer husband driving their matching Mercs to Borrowdale Village and each buying a subsidised bag from each of the four supermarkets there. It should also eliminate the black market, although some of the poor will sell their coupons. But even so they benefit since they will use the cash raised for other needs or other food.
Coupon systems do work. Something similar, except through registered consumers, has been used in India with 100 times the Zimbabwean population. And the trial is needed if subsidies are to be extended to other products. Details have yet to be given, such as will the coupons be redeemable in only special shops or can be used everywhere, with retailers perhaps being able to use them to offset taxes. We cannot guess how cheating will occur, but we can predict that someone will try and cheat in some new and innovative way. So loopholes will need to be plugged.
Better still is to move fast towards the real solution, that is direct payments to the very poor and vulnerable, no matter how small these will be. Since everyone has a phone these days getting the money to the families is simple and cheap.
What is needed is an accurate data base of those who should benefit, but the starting point is the one now being assembled for the coupons; aid agencies in any case have test lists and so it is not difficult to get a starting point, and then figure out ways of adding and subtracting those who benefit.
Such a system of direct payments is now considered the best practice. Some argue that the poor cannot be trusted to buy food and will waste money on booze or gambling. But even if people are given food packs they can sell these and waste the money. Most will need the money for food anyway, so distortions and cheating can be largely eliminated through this method. Bureaucrats will be needed to check that those added to the list are genuine, but this is needed in any case.
