Fuel price cuts, welcome and good, but?

26 Jan, 2018 - 01:01 0 Views
Fuel price cuts, welcome and good, but?

eBusiness Weekly

Clive Mphambela
This week the economy got another dose of good news. Government announced a reduction in the excise duty on fuel, which was soon followed by the concomitant reduction in the pump prices of fuel across the country. This indeed is a welcome development. Whilst we celebrate the move by the Government, one needs to carefully analyse the real impact, if any that the price reductions in the cost of fuel will have on the broader economy.

To answer this question, I will draw a bit on recent history.

In 2014, at the request of the Ministry of Industry and Commerce, the Zimbabwe Economic Policy Analysis and Research Unit- ZEPARU conducted a detailed evaluation of the cost drivers affecting the competitiveness of Zimbabwe’s businesses.

The factors identified in the ZEPARU study, validated its previous studies, which had identified cost drivers for the Zimbabwean economy to include cost of labour, power, water, finance, transportation, tariffs and trade taxes, domestic taxation and information technology.

The 2014 study extended its analysis to additional factors, such as the lack of scale and under-performance of agriculture; the failure by government to pay for goods and services within reasonable time; and lack of small change, (small denomination notes and coins) in the economy.

We all recall now that the bond coins were introduced to address the coinage problem, and the success of the bond coins led to the introduction of their evil big bothers-the bond notes..But that’s a discussion for another day.

My task this week is to analyse the impact of the cut in the price of fuel and the try and see whether this will have a meaningful positive impact on the economy.

My brief and short answer is that the fuel price cuts are cosmetic and apart from being symbolic will not get us much traction in terms of improving the competitiveness of commerce and industry. I am not saying that they are bad, but perhaps the price reduction is “too little too late”.

Why do I say so. Firstly the margin of reduction is in my view too small to have any meaningful down stream impact on the rest of the economic variables. What is more likely to happen is in the short term, fuel retailers will reduce the pump price of any executives and business associations during interviews as negatively impacting on costs and competitiveness.

Secondly, I strongly feel that whilst fuel costs are an important variable in the in the economy, at this moment in our history, the cost of fuel is not and should not be a major priority. What we should be worrying more about is the fact that as a country we are importing fuel and for that we need real dollars. Cutting the domestic prices in an environment where we have real foreign currency availability issues seems to me like shooting off the mark. Lowering the price of fuel will not address the fundamental issues of ensuring that fuel remains available in a sustainable way. That requires us to focus not just on the domestic costs but the regional and international dynamics as well.

The quantum and composition of Zimbabwe’s trade flows, continue to point towards a sustained loss of economic competitiveness. Merchandise imports rose twice as fast as exports in the five years from 2009 to 2014 and whilst things have stabilized a bit the composition of exports has changed little to date. There is over reliance on raw minerals exports. The country’s invisible trade (services) has traditionally also experienced higher import growth compared to export of services.

There is a small uptick in exports and imports have been under sustained downward pressure in the last two years, but any gains made on the trade account are being offset by yawning gaps that are keeping the overall balance of payments in negative territory.

We need to address the export mix, both in terms of widening the export base, and diversifying markets. Those to me are imperatives. We also need to understand that demand for fuel is likely to increase, hence demand for foreign exchange, and balance that out against the rising cost of acquiring foreign exchange on the real market.

The official market is dry and the foreign payments pipeline continues to increase. This to me presents real challenges.

Therefore the discussion on cost drivers cannot be adequately exhausted without having an honest engagement on the currency debate. This issue is perhaps the most important, followed closely by the accepted challenges associated with Government deficits, which have been singled out as being the key drivers of money supply growth and directly and indirectly driving inflation in the economy. So the conversation must be widened to issues now driving labour costs, the cost and availability of adequate power, quality and availability of water, cost and appropriateness of finance, public and commercial transportation, trade and other tariffs, domestic taxation thresholds and availability, cost and quality of information technology platforms, which are all key drivers of competitiveness.

In conclusion, the Zimbabwean economy needs to adjust to the realities of dollarisation and the need to respect the rules of the multi-currency system. The impact of the unsustainable “peg” between the US dollar and the bond notes is making it difficult for households firms and government to make the correct allocation decisions. This in turn will affect investment flows in the medium term.

We need to get this right. The exchange rate risks inherent in the current economic setup are very persuasive arguments against foreign investors taking this market seriously. We cannot afford to continue to assume that currency risk is unreal are increasing the cost of doing business in Zimbabwe.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organizations that the writer is associated with.

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