Fuel price increase necessary

26 Jul, 2019 - 00:07 0 Views
Fuel price increase necessary

eBusiness Weekly

Persistence Gwanyanya

Now that we have dealt with the issue of optimal currency option, focus should shift to addressing economic distortions to sustain the Zimbabwean dollar. Our economy today is burdened by the damaging effects of economic distortions that are contributing significantly to currency instability.

These distortions take the form of mainly economically unviable tariffs on utilities, fuel and the so called “essentials” pricing. Imagine fuel which lands at Msasa at around US$0,57c-60c was being sold at around US$0,6c equivalent in ZWL$. Electricity which cost about US$0,08c/unit to import is currently being sold at US$0,02c/unit.

The same currently applies to pricing of water, which doesn’t make economic sense. At one point GMB was buying maize at US$390/tonne and selling the same at US$240/tonne with a number of the so called essentials accessing forex at highly subsidised and unsustainable exchange rate parity (1:1), resulting in US$1,2 billion legacy debt in respect of unremitted funds (blocked funds) that RBZ is now in the process of assuming.

As they say cheap is expensive, it’s now very clear to us that it’s indeed expensive. In the end it’s the ordinary person who bears the ultimate cost of these economic distortions.

The US$1,2 billion in respect of blocked funds (unremitted funds) I talked about earlier will eventually be borne by the ordinary person, which confirms my assertion above.

Currency instability in the country can be traced back to these economic distortions, especially on  fuel, which consumes about 25 percent of the country’s forex.

The increase in the price of fuel to $7,19 and $7,47 per litre for diesel and petrol is the fifth one since November 2018 when the product was increased to $3,13 and $3,31 per litre for diesel and petrol respectively, and would want to see the price going up to economical prices determined by the interbank exchange rate, as fuel is an imported product.

That way we deal with cartels who are currently cashing in on price distortions to the detriment of the ordinary person in the street.

Importantly, fuel price increase will rationalise demand from the influential and wealthy elements in the country who have been accessing the scarce product at these cheap prices when the rest of the economy was sourcing the product from the parallel market at exorbitant prices.

There is need to rationalise demand for fuel through the operation of the price mechanism. Like many in normal economies, pricing of fuel should be market determined and in line with the interbank market. This is necessary to rationalise the demand for the product and improve its availability and thus deal with black market for the same.

Dealing with distortions has far reaching benefits to the whole economy through improved efficiency in the working of the interbank market, which will usher currency and price stability, to the benefit of the ordinarily person.

As we achieve price stability it means even the real value of our earnings is increased. Matched with the current and planned salary increases, measures to deal with distortions will go a long way in alleviating economic burdens on the ordinary person. Importantly, dealing with distortions is expected to create a sound base to kick start production, which is needed for economic growth.

Its important to emphasise that in their imperfection, the principles of market-based economy and good governance are the best and proven drivers  of a modern economy. As we move the economy towards market system, everything will fall in place.

Persistence Gwanyanya is a Chartered Banker, Economists and Trade Finance Specialist who also founded the Bullion Group. For feedback email email [email protected] or whatsApp ±263773030691


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