eBusiness Weekly
Kudzanai Sharara
The International Monetary Fund’s (IMF) resident representative in Zimbabwe Patrick Imam, has backed Government’s decision to remove fuel subsidies saying they are “among the worst types of subsidies to have as they are badly targeted”.
For years, the country’s fuel was the cheapest in the region in real US dollar terms.
Although the country’s exchange rate was pegged at 1:1 between the local currency and the US dollar, the unofficial exchange rate made Zimbabwe fuel prices the cheapest in the region and open to manipulation.
This led to massive spike in the demand for fuel in the country.
At the time, the Reserve Bank of Zimbabwe (RBZ) was allocating real USD cash to import fuel and yet the country only received less of the real USD price paid to acquire the fuel.
In real terms, the country was now subsidising the price of fuel.
The subsidy was, however, removed in May after the Reserve Bank said Oil Marketing Companies will now have to get foreign currency at the prevailing interbank rate.
“The Reserve Bank of Zimbabwe is pleased to advise the public that with effect from May 21, 2019, the procurement of fuel by the Oil Marketing Companies (OMCs) shall be done through the interbank foreign exchange market,” RBZ governor Dr John Mangudya said in a statement released in May.
“There shall be only one foreign exchange rate to be used in the market for the importation of all goods and services. This means that the 1:1 exchange rate that was being used by OMCs for the procurement of fuel will be discontinued with immediate effect,” he added.
This is a good move according Imam in an interview with Business Weekly at his Harare office.
“Fuel subsidies do not benefit the poor who only get a disproportionately small portion of the subsidy, and a disproportionately larger share of the hurt.”
He argued that most of the benefits of the subsidy go to the upper classes who have fuel-guzzling cars.
“Is it fair that poor villagers, who pay taxes and don’t have a car, are subsidising CEOs or other well-off people such as expatriates who have large cars,” Imam asked.
Further, Imam suggests, subsidising fuel leads to misallocation of resources.
He said the poor are also harmed as fuel subsidies drain government budgets of funds that could benefit the poor in a more targeted way.
“These could be used to raise public spending on education and health for instance. Therefore, freeing up public funds for such needs was one of the major objectives of the fuel price reform,” said Imam.
He also said fuel subsidy leads to overconsumption as people buy cars that are energy-consuming, or keep old inefficient cars on the street rather than trying to find ways to save on fuel.
“In the case of Zimbabwe, it’s even worse as a lot of the fuel was until recently smuggled to neighbouring countries. From a macroeconomic point of view, we used our scarce foreign exchange to import fuel, to give some of it away to neighbours.”
Imam also castigated the way subsidies were being funded in the country. “Until recently, Zimbabwe significantly subsidised fuel.
“But it was not the treasury that directly foot the bill. No, this was instead done in a non-transparent manner, with the central bank picking up the tab.
“The RBZ, through preferential foreign exchange allocation to fuel importers, subsidised fuel.
“This is being addressed, as was observed with the hike in fuel prices in recent weeks, and we are getting close to the market price,” he said.
“By moving towards the market price for fuel, we are stopping fuel smuggling, we are encouraging energy efficiency and containing the environmental damage, we are preserving foreign exchange, we are reducing rent-activities and improving the balance of payment.”
Imam, however, said the global lender was not necessarily against subsidies as they are in fact good arguments for subsidies including education. An educated workforce imposes a positive externality on the country, he said.
“The same argument applies also to subsidising health. If sick people have to pay for expensive healthcare and cannot afford it, they may contaminate others, creating a large burden on society. These types of subsidies are therefore desirable, and we encourage them wholeheartedly,” said Imam.
He showed support to government’s decision to use savings achieved from getting rid of the fuel subsidy to help the poor.
“With the savings, the Government has invested more in ZUPCO bus service for instance, which is used by the working classes, and thus is well targeted. Some of the surplus generated by getting rid of the subsidy is also being used to raise the wages of teachers and civil servants.”
He said the losers from this measure, who are basically the upper classes, can bear this burden.
“So from a social and equity point of view, the measure taken is the right one as well,” said Imam.
