Targeted subsidies: Govt finally strikes right code

20 Dec, 2019 - 00:12 0 Views
Targeted subsidies: Govt finally strikes right code Subsidy on fuel in the past led to large and often unpredictable expenses

eBusiness Weekly

Taking Stock  Mishek Ugaro

In a contribution of 15 November entitled “Mthuli May Pull The Rabbit Out of The Hat” the writer then alluded to the many positives that were contained in the 2020 Budget barring a few weaknesses, which have been highlighted by other commentators. Among many aspects, the issue of targeted subsidies received the writer’s thumps up signal.

It is, however, disappointing to note that following that positive announcement, there was an upheaval of protest from players in the grain milling value chain. The minister’s proposed route struck a raw nerve. We saw an immediate spike of retail prices of mealie meal where a 10 kilogramme packet of roller meal rose from an average of ZWL50 to an average of ZWL110. Obviously this was designed to spark an upheaval in the society in order to corner the Government to reinstate the inefficient subsidies and revert to the status quo.

One may ask the question what was the rush all about when the minister had actually not abolished subsidies. A picture was reported as if the Government had totally abolished subsidies and left the vulnerable sections of the society at the peril of the market. In fact, wide coverage was given in the media about how the President had purportedly reversed the subsidies policy as announced by the minister.

This painted a picture of conflicting positions within cabinet and thereby playing to the hands of those ready to just paint everything with the same colour of confusion but without facts. Nothing could be further from the truth. In his Budget Statement, the minister had alluded to market distortions associated with subsidies that presented additional risk to macroeconomic and fiscal stability.

In quote, the minister said “. . . In particular, subsidies on fuel, electricity and agriculture have, in the past, led to large and often unpredictable   expenses. Where subsidies are deemed essential and can be financed, these will need to be clearly targeted and reflected in the Budget with adequate budgetary provisions.

To ensure effective implementation of the proposed subsidy policy, additional measures will be taken to tighten eligibility to subsidised goods and services so that only those who are eligible can benefit.”

What really upset the apple cart was the fact of the targeted subsidies, but interpreted and conveniently portrayed as abolition of subsidies across the board. This did not go down well with many players who have benefited from embedding in the inefficiencies and taken advantage to arbitrage on the milling value chain.

The way the subsidies were, as correctly noted by the minister, created unpredictable expenses covering inefficiencies and one might add profiteering in the system. This challenge was wide spread in several sectors including fuel, electricity, and grains. The Government instituted new pricing frameworks for fuel and electricity reflecting costs.

However, it is with relation to basic food staffs that have a direct impact on the ordinary man and woman on the street that sparked an outcry. While the minister specified a basket of basic goods including roller meal, cooking oil, bread and public transport, it was in relation to roller meal that we experienced an up row before the ink of the budget statement had even dried.

It is the removal of that arbitrage gap over the purchase of maize directly subsidised through the GMB by the millers that wiped out this profiteering window. It is public knowledge that some unscrupulous dealers were kyte flying maize supply to the GMB by selling and purchasing from same and pocketing the resultant differential.

The rejig of the subsidy, reworked and reintroduced in another way that would directly benefit the end consumer did not sit well with some players and unfortunately almost held the government at ransom. The mechanics and methods of implementation were still on the way but already prices had shot up 200 percent.

To its credit, the government has not barged down. It is correct that subsidies must benefit the vulnerable end users. The ministry has subsequently issued an outline of the way the subsidies will work and this is contained in the public statement of 13 December 2019.

What is amazing is that the Government announcement is with effect from January 2020 and yet by end of November 2019 the prices of roller meal had already more than doubled. There is no reasonable explanation for this rise because millers are still picking up grain from the GMB until the end of December 2019 on the old way of accessing the subsidies. One would expect that millers are still processing the stocks they have already accessed at the current subsidy arrangement.

The new method starting January 2020 include:

GMB to sell wheat and maize at market prices? Grain millers have the option to either import or purchase grain from GMB.

In order to protect vulnerable groups of society, targeted subsidies on the production of roller meal, cooking oil and the standard loaf of bread is given through a reimbursement system to be implemented (This mechanism has subsequently been published on 13 December 2019.

This would be done through tax set off arrangements where possible and voucher schemes.

There were several other subsidy measures that were either removed or reworked in order to improve the efficacy of applicability and directed at ensuring the targeted beneficiaries received the benefits instead of middle men or suppliers. This includes the transport subsidy through ZUPCO. What the new rules did was to remove the inefficient subsidies such as on fuel through the preferential allocation of foreign currency as well as for electricity.

Full cost recovery pricing models were implemented. It was however on the milling value chain that stiff resistance was faced.

In conclusion, subsidies were clearly not removed on essential basic goods listed above. These were removed where it made economic sense and this was unfortunately twisted in the market by a section for whom an arbitrage window was abruptly  closed.

The new subsidy regime goes a long way towards fighting corruption and promotes honest business practices. Only efficient operators should be allowed in the system and to this point, the operating procedures as published by the ministry are sufficiently stringent and should remove any part time briefcase rent seeking players who have been round robbing maize deliveries through the system and pocketing a non-productive margin.


Misheck Ugaro [email protected] — Misheck is an economist, a former expatriate banker based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is a member and past Vice President of the Zimbabwe Economics                                                            Society.


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