ANALYSIS | Mnangagwa plans to cut fuel taxes. He’ll also need a plan to close the hole this will leave

(File Picture: AFP)

President Emmerson Mnangagwa believes he has a plan to soften the blow of rising global oil prices; cut fuel taxes. But he will also need a plan for what to do with the gaping hole that this will leave in his government’s pocket.

Cutting fuel taxes is a logical step, but it also means Treasury letting go of one of its top revenue earners at a time it is under pressure for more money.

Fuel prices went up from US$1.44 per litre to as high as US$1.68 per litre last week. A further hike is expected in the coming days.

The push is from world oil prices, which have touched near decade-highs due to the Russia-Ukraine war. But a large part of what Zimbabwe pay for at the fuel pump is made up of taxes and levies. These will now be cut, Mnangagwa says.

“We are looking at the whole duty framework to cushion our economy from shocks and pressures from galloping fuel prices,” Mnangagwa said in an article he wrote for the Sunday Mail. “I have already directed the Ministry of Energy and Energy Development to review and reduce duty and surcharges on fuel, so the pump prices of petrol and diesel remain manageable.”

Fuel taxes: A job for Mthuli

But this will be no easy job for Finance Minister Mthuli Ncube.

The taxes that are charged on fuel are a big earner for Ncube. Last year, fuel duty accounted for 83.1% of Treasury’s total excise collections, showing how much government relies on fuel taxes.

He needs the fuel taxes to pay for critical imports, such as grain, fertilizer, equipment, and fuel itself. All these imports now cost a lot more than they did last year.

There is also pressure now on Ncube to raise the US$175 salaries that he promised to civil servants.

Ncube admitted this at a meeting with business executives on Wednesday.

“It’s not easy to come up with risk mitigation measures, but one thing we have done is to lower the taxes on fuel from about 12,7 (US) cents to 8,7 cents, and that’s where we are now,” Ncube said. “We could lower it further, but it’s difficult to get to zero because we have pressures as Government, such as civil servants’ salaries and so forth.”

Among the range of taxes and levies on fuel is the US 2 cents collected by roads agency on every litre of petrol and diesel. Via Statutory Instrument 31 of 2022, Treasury set the NOCZIM Debt Redemption and Strategic Reserve Levy – a tax imposed on taxpayers to pay for past debts – at US$0,087 per litre for both petrol and diesel in February.

According to the latest trade data, Zimbabwe’s biggest import is fuel and oils, which made up 21.5% of all imports in December.

Higher fuel prices mean that Zimbabwe needs more US dollars this year to buy fuel. Last year, Zimbabwe imported fuel worth US$856 million, in a year in which crude started the year at US$50 a barrel and averaged US$70. With oil now having touched double that average and expected to rise higher, Zimbabwe will have to spend much more at current consumption levels.

“It’s a very difficult situation for us as industry and the Government as well because they depend heavily on taxes from the energy sector,” says Confederation of Zimbabwe Industries (CZI) president Takura Matsheza.

Mnangagwa, on Sunday, said he believes firmer commodity prices, such as gold, will help counter the impact of rising fuel and grain prices.

“What we lose on the swings of galloping fuel and cereal prices, we should be able gain on the roundabouts of windfalls from the mining sector,” he said.

But the cost of mining those commodities – already rising last year – has also now gone up significantly, which may erode gains from commodity prices.

Over the short term, miners cannot ramp up production beyond their current development plans just to latch on to the gold prices. In February, Caledonia announced a contract to hedge 25% of 2022 target gold production at Blanket via a cap and collar hedging contract for 20,000 ounces of gold from March to July.

For the 4,000 ounces of gold per month for the period, Caledonia will receive an effective gold price per ounce of not less than US$1,825/oz or greater than US$1,940/oz and will receive an effective spot gold price between these two levels.

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