Fueling the fire: High fuel consumption, corruption and subsidies got us here, and something had to give

Violent protests erupted across Zimbabwe last week after a 150% fuel price increase. Picture credit: TSVANGIRAI MUKWAZHI/AP

During a December 20, 2018 appearance before a parliamentary committee, central bank governor John Mangudya was asked if it was sustainable for government to continue subsidising fuel. Why not let all fuel retailers sell in forex?, one lawmaker asked.

“Subsidies are not sustainable in the long run,” Mangudya said. “But fuel is a sensitive product, we need to look at the implications (of removing the subsidy) and sequencing. The implications, sometimes, are horrendous.”

A little under a month later, Zimbabwe exploded in violent protests after government increased the price of fuel by 150%, to track an exchange rate officials comically refuse to acknowledge.

Twelve people are reported to have died, while scores others were injured after the security forces violently cracked down on protesters and, in many instances, citizens who had nothing to do with the demonstrations.

In December, Mangudya had predicted that, based on the several running fuel facilities the central bank has secured as well as anticipated lower demand in the traditionally difficult month of January, fuel queues would disappear.

The opposite proved true. Queues only got longer, darkening the crisis mood engulfing the country.  

How did we get here?

Virtually every Zimbabwean energy minister, including Elias Mudzuri and Elton Mangoma during the power-sharing government, has had to deal with fuel shortages. The episodic crises stretch far back to 2000, when Enos Chikowore resigned as energy minister, citing his failure to end what was then a three-month fuel shortage.

“Having considered the prevailing problems, the honourable thing for me to do is to resign with immediate effect,” Chikowore said in his resignation letter.

Apart from the shortages which the country experienced between December 2010 and January 2011, Mangoma largely managed to stabilise fuel supplies, thanks to liberalised procurement and the country’s healthy foreign currency holdings at the time.

Apart from minor stock-outs experienced in December 2014 – associated with low local ethanol production – fuel supplies remained stable until late 2016.

Shortages started to manifest as the foreign currency situation, which had worsened by the time the central bank announced tight controls in May 2016 – leading to the introduction of bond notes that November – further deteriorated.

Under the new forex regime, the central bank would run a centralised foreign currency allocation system, mostly funded by punitive ‘surrender requirements’ for exporters, mainly gold, platinum and chrome miners.

September 2017 saw another episode of fuel shortages, as money supply really started to take off on the back of unrestrained government expenditure. The total stock of money in the system reached $7.5 billion in September 2017, as annual broad money supply grew 41%.

The ‘local currency’ – digital deposits and bond notes – weakened against the United States dollar, reflecting the monetary deluge.

The value of the local currency took another sharp dip in October 2018, when the central bank announced plans to separate US dollar deposits from the digital deposits and bond notes – a move the market correctly read to be the first step in impending currency reforms that would end the peg. By then, the total money stock had breached the $10 billion mark.

Although the US dollar exchange rate peaked at levels around 1:6, before settling to the current 1:3.5, the fuel price, with a huge forex component, remained largely unchanged.

Instead, the central bank was shelling out more and more for fuel imports each week.

Demand surge

By December, Zimbabwe’s monthly fuel consumption had reached 210 million litres, nearly 100% more than the previous year.

Thanks to the decline in the ‘local currency’, the fuel price was effectively around US$0.40 per litre, lower than what motorists in oil producer Angola were paying. Some bottled water brands became  more expensive than fuel, in one of the many absurd market distortions wrought by the fictitious exchange rate.

Inevitably, demand surged, reaching all-time highs.

As a consequence, Zimbabwe’s fuel consumption exceeded that of Zambia, a comparative country with a bigger population and larger economy.

In fact, Zimbabwe’s per capita oil consumption is one of the highest on the continent, putting the likes of Kenya, Tanzania, Ethiopia and Uganda in the shade.

Meanwhile, the central bank’s capacity to shell out the US$140 million now required monthly to meet the growing demand was severely diminished.

Gold producers, who account for most of the country’s forex earnings, had revolted. Although they were required to receive 30% of their gold sales in forex, with the balance in rapidly devaluing electronic deposits, the reality was many miners were getting far less than this. The golden goose was hurting.

RioZim, a major gold producer, shut some of its mines and took the central bank to court, screaming robbery.

Government relented as output collapsed 60% between last September and November.

From November, the miners could now keep 55% of their forex earnings.

Combined with the end of tobacco sales, there was less and less forex for the central bank to spend on fuel.

‘The world’s most expensive fuel’

Something had to give.

In its policy advice to government ahead of the 2019 budget speech, the Confederation of Zimbabwe Industries (CZI) warned that the fuel subsidy could no longer be sustained.

“It will be far preferable to take the bitter medicine in one swallow rather than to sip it slowly over several years, thereby prolonging the agony and delaying the benefits of taking the medicine,” CZI wrote.

“We are currently at a point where fuel and basic commodities in Zimbabwe are trading at significant discounts to prices in regional markets.”

On January 9, 2019, government finally moved to remedy the situation, ordering a 150% price increase for both petrol and diesel.

Nominally, and because government itself insists the domestic currency is at par with the US dollar, Zimbabwe’s new prices have earned the country yet another unwanted record – the most expensive fuel prices in the world. The reality, however, is different. Zimbabwe has a currency and that currency is not at par with the US dollar.

This reality was demonstrated by 60 haulage trucks intercepted by Zambian authorities in October 2018, with 1,800 litre ‘belly tanks’ fastened to their bodies. According to the Lusaka Times newspaper, the trucks were smuggling cheaper fuel into the country from the likes of Zimbabwe, where it cost the equivalent of 10 kwacha, way below the 16 kwacha they would have to pay in Zambia.

A Zambian official inspects one of the ‘belly tanks’ used to smuggle fuel into the country

What needs to be done?

At the centre of Zimbabwe’s episodic fuel crises are two constants – an overvalued exchange rate and corruption. Before the liberalisation of the fuel sector in the early 2000s, the NocZim monopoly created vast opportunities for corruption by both executives at the parastatals and politicians who enabled and protected them.

After the monopoly was broken, government, through the central bank, has sought to retain control on fuel procurement. Before dollarisation, this was through weekly ‘foreign currency auctions’ at the central bank at an overvalued exchange rate.

After dollarisation, the brief period of genuine liberalisation presided over by Mangoma was rudely interrupted when the central bank once again interfered with its allocation system.

The long-term solution lies in economic reforms which will yield a domestic currency and a market-determined exchange rate.

Only until oil marketing companies are able to source their own funds to import fuel and sell it at a profit will Zimbabwe finally slay the monster which rears its head with disruptive regularity.

The current situation, which allows government to shake down exporters to subsidise consumption, has time and time again proved futile. It has also, now, proved deadly.   
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