Robbing Peter to fly Paul: Govt subsidises air travel at exporters’ expense

Late last year, RwandAir’s Harare office sold return tickets to Dubai for $352, payable through ‘swipe’ or RTGS$, Zimbabwe’s unofficial currency which is pegged at parity to the US dollar.

Bargain hunters with foreign currency paid slightly over US$100 for a coveted trip to the emirate.

The generosity extends beyond RwandAir.

At current fares, a return flight from Harare to New York on SAA costs the equivalent of US$314, while a return trip to London costs all of US$298. The same flights, originating from Johannesburg, cost US$775 and US$691, respectively. A passenger flying SAA out of Lusaka can expect to pay US$1,127 to New York and US$814 million.

Even Air Zimbabwe has seen its passenger load factor go up dramatically in recent months, thanks to the obvious arbitrage opportunity. A return trip to Johannesburg on Air Zimbabwe costs no more than US$150. In this post-holiday period, it costs even less to fly SAA on the Harare-Johannesburg route – US$124.

For a while, flights on the Harare-Johannesburg route were deemed quite expensive. Not anymore, thanks to a benevolent central bank. Well, in fact, thanks to gold and tobacco producers, many who will never get to fly.

This week, RwandAir announced it would now only accept US dollars and international credit cards as payment for tickets.

The airline, which services the Harare-Kigali-Dubai and Harare-Cape Town routes, joins Emirates and British Airways in changing ticketing terms in response to Zimbabwe’s foreign currency crisis.

As Zimbabwe’s currency crunch worsens and the value of its bond note and electronic deposits weakens, airlines, like most other businesses with forex exposure to the country, find it harder to repatriate their money from the country.

Airlines with operations in Zimbabwe have US$150 million trapped in the country. South African Airways, which has the highest number of flights into Zimbabwe, is owed the bulk of the unremitted funds.

Under a forex allocation system introduced in May 2016, the central bank distributes the ever dwindling forex resources according to a priority list which seeks to spread payments to essential imports such as fuel, medicines, electricity, industrial equipment and raw materials.

Since then, airlines have had to line up at the Reserve Bank of Zimbabwe (RBZ), to cash in their electronic balances and bond notes in exchange for real dollars.

Predictably, the central bank has struggled to pay the airlines, running up a payment backlog that reached US$150 million late last year, according to the Zimbabwe Tourism Authority.

With the International Air Travel Association (IATA) warning of dire consequences, Zimbabwe promised monthly payments of US$4 million to clear the debt.

This has proved to be difficult, in the face of competing demands such as fuel, wheat, electricity and medicines. Exporters have also been pushing to retain more of their forex earnings.

As more and more airlines opt out of the central bank’s allocation system, it might be time to end the flawed practice altogether. The system basically robs gold miners and tobacco farmers, to subsidise air travel.

Gold miners, who generate the most forex for the country, give up 45% of their foreign currency earnings to the central bank, in exchange for electronic deposits (RTGS dollars), which have devalued considerably over the past year.

Similarly, the central bank wants producers of tobacco, the number two forex earner, to retain only 20% of their forex earnings. The farmers have rejected this and want to keep 80% of their sales proceeds in forex.

There’s no justification for the central bank’s insistence on subsidising air travel using exporters’ hard-earned cash.