How government is perpetuating fuel crisis

Long queues at Zimbabwe's fuel outlets amid shortages of the commodity/VOA

When the fuel crisis escalated last January, President Emmerson Mnangagwa was forced to announce a 150% price increase.

Amid the outrage and riots which followed, one important detail went largely unnoticed: about 70% of the new prices was going to government in the form of taxes and levies.

Although it is giving oil firms forex for fuel imports at a huge discount because it has maintained the 1:1 rate for the sector, government is raking enormous amounts from fuel sales.

This is borne out by official statistics which show that excise duty, to which fuel contributes more than 80%, was by far the single biggest contributor to revenue collection in the first quarter of 2019, exceeding value added tax on local sales.

Excise duty was $565 million in the first three months, as total tax revenue reached $2.1 billion, exceeding the target by 42%. Duty on fuel alone accounted for about a quarter of government revenues in the first quarter.

Oil importers and dealers, on the other hand, are restricted to margins of 10 cents and 15 cents per litre of fuel, respectively. Herein lies part of the problem.

Announcing the January price increase in an unprecedented live television address, Mnangagwa said government had “chosen to act, and act decisively.”

However, perhaps mindful of the violent reaction that greeted the January increase and the turmoil already in the economy, government has not acted decisively to resolve the persistent problem, despite compelling reasons to do so.

Although the huge price increase dampened demand and briefly cleared queues, the pricing regime has not kept up with movements in the exchange rate, meaning the commodity is, once again, significantly subsidised.


The applied exchange rate at the time of the January fuel price increase was 2.5.

A lot has happened since then, including the partial floating of the exchange rate following the introduction of an inter-bank forex market in February.

Now, the official exchange rate is above 3.3 but the fuel price hasn’t moved much.

Industry experts say the growing gap between forex and RTGS fuel prices has created room for arbitrage.

Because the government has also allowed some fuel retailers to sell the commodity in United States dollars, the significant difference in forex and local currency pricing creates arbitrage opportunities and market distortions.

At current prices, using the official exchange rate, petrol and diesel cost the equivalent of US$1.01 and US$0.96, respectively. Using the black market rate, the prices are US$0.67 and US$0.64 for petrol and diesel, respectively.

Meanwhile, service stations permitted to sell in forex are charging as much as US$1.48 per litre of petrol and US$1.37 for diesel. This has created a huge arbitrage opportunity which petroleum industry watchers believe is being exploited by some traders.


There are few things which have done more to undermine confidence in the Mnangagwa administration’s capacity to revive the economy than the seemingly interminable fuel crisis.

Fuel queues, which have become a regular aspect of daily Zimbabwean life, keep growing longer. Last week, the country virtually ran dry.

In what is now a recurring theme, the Reserve Bank of Zimbabwe (RBZ), which has taken upon itself the role of national fuel procurer, scrambled to organise payment and the pumps started running again towards the end of the week.

The central bank says it has made letters of credit worth US$50 million available to the fuel industry, to secure some 130 million litres – enough for about a month’s consumption.

The central bank now mostly issues letters of credit  – an undertaking by the central bank to pay commodity sellers on more relaxed terms than cash – to fund imports of products such as fuel and crude edible oil. Typically, the central bank deposits 25% of the LC’s value, with the rest of the payment spread over six months.

In a December 20, 2018 appearance before the energy parliamentary portfolio committee, central bank governor Mangudya promised that fuel queues would disappear in the post-Christmas period on increased supplies. He also believed that January would see reduced demand.

He was wrong on both accounts.

Even Energy Minister Joram Gumbo has run out of excuses and explanations for the crisis. Previously, the minister’s standard responses ranged from ‘panic buying’ to ‘a rapidly expanding economy fueling demand.’ Now, he blames Mangudya.

For his part, Mangudya seems defiantly stuck in denial and refuses to admit that the current fuel procurement and pricing model is broken.

Is full-scale liberalisation the answer?

Oil industry experts says current fuel prices should be adjusted by as much as 53% to move from the prevailing sub-economic levels.

The authorities are believed to be strongly considering ending the current arrangement where the central bank still provides forex for fuel imports at 1:1, despite the introduction of an inter-bank forex market late February.

Other key sub-sectors, such as cooking oil manufacturers, who import as much as US$200 million worth of soybean oil, have already been weaned off the 1:1 and are now accessing forex at the interbank rate.

Removing the 1:1 from the fuel importation matrix will immediately trigger another big price increase and have a domino effect throughout an economy already experiencing high inflation.

It will also exert pressure on the inter-bank forex market, where only US$85 million has been traded in the two months since it took off. The upside, though, is that, with the biggest import item off its back, the RBZ can release more forex into the market by reducing or eliminating the export surrender requirements.

Zimbabwe’s fuel import bill is huge, coming in at US$1.2 billion in 2018, about a fifth of total imports.

If the liberalisation is to work, the inter-bank market would require a significant injection of liquidity and less meddling by the central bank, which has been accused of keeping the exchange rate low through ‘moral suasion’, despite promising an unfettered market.

For this to happen, in the absence of a significant injection from outside, the central bank would also have to accede to exporters two key demands: lower the threshold of forex they still surrender to the central bank and allow them to hold onto their export receipts for longer than 30 days.

Gold producers, who generate most of the country’s forex, are unhappy about retaining just 55% of their export proceeds in dollars, with the rest being in an unstable local currency. Output for the first quarter has been reported at 11% lower, compared to the record-breaking first quarter of 2018.

The tobacco industry, the second largest forex earner after gold, has also protested against unfavourable payment terms and slowed down sales that were expected to improve forex liquidity in the economy.

As if there isn’t enough pressure, the country plans to increase power imports to make up for declining output from the Kariba hydroelectricity plant.

A disastrous farming season also means a huge food import bill for the country and more pressure on its forex position.

The authorities are reportedly considering ending 1:1 forex allocations to the fuel industry

Is there enough to spread around?

It is trite that markets do a better job of allocating resource than governments. Experts contend that Zimbabwe’s foreign currency crisis is compounded by the inefficient allocation of the resource. With US$4 billion in exports, Zimbabwe is in the same ballpark with the likes of Kenya, Namibia, Botswana and Cameroon, while bettering countries such as Tanzania, Senegal, Uganda, Ethiopia, Mauritius and Rwanda.

The prolonged absence of a proper forex market and an over-valued currency, centralised forex allocation and the attendant corruption and arbitrage, coupled with the collapse of production – which has fueled demand for imports – has resulted in this inefficient allocation of forex.

Government needs to cut taxes

The state collects between ZWL$2.11 (diesel) and ZWL$2.48 (petrol) per litre of fuel sold. This is made up of excise duty (ZWL$2.05 for diesel and ZWL$2.31 for petrol), as well as a road levy, carbon tax, strategic reserve fund and the NocZim debt redemption levy. A huge part of this would have to be cut once the fuel pricing regime has been liberalised.