Zimbabwe has removed subsidies on grain, leaving prices of staples at the mercy of market forces

Zimbabwe prices
A woman stands by bare bread shelves in a Harare supermarket on October 9, 2018. AP Photo/Tsvangirayi Mukwazhi

Finance Minister Mthuli Ncube has ended subsidies for maize and wheat, a move meant to cut costs, but set to further drive up the cost of staples for already pressed Zimbabwean consumers.

Ncube announced a Z$63.6 billion budget on Thursday, which came out moderately more expansionary than his previous austerity-themed budgets. However, he has continued with war against subsidies, which he has been rolling back since his appointment in 2018.

The grain subsidies have kept a lid on the prices of maize meal and bread for years, but Ncube says they cost the government too much and the grain sector must be left to the market.

“The current subsidy policy whereby Government funds the procurement of grain at market price and sell this to registered grain millers at subsidised price, has been open to abuse and placed a huge burden on the fiscus. At times the intended beneficiaries do not enjoy the benefits of the subsidy from Government,” Ncube said in his budget statement.

“To address these distortions, Government, will, with effect from January 2020 remove the existing grain marketing subsidies for maize and wheat that were being provided to Grain Millers through the Grain Marketing Board. The intervention will see GMB selling wheat and maize at market prices, with Grain Millers having an option to either import or purchase grain from GMB.”

Ncube admits that this is certain to drive up the cost of basic foodstuffs.

“This means the prices of basic commodities such as bread and mealie meal may adjust,” he said.

Ncube announced that he will however “extend targeted subsidies on the production of roller meal, cooking oil and the standard loaf of bread”. It is not clear how exactly this new subsidy system will work. Ncube only suggests it would be a reimbursement system to the producers of roller meal, cooking oil and standard bread through tax set-off arrangements where possible, and voucher schemes.

Anti-subsidies

Since his appointment, Ncube has set about peeling back the subsidies that kept prices of basics, fuel and electricity low.

On fuel, Ncube said pump prices must remain comparable to those in the region, “so as to remove arbitrage opportunities arising from illicit fuel exports”.

In October, the power utility ZESA announced a 320% increase in the cost of electricity, its first tariff hike in eight years. This has forced households to cut back on consumption, even amid critical load shedding. He also allowed a partial float of the currency, which had been pegged at par with the US dollar.

Despite the public rage over the prices of fuel, power and now grain, Ncube insists this has to be done.

“Market distortions associated with subsidies present an additional risk to macroeconomic and fiscal stability. 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,” he said in his budget statement.

“Government has already instituted new pricing frameworks for fuel and electricity that adequately reflect costs, including those resulting from changes in import prices and exchange rate fluctuations. The pricing framework for fuel also ensures that pump prices remain comparable to those charged in neighbouring countries.”

Command agriculture, which has drained Treasury and been blighted by corruption, is also being shifted towards a new model where banks provide state-guaranteed loans to farmers.

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