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The Hard Truth About The Fuel Price Increase

17 Jan 2019 at 09:58hrs | Views
Sometimes the truth hurts. And in this case, it really hurts. The price increases were both necessary and proportional.  The economy needs them. The country needs them.  However there has been much media coverage about Zimbabwe having the highest fuel price globally post the increase, a "fact" which is simply wrong.  It is therefore crucial to clarify the reasons for the increase and to also illustrate how following the increase, things will get better.

It is simply incorrect to state that Zimbabwe now has the most expensive fuel globally. This shows a lack of understanding of Zim's system, and is just simply wrong.

Let's look at the details.  Zimbabwe currently effectively utilises a parallel/ dual currency system; being US Dollars (USD) and Bond Notes / RTGS. These parallel currencies are stated at equal value, i.e. US $1 equals 1 Bond Note. In reality and practically, this is not the conversion rate which is currently trading at 1 US $ to 3,6 Bond Notes/RTGS (this conversion rate is practically used across all sectors of the economy except for fuel).

This currency conversion differential has therefore created an arbitrage opportunity in the fuel industry whereby fuel was being purchased with Bond Notes with a value of less than 30c to the US Dollar. However, to ensure fuel supply, government has to accept the Bond Notes at an effective 1:1 conversion rate and use US Dollars to acquire supply.

Unfortunately, this clear arbitrage opportunity has resulted in government having a severe exodus of US Dollars, resulting in increased cash liquidity constraints to the country, severely impacting all sectors of the economy.

Furthermore, the currency arbitrage has resulted in exploitation as we have witnessed the mass illegal exodus of fuel supply out of Zimbabwe to neighbouring countries, precisely because the fuel is far below regional rates when paid in Bond Notes / RTGS. This has negatively impacted the economy and the industry, as fuel has been in short supply as a result.

An example of this is that in December 2018, fuel usage was up by 60%, when compared to December 2017. In reality therefore, the current fuel pricing, post increase, is in real US$ still well under $1 per litre.

The increase in fuel price has thus been necessary to effectively charge a regionally competitive price given the effective and real trading value of the Bond Notes / RTGS.  We do not exist in a vacuum here in Southern Africa.  This move was therefore crucial to improve the government balance of payments and also to remove the obvious incentive for those looking to profit from the illegal fuel exodus and currency arbitrage. Furthermore, government has given clear incentives for the industry to be able to be reimbursed the additional cost it may incur.

In summary, if it is accepted that the realistic and practical trading value of the Bond Notes / RTGS is around 3,6 to US $1, the true price of fuel post increase in effect is regionally competitive and still on the low side.
This government is dealing with an extremely tricky economic situation. It is why there are technocrats and academics at the helm; not political party operatives.   

While government needs time to turn the economy around, us citizens and analysts have a role to play. And so do the media.  We must stick to the truth and the facts to avoid panic; because panic is by far the greatest danger to Zimbabwe's economy and immediate future.

Source - Faith Hope
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