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Zimbabwe's fuel crisis: The role of policy errors

24 Feb 2019 at 06:46hrs | Views
Dear Mr President,

I write this letter to you as a citizen of Zimbabwe who has been a lifetime student of policymaking, with a particular interest on using policy to achieve equity and social justice outcomes. I see that the country has been worked into a corner where we are trapped in an endless cycle of economic crises and potential conflict between the leadership and citizens. I wish to highlight three factors that have put us in this situation and a focus on two priorities to get us out of the mess. Please consider this as my patriotic contribution for which no acknowledgement or compensation is required.

The prevailing scenario

A few weeks ago, Your Excellency you announced a fuel price hike of more than 150% that triggered demonstrations in which lives were lost. I fully understand what the price hike attempted to achieve, but believe that your advisors let you down in terms of the tactical approach to achieving the ends. At the end, we got an appearance of change — with the true pain of actual change, but without the actual change. First, the choice of instrument to effect the price change was terrible. Administrative measures (a tax increase) was used meaning that we are trapped in a cycle of tax changes to correct distortions in the price fuel that will arise each time the exchange rate between the real US dollar and our RTGS dollar shifts. Second, making the announcement yourself was an ill-advised decision. It creates an intractable situation in which market distortions become a conflict between yourself and citizens. You have said that you are a listening president. Fuel prices were raised, citizens demonstrated with some killed and many injured, yet the choice of instrument requires that you announce, yet another fuel price increase. Not announcing another increase means accepting the new price distortion and finding ways of financing this untargeted subsidy. On the other hand, citizens may interpret announcing a new fuel price increase as evidence that Your Excellency is not a listening president. A problem of bad policy-making in one area of our economy is now a political issue and a reference point on Your Excellency's credibility as a listening president — a development that was avoidable.

How we got here

Sir, it is my humble view that three factors got us where we are today. These are as follows:

a) The insistence that the exchange rate between real US dollars and local Bond/RTGS dollars was 1:1

b) The partial acknowledgement of the fallacy of the statement above through the price adjustment and the separation of bank balances that are real US Dollars and those that are RTGS dollars, and

c) Selfishness/self-interest/opportunism/corruption among those charged with policy-making (here it is beneficial to distinguish between the institutions such as Parliament and the bureaucrats). I believe it is at the level of bureaucrats where the rot emanates and permeates other levels. I will illustrate the effects of each of these three factors.
Insisting on an exchange rate of 1:1

By this logic, if I am to travel to Cape Town in South Africa today, I can purchase an airline ticket for about $647 return. These are RTGS dollars. The street rate between these RTGS dollars and real US dollars is 3,8:1. This effectively means that this ticket will set the buyer back not more than $166 in real US dollars. A traveller by bus would pay R1 200 for journey paid in actual rand and not bond/RTGS dollars. She would need a further R450 for food and drink over the three day journey. The journey would cost R1 650 which is about 120 real US dollars one-way giving a total of US$240 for a return journey. Clearly, something is wrong if uncomfortable travel by bus over a six-day period is more expensive than achieving the same ends by flying fewer than 12 hours. The airline will, through IATA, demand their real US$647 from the state, meaning that the state is subsidising this travel. On the other hand, persons on single dose ARVs find that pharmacies are charging real US$21 or 84 RTGS dollars for a month's drugs supply. These patients are not subsidised but air travel is heavily subsidised. I am certain Your Excellency can see the immorality in this. The response of your advisors to this scenario is predictable and illustrated in their policy prescription. Setting up an alternative supply system, introducing price controls, blame, threats, etc. These are not effective responses as they only deal with the symptoms and not the problem.

Partial acknowledgement and redress of the issue

When Your Excellency announced the fuel price increase, I was surprised. I was surprised by not the magnitude of the increase, but by three things. These are: the choice of instrument for the increase; placing yourself as the face of the increase; and, limiting the acknowledgement of the distortion to the fuel sector alone.

a) Choice of instrument

The choice of instrument means that the state must and will continue to take the blame for goings-on in the currency black market that will force future adjustments. Here you had the option of creating a grey-market and allowing the private sector to achieve the same ends for you.

b) Making the price increase announcement yourself

Making the announcement yourself removed a layer of protection and room for manoeuvre availed by having one of your ministers as the face of the increase. It is possible that this decision played an important role in the heavy handedness that characterised the response to the protests. Indeed, the security forces may have held the view that they were protecting the authority of the president and as such, their heavy handedness was a show of loyalty to His Excellency.

c) Limiting the correction to fuel only

Limiting the correction to the fuel sector alone meant that in the one area citizens felt the pain of correcting a distortion. Had the correction applied to all areas of life the pain would not have been any worse because in many other areas the market has already self-corrected. The nation would have felt the pain once and sought lasting adjustments. Instead, the solution put forward means there will be, but more adjustments that are painful. More importantly, the adopted solution does not allow for the renegotiation of all contracts based on the prevailing reality. On the one hand, we appear to be cushioning the citizen from pain when in reality, the citizen is already in pain and we are not acknowledging the pain. We are using an untenable fallacy to deny the existence of the pain. The effect of this is that we have kicked the resolution of the situation down the road to a later date. This is akin to letting a wound begin to heal with a foreign object that will need to be removed later. We started a fight and chose not to finish until a later date. This is not at all helpful.

Zii Masiye (ziimasiye@gmail.com) writes elsewhere on social media as Balancing Rocks.

Source - the standard
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