Fuel has been on the lips of every Zimbabwean since 2018 when the current shortages started. While many reasons have been given by various government officials in order to explain the chronic shortages, one thing a lot of economists have agreed on this the fact that the sector needs to be liberalised and operated on a market basis. This is set to happen this week according to Bloomberg.
The international financial publication states that the government will stop supplying foreign currency to the fuel industry sometime this week. This is may happen as early as tomorrow when the new market based foreign currency auction system starts trading. However, Bloomberg quotes unnamed individuals who say the scrapping of these effective subsidies may be delayed. We call these subsidies because foreign currency is provided at an official rate of 25 ZWL as to 1 USD far lower than the market rate which has allegedly gone above $100
The plan, which will end an effective subsidy, will take place as early as June 23 when a currency peg is removed and an auction system for foreign exchange is set to begin, the people said, asking not to be identified because a public announcement hasn’t been made. The plan may be implemented a week or two later when its clear how the new system is working, one of the people said.
The move is an attempt to save the government $100 million of foreign exchange. The country has been beset by persistent fuel shortages as the central bank doesn’t have the money to pay for adequate import.
Part of the Bloomberg’s report on the issue.
Possible effects
It seems some fuel sellers are privy to these plans as they have started dragging their feet when it comes to selling fuel in local Zimbabwean dollars. Social media is full of such service stations, who are, apparently claiming that they have no fuel even as they are selling in foreign currency what appears to be fuel obtained from the government under the subsidy program.
The likely immediate effect of fuel being no longer subsidised is going to be a massive fuel price hike and we are not kidding. As already said according to some rumours the rate is already as high as $105 ZWL as to 1 USD, it’s a rate that is being used by supermarkets and hardware sellers. A litre of fuel, diesel or petrol, is going for more than $1 USD. Currently, fuel is selling at just under $30 ZWL. If subsidies are removed its very possible that fuel prices will rise above the $100 ZWL per litre. Such a shock increase will have very real consequences on the market.
Another effect could be that, if the new foreign currency auctioning system fails to satisfy the fuel sector’s demand for foreign currency less and less fuel will be sold in local Zimbabwean dollars. After all, the fuel sector will be competing with just about every other sector for that scarce foreign currency. This might force them to try to access foreign currency directly from the public. The result will be an effective dollarisation.
A massive hike in fuel prices will lead to a massive hike in the prices of just about everything. Demanding in foreign currency will result in trickle down dollarisation as every level including supermarkets will start to favour foreign currency as well. Eventually everyone will be looking for and demanding that elusive dollar from your banana vendor to the big oil companies.
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