By Everson Mushava
THE Reserve Bank of Zimbabwe will today cancel fuel subsidies, with oil companies now required to compete for foreign currency on the interbank market, a move likely to see the price of fuel rising sharply.
Central bank governor John Mangudya yesterday said the bank was dropping the 1:1 peg from the fuel importation matrix, which many fear will trigger another round of price rises and a domino effect in an economy already experiencing high inflation.
This comes after the central bank said it had secured a US$500 million loan from unspecified international banks to support its interbank currency market to ease shortages of hard currency.
“The Reserve Bank of Zimbabwe (the Bank) is pleased to advise the public that with effect from May 21, 2019 (today), the procurement of fuel by the Oil Marketing Companies (OMCs) shall be done through the interbank foreign exchange market,” Mangudya said in a statement last night.
“There shall be only one foreign exchange rate to be used in the market for the importation of all goods and services. This means that the 1:1 exchange rate that was being used by OMCs for the procurement of fuel will be discontinued with immediate effect.”
Government scrapped its discredited 1:1 dollar peg for surrogate bond notes and electronic dollars, which it merged into the Real Time Gross Settlement (ZWL) dollar in February and launched the interbank market.
It, however, maintained the 1:1 parity for fuel companies to keep fuel prices low, a move critics said was promoting corruption in allocation of foreign currency and exacerbating shortages of cash, with allegations that the market was controlled by few politically-connected players.
As of yesterday, the interbank rate closed at US$1:ZWL$3,48, while on the black market, the rate was at ZWL$5,7.
The last fuel price hike in January, announced by President Emmerson Mnangagwa himself, triggered protests around the country, which resulted in security agents killing 17 people, according to human rights groups, with hundreds left nursing gunshot wounds.
Mangudya yesterday said the new position was necessary to promote the efficient use of foreign exchange and to minimise and guard against incidences of arbitrage within the economy.
The central bank, Mangudya said, would proceed to drawdown the US$500 million from the offshore line of credit to supplement the country’s foreign exchange receipts to underpin the interbank market.
“The facility will be disbursed into the country through the interbank foreign exchange framework at the prevailing interbank foreign exchange rate on a willing-seller willing-buyer basis,” he said.
“Over and above these initiatives, letters of credit (LCs) shall continue to be used for the importation of essential commodities such as fuel, grain and cooking oil. The LCs will also be priced at the prevailing interbank foreign exchange rate.
“The bank has directed banks to effectively apply the willing-seller willing-buyer principle to ensure that the interbank foreign exchange market is reflective of market conditions.
“Accordingly, banks must ensure that there are no moral hazards in the operation of the interbank foreign exchange market. In this regard, all the foreign exchange requirements for bank for their own use that includes dividend payments, subscriptions fees, etc, would need prior exchange control approval; for the proper conduct of the interbank foreign exchange market. Similarly, banks should discontinue twinning arrangements for their customs as this undermines the efficient operations of the interbank foreign exchange market.”
However, critics note that the high price of fuel was also because of exorbitant government taxes on fuel, which accounted for nearly 25% of the ZWL$2,1 billion revenue collected in the first quarter alone.
“No more getting forex at 1:1 to import fuel or cooking or wheat. They now get priority forex through banks at the going interbank rate. This means fuel pricing is likely to increase by a huge margin unless government immediately reverses its Jan 13 fuel tax increase,” economist Kipson Gundani said.
“Cutting excise duty back to 45 cents per litre would ensure pump price remains more or less stable at around ZWL$4/litre.”
Government collects ZWL$2,11 per litre of diesel sold and ZWL$2,48 for petrol, which the State has to cut significantly to keep fuel prices low.
Meanwhile, the Zimbabwe United Passenger Company (Zupco) yesterday announced a 50% price cut on transport fares that will see the majority of commuters paying 50 cents for a trip to town.
A statement issued by Finance secretary George Guvamatanga, headlined “Operation Restore Sanity,” said the new fares were with effect from yesterday.
A distance of 20km and less will cost 50 cents; 20km to 30km will be charged 75 cents, while 30km to 40km will cost $1.
“Further distances will follow similar reductions,” the statement read.