On Tuesday the 29th of October the Zimbabwe Energy Regulatory Authority announced yet another fuel price hike. One litre of diesel now goes for ZWL$17.47 which was formerly ZWL$15.64. One litre of petrol went up from ZWL$14.97 to ZWL$16.75. These changes constitute a price hike of roughly 12%. Fuel prices are no longer that surprising in Zimbabwe since they have become a common feature that occurs almost weekly. At least this time around the fuel prices had remained static for 2 weeks in a row. I recently wrote an article in which I pointed out how the justifications of fuel price hikes on FOB price movements and excise duty changes seem exaggerated. In this article, I discuss some interesting observations from what has been happening regarding fuel price hikes.
What Are These Fuel Price Hikes Really Based On?
If you have always closely followed the fuel price hike announcements you would have by now noticed something. The fuel prices have always been attributed to FOB price movements and revised excise duty. However, it has not always made sense as to why it seems like Zimbabwe is the only country in the region affected this much. Come to think of it there are some countries that pass through Zimbabwe whilst ferrying their fuel (e.g. Zambia). Yet we do not get to hear of weekly fuel price hikes in their country yet they incur more costs than us.
Beginning the month of October ZERA stopped including the part in their announcements where they would mention the FOB and excise duty elements. Now they no longer specifically mention that during their announcements. If you look you can see that the recent fuel price hikes have been mainly premised on the exchange rate on the interbank market. Even more interestingly if you examine closely you will notice that before, the exchange rate highlighted in the announcements had somehow been tied in to parallel market exchange rates. So it has always been very blurry as to what exactly informs the fuel price hikes but as for now, we know they are currently using the interbank exchange rates. ZERA made it explicitly clear that loss in value of the local currency against the US dollar on the interbank market led to the recent fuel price hike.
Implications On Prices Of Goods And Services
Fuel is a significant factor when it comes to the cost of doing business. This simply means that the more fuel prices go up, the more costs of production go up. This then culminates in the going up of prices of goods and services as businesses will be trying to recover costs and get a profit. In principle, premising fuel prices on the interbank market is not entirely bad but it does not entirely help matters. Look, in short, the fuel price adjustments are now meant to remain in sync with changes on the interbank market. Here is the downside; there are foreign currency shortages on the interbank market. So the hiking of fuel prices becomes inevitable because importing it becomes costly due to the scarcity and cost of getting foreign currency. Those costs are catered for in the ultimate pricing of the fuel to the customers. All these factors lock the country into a perpetual cycle of price increases. Every fresh wave of fuel price hikes triggers a fresh wave of price hikes for good and services. Recently mobile tariffs were hiked by 95% something that has been justified on the inflationary nature of the operating environment. To put into perspective what these mobile tariff hikes mean here is an example, an on-net call now costs roughly ZWL$0.96.
Considering the fact that the government is still grappling with issues that are not at the root then fuel price hikes can expect further on. Every business sector is echoing the same sentiments that the fundamental issues must be addressed otherwise inflation will still elude us. We are also fresh out of sentiments by the finance ministry and the central bank that new notes and coins shall be added into circulation in less than 2 weeks’ time. Is this a development that will improve cash shortages or it will worsen the current situation? All that and more waits to be seen as we move along in this final quarter of the year.