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Excessive taxation driving fuel prices up

19 Apr 2021 at 09:09hrs | Views
On the 5th of April, the Zimbabwe Energy Regulatory Authority (ZERA) announced new pump price ceilings for fuel on the local market. The maximum pump price for Diesel is now ZW$111.77 per litre, up from ZW$110.41 set a month ago while the USD price remains unchanged at USD$1.32. The maximum price of Petrol per litre is now ZW$112.96 per litre, up from the march price of ZW$109.17 and USD$1.34, up from USD$1.30. ZERA has been increasing fuel prices at the beginning of each month by approximately 3% since January. The increases are partially caused by the increase in world prices for crude oil which has been trekking upwards from the COVID-19 inspired record low of US$21.04 per barrel in March 2020 to the current US$62.20 for Brent Crude. The planned cuts in oil production by the Organization of the Petroleum Exporting Countries (OPEC) and the resumption in normal business activities in most parts of the world is providing impetus to firm global oil prices in the short term. The increases in world prices mean that total landed cost for fuel locally also increases, while taxes and levies remain extremely high as compared to regional peers.

Zimbabwe imported fuel worth approximately US$560 million in 2020, down from the average of US$1.2 billion imported between 2017 and 2019 when fuel consumption subsidies existed. A significant portion of the fuel was being smuggled out of the country to neighboring countries. The country used to consume 1,06 billion litres of diesel and 570,12 million litres of petrol per year (An average consumption of 70,2 million litres per month for diesel and 47,5 million litres for petrol in the same period). However, local consumption has significantly gone down to a level where demand becomes relatively inelastic to price changes.

Government cashing on fuel tax
The inelasticity of demand to price changes means that the government can cash in on taxes levied on fuel which are relatively easy to collect as compared to other taxes levied on struggling businesses such as Value Added Tax (VAT) and Income Tax. The decline in economic activity has seen high levels of informalization in the country and a significant drop in tax revenues from the US$5.237 billion achieved in 2018 to below US$2.4 billion achieved in 2020. To compensate for the enormous drop in taxes levied on corporates and high levels of tax evasion by small businesses, the government makes a killing on Import & Excise duty levied on fuel. Duty accounts for US$0.30 for every litre of fuel imported via pipeline and US$0.35 per litre for fuel imported through road haulage. The ZINARA Road levy (US$0.06), Debt Redemption Levy (US$0.057), Carbon Tax (US$0.04) and other taxes are then added on top to take the total taxation to US$0.49 per every litre consumed locally. Businesses in the petroleum value chain especially the thriving retailers, will then pay ZERA license fees and additional taxes levied on operating income. Close to 90% of the fuel imported in Zimbabwe in transported via the Beira to Harare pipeline while 10% is imported through road haulage by independent petroleum companies.

Regional Comparisons
In the Southern African Development Community (SADC) region, Zimbabwe now has the most expensive fuel prices with regional peers charging significantly lower prices. Zambia fuel costs US$0.97 per litre, Botswana US$0.728, Mozambique US$0.898, Namibia US$0.85, and South Africa US$1.073. For the five countries, import duties and other levies (total taxation) constitutes an average of US$0.22/litre. Of particular interest is Zambia which has an economy slightly bigger than Zimbabwe and comparable vehicle population. Zambia has a GDP of US$23 billion, while Zimbabwe has US$21 billion according to World Bank 2020 estimates. Zambia is also land locked and imports bulk of its fuel via the 1700km TAZAMA pipeline from Tanzania to the Copperbelt province. The pipeline is significantly longer than Zimbabwe's 287km Beira to Mutare or 542km Beira to Harare pipeline. It is cheaper for Zambia to import its fuel from Harare via road haulage using Zimbabwe's pipeline. Surprisingly, fuel imported via Zimbabwe by the northern neighbors retails cheaper than the pump prices in Zimbabwe. Zambia levies less than US$0.25 per litre in terms of excise duty on fuel while VAT on petrol and diesel is zero rated since 1 January 2021 as a move to stimulate economic activity in light of COVID-19 business downturn and maintain general price levels in their economy.

Impact on cost of production
The 3% increase in fuel prices for every month since the beginning of the year means that cost of production on the local market is increasing by a bigger margin since fuel is an input at all levels of production. This means pressure on price increases remains high enough to maintain month on month inflation at the current levels. The increase in cost of production also hurts Zimbabwe's export competitiveness in the region especially for manufactured exports.

It also means Zimbabwe will continue to be a lucrative destination market for merchandise produced in South Africa, Zambia and other SADC countries which are landing in the local market at cheaper prices than locally manufactured products. Mineral exports will not be affected significantly considering that commodity prices are standardized on the world market, even though cost of production has significantly gone up for miners. The high cost of fuel on the local market discourages value addition by the industry and dents Zimbabwe's chances to flourish under the Africa Continental Free Trade Area (AfCFTA) which came into effect this year. AfCFTA aims to create a single continental market for goods, services and free movement of labour and capital in Africa. Countries that benefit most from such trade agreements are those that have exceptionally low costs of production and a large industrial base which is supported by strong financial services to boost trade financing.

Impact on economy
The fuel tax burden on businesses adds to the cost of doing business in the fragile economy as it underpins production in all economic sectors. While the Zimbabwean government collects the maximum possible revenues from the low hanging fruit of excise and import duties on fuel, other regional governments are looking at ways to cut on taxes levied on fuel to stimulate consumer demand and economic production.

The current taxation levels on fuel are excessive and not in sync with trends on the African market for oil importing countries. As such, there is need to reduce Import & Excise Duty paid on fuel to below US$0.20 per litre, Carbon Tax to US$0.01 and ZINARA Road Levy to below US$0.03 to manage the cost of production in the economy. The cost of fuel heavily feeds into the cost of production across all economic sectors. The increase in Brent Crude prices call for a policy change by the government, or else pump prices reach US$1.50 before the end of 2021.

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email vbhoroma@gmail.com or Twitter @VictorBhoroma1.


Source - Victor Bhoroma
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