Dear Zimbabwe, Stop Setting The Petrol Price Too Low, Yours Etc, Reality

If we could actually get the universe to write letters to people that’s what the current one to the Zimbabwean Government would read :

Sirs Please stop setting the petrol price too low Yours etc Reality.

Because that’s what they’re doing, setting it too low. No, I know, no one can afford the stuff, there’s a shortage and all that. And that there’s a shortage is the very proof we need that the price is too low.

Here’s the most recent state order detailing petrol prices:

It’s too low in RTGS

So, what’s wrong with this? Well, note what the exchange rate is. That between the Real Time Gross Settlement system and the US $.

There’s nothing particularly wrong with a US $ price of $1.36 or $1.47. Well up there with many European prices, sure. Either there’s a significant tax take in that or a horrendous logistical system trying to get the gasoline there. It’s the RTGS prices that are entirely wrong.

Sure, the exchange rate is supposedly now market determined. But it ain’t, it’s still significantly manipulated by the government.

By Friday the RTGS dollar had weakened to RTGS$ 3.0120 against the US dollar, a 20% drop.

OK, that’s a month ago but still.

The official exchange rate is however 40% lower than what is prevailing on the parallel market, where the RTGS dollar is trading at 4.2 times the greenback

And that’s more like reality. Or, up to date numbers:

USD / RTGS 4.80
USD / RTGS (interbank) 3.23

The interbank market being that manipulated by government rate.

But now go back and look at those petrol prices. Even at that rigged FX rate $1.37 US is $4.39 RTGS. So that’s what the petrol price should be. Or, to be proper about it, the black market rate is the real rate and thus the RTGS price of petrol should be $6.60 RTGS or thereabouts.

Now, when there is price setting it’s always going to be that government likes to make stuff nice and cheap for people. Because, you know, try to please the voters, or at least stop them rioting in the streets. But it never does work. Make the price of something below the market price and you’ll have shortages. As Venezuela has proven so conclusively with food.

Here the problem is slightly disguised. The government is trying to say that petrol costs what petrol costs. But it’s doing so at a fake exchange rate. The implicit exchange rate in that dual petrol price is more like 2.30 RTGS to one US$. That’s a rate that hasn’t been seen in 6 months and more likely in a year in the black market. So, what’s the effect of this?

There is no domestic production of oil nor refining of it, not at any scale. So, all must be imported and imports need to be paid for in proper hard currency. Then government sells it as the RTGS price, using that silly exchange rate. They thus gain less in RTGS than it has cost them to go buy the petrol. What then happens? Well, in Zimbabwe, obviously, they then print more RTGS to cover the bills they’re trying to pay. And what happens when you expand the money supply like that? Well, yes, that’s right, you get the inflation which the country is suffering.

To all of which there is actually an answer. Over and above just not following stupid economic policy that is. One would be difficult, which is to retain the bond note, RTGS system but to apply the proper and actual exchange rate to pricing. The reason it’s difficult is that no politician ever does, once they’ve got the power to deny having to do so, want to admit to galloping inflation they’re causing. The other answer is to go back to what Zimbabwe was doing, using other peoples’, other countries’, money so that the local Zimbabwean politicians can’t inflate the hell out of it.

Strive Masiwiya was right, even if not quite in detail. Just stop using Zim money at all and price everything in SA Rand. Many to most of Zimbabwe’s current problems are because the government has control of the creation of money. So, stop them having that and thus stop most of the problems.

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