Zimbabwe’s One Sensible Economic Move – Abolishing The Special Exchange Rate For Fuel Purchases

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Something that’s just so hard to get across to people is that special exemptions and treatments for certain parts of the economy just don’t work. People are interested in money and they’ll exploit any system at all to try and get it. Thus this move to using the basic market exchange rate for fuel purchases is a step forward for Zimbabwe’s economy – for it removes one of those exploitable special treatments.

Sure, it means that fuel prices have gone up. Again. But then they should, as the currency is still losing value:

ZIMBABWE’S local currency yesterday shed as much as 33% in value to trade at US$1:RTGS$4,70 on the official interbank market in response to a nearly 50% fuel price hike.

Well, no, not quite. There wasn’t a fuel price hike so much as people buying USD to buy fuel abroad now have to use a sensible exchange rate:

ZERA hiked fuel prices following the Reserve Bank of Zimbabwe’s (RBZ)’s decision to stop providing Oil Marketing Companies (OMCs) with foreign currency at a 1:1 exchange rate. In a statement released on Monday, the RBZ said with effective from May 21, 2019 all fuel dealers will now have to “procure foreign currency for fuel through the interbank foreign exchange market to mitigate against arbitrage in the economy.”

Think of what happens when there is that special exemption. Someone has to have a licence to get that special price. Who gets the licences? The friends of those who issue the licences. Whether or not they’re actually going to import fuel with the USD they’ve now got at that special price. Not to point any fingers but we’re certain that this does happen.

Then think on what happens next. The Zimbabwe government has to pay the market price for the USD. And then they sell it at less than the market price. Even if they get it cheaper than the market price – say by not paying the tobacco farmers the full market value of their exports. They *could* have sold it at the full market value, that foreign currency. So, this special price is a transfer from the general taxpayer to one of two groups. If people are cheating the system then to the cheaters. And if they’re not, if every cent of that foreign currency is spent upon fuel imports then it’s still a transfer from the general taxpayer to the people who buy fuel.

Why should this happen? Why should there be – say – this transfer from tobacco farmers to the sort of richer people who can afford to drive a Mercedes? Quite so, there shouldn’t be therefore there shouldn’t be the special exchange rate:

There were long queues at several filling stations, with the commodity selling for anything between ZWL$4,80 and ZWL$5,15 for both petrol and diesel.

Those queues will disappear because petrol will be selling for what petrol costs. This is one of the few decent economic decisions in Zimbabwe in recent times. Now all that is necessary is to get rid of all the other special prices and privileges that exist. Proper free market prices will solve a lot of the problems.