Influential Zimbabwe business lobby groups and economists this week called for the immediate easing of taxation on fuel to soften inflation blows in light of the devastating effects of the ongoing military conflict between Russia and Ukraine.
This week, the price for blended petrol shot up to US$1,73 per litre and diesel rose to US$1,76 per litre, the Zimbabwe Energy Regulatory Authority said Tuesday.
Since the conflict in Ukraine started on February 24 this year, the price of petrol and diesel have gone up by 20 percent and 22 percent respectively.
To cut fuel prices, Zimbabwean Government reintroduced mandatory blending of petrol with ethanol on April 24, starting at 10 percent. The blending levels have since risen to 15 percent.
With little prospects of ending the Russia/Ukraine conflict, further increases are expected, with oil prices expected to hit US$150 per barrel by September, some analysts say.
Maintaining the current tax regime on fuel has a direct and positive impact on inflation, economist Professor Gift Mugano told Business Weekly on Wednesday, noting the sustained increases in prices have resulted in imported inflation.
Diesel attracts levies and taxes amounting to US40 cents per litre, while taxes on petrol taxes amount to US49c per litre.
These include duty (US30c per litre for both diesel and petrol), the Zimbabwe National Road Administration road levy (US2c), carbon tax (US4c) and strategic reserve levy (US0,047c) for petrol and (US12c) for diesel.
Already, Zimbabwe’s annual inflation for May 2022 increased to 132 percent, worsening “the plight of the general public and vulnerable population, especially in the face of inadequate safety nets”, Prof Mugano noted.
However, some analysts argue fuel price increases are largely transitory being driven by exogenous factors.
“Reducing taxes would not be prudent considering that the concomitant reduction in Government revenue will impact more on its spending on social services and increase vulnerability at a time inflation is already high,” economist Brains Muchemwa said.
“Worse still, we have (a) history of fiscal deficit financing that induces permanent loss of value of the domestic currency. Therefore anything that endangers the fiscal balance, which is already in bad shape, can precipitate permanent erosion of purchasing power from an exchange rate perspective.”
However, Prof Mugano said; “the conventional wisdom, which argues that tax cuts in the fuel sector will result in reduction of tax revenue, which will push the budget into a deficit may not be correct”.
“One has to look at this argument from a tax sensitivity perspective,” said Prof Mugano.
“There is abundant empirical evidence on the sensitivity of revenue to tax cuts in the fuel sector. I carried out simulation modelling which shows that marginal decrease on taxes in the fuel sector will result in a sudden surge in demand which compensate for the minimum revenue loss.”
“This can be linked to the analogy which says that 10 percent of an elephant is better than 100 percent of a rat.
“Looking closely at the pricing model of fuel in Zimbabwe, tax heads or levies such as strategy reserve levy and Zinara levy have nothing to do with the direct effect on the performance of the budget since they are linked to specific areas of national interest such as road maintenance.
The business case of removing say the Zinara levy is based on the notion that the very same truck still pays for toll gates; so we will still get the money for road maintenance and avoid double counting.”
The more than 3000 strong industrial lobby group, Zimbabwe National Chamber of Commerce (ZNCC), said with fuel prices expected to continue rising, the Government needed to forego some of the taxes and levies.
“Our fuel tax levels are already high and the Government cannot continue reviewing prices upwards in line with global oil prices. I think we can achieve some level of stability if Government foregoes some of the taxes and that has always been our position,” ZNCC chief executive Chris Mugaga told Business Weekly in an interview on Friday.
Economist, Prof Tony Hawkins, partly supported the idea of tax cuts, but does not see the Government taking such a measure given the revenue they are collecting from taxes.
“You should know that we have a Government that is looking for money, foreign currency to be particular,” said Prof Hawkins. “The country is in short of foreign currency so the Government is looking at ways to raise forex. As for carbon emissions we do not have much carbon emissions; so the carbon taxes burden on people is just a way of getting money from the people.” He added.
“We have an election next year (which need to be funded) so if they cut the taxes on fuel what do they do.”
But Prof Mugano said the Government had the responsibility of dealing with exogenous shocks coming on the back of the Ukraine crisis and tax cuts “look plausible.”
“I am still convinced that the costs of fuel hikes, which are transmitted through inflation have massive negative consequences on the economy than the possible costs associated with budget deficits if the tax cuts result in loss of tax revenue,” he said.
The Safari Operators Association of Zimbabwe (SOAZ), said Government should seriously look into how potential revenue loss from tax cuts could “be compensated” while stressing easing taxation on fuel would help reduce prices and the cost of production for businesses, thus enhancing their viability and growth prospects.
“The impact is unprecedented,” Dr Emmanuel Fundira, the chairman of SOAZ said in an interview.
“It is something that we did not anticipate when we were doing our costing on forward bookings and the rise in fuel price is taking a significant knock-on our margins; viability is eroded.
Ordinary citizens, already feeling the heat of price increases in food commodities, electricity and transport said trimming taxes was the only way to cushion the public.
“The situation is so bad, it is difficult and life is getting harder each passing day,” said Gerald Runako, a teacher at Harare government school.
“When the price of fuel goes up, prices of all commodities also go up. Tax breaks, for now, or maybe until the situation in Eastern Europe stabilises will give us a huge relief,” Runako added.
Zimbabwe resumed petrol blending on April 25 this year at E10 and is expected to go up to E20 at the end of this month as part of measures to lower prices and ensure the availability of the commodity amid uncertainties due to the ongoing conflict between Russia and Ukraine.
There were concerns in certain quarters the immediate spike in ethanol demand could lead to supply shortfalls, with some analysts suggesting tax breaks would guarantee fuel price stability in the long term.
Blending at E20 will result in price reduction by US0,07 cents per litre.
Barring adverse weather conditions, such as heavy rains, which normally result in inaccessibility of cane fields by the machinery, “we are more than prepared to satisfy the market,” a senior official with Green Fuel, the sole producer of ethanol for fuel blending said in a recent interview.
“We have just completed upgrading our crushing capacity and I can assure you that the supplies would be more than adequate to meet the demand in line with new blending needs,” he added.