daniel chigunwe
Economy Uncensored with Tapiwanashe Mangwiro
The continuous increase in fuel taxes by the Ministry of Finance, Economic Development, and Investment Promotion, including the recent additional US$0.005 per litre petroleum levy, raises critical concerns for the local economic landscape.
With taxes now constituting US$0.5220 per litre for diesel or 38,39 percent of the total cost per litre and US$0.5370 per litre for petrol or 39,87 percent of the total cost per litre, the implications for production, distribution and the broader economy are profound.
Fuel taxes already account for 35 percent of the total fuel price, with last year’s excise duties contributing to 70 percent of government revenue. While fuel taxes serve as a major revenue generator for the government, their cumulative effect threatens to exacerbate inflationary pressures, strain production capacities and increase the cost of living for citizens.
At the same time, the country’s need for foreign currency to fund operations on the foreign exchange market and manage external debt repayment highlights the balancing act that the government must navigate.
Impact on production and distribution costs
Fuel is a core input in both production and distribution processes, making any increase in fuel prices a direct threat to the cost of doing business. Many Zimbabwean industries, mostly manufacturing and agriculture, rely heavily on fuel for transportation and powering machinery.
The increase in fuel taxes will, in turn, lead to higher operating costs for these industries. Producers will face upward pressure on their production costs, which could erode profit margins, reduce production capacity and potentially lead to layoffs or scaled-back operations.
The agriculture sector, which depends heavily on fuel for mechanised farming and irrigation, will feel this burden acutely. Farmers will face increased costs in transporting goods to market, which will be passed on to consumers through higher food prices. This may result in a contraction in the agricultural sector’s output, further pressuring food security in the country.
Moreover, distribution costs across the board are set to rise. The logistics sector, responsible for moving goods from factories to consumers, will see a spike in fuel costs, which may lead to increased freight charges. For retailers and wholesalers, this will mean higher costs for moving inventory, translating into higher prices for end consumers.
The multiplier effect of fuel tax increases on the entire supply chain could potentially result in higher inflation, eroding purchasing power for both businesses and consumers.
Impact on the cost of living
For households, the increase in fuel taxes comes at a time when Zimbabweans are already grappling with a high cost of living. Rising fuel prices will push up transportation costs, directly impacting commuters and businesses that rely on public transport to move goods and employees.
Public transportation costs are likely to rise as operators factor in higher fuel expenses, further straining household budgets. The ripple effect is that food and other essential goods, already experiencing price hikes, will become even more expensive.
Additionally, in a country prone to electricity shortages, many businesses and households rely on diesel-powered generators to maintain power supply during outages. These generators are used not only for household consumption but also for critical infrastructure such as hospitals, schools and businesses.
The increase in diesel taxes will make operating generators more expensive, leaving many institutions vulnerable to longer periods of downtime during blackouts, which can have serious socio-economic consequences.
The burden of increased fuel taxes will also disproportionately affect the informal sector, which constitutes a significant portion of Zimbabwe’s economy. Informal traders, who often use public transport or operate small delivery services, will see their already tight margins shrink further, pushing more businesses to the brink of collapse.
Foreign currency and debt repayment pressures
The government’s decision to continue raising fuel taxes, however, cannot be seen in isolation from the broader economic pressures Zimbabwe faces, particularly its foreign currency needs. Fuel imports require substantial amounts of foreign currency, which Zimbabwe struggles to maintain.
Higher fuel taxes can, in theory, slow down fuel consumption, reducing the country’s fuel import bill and helping to manage the foreign exchange reserves. This strategy could free up much-needed foreign currency to support other vital imports, such as medical supplies and industrial equipment.
At the same time, Zimbabwe has significant external debt obligations that require foreign currency for repayment. Revenue generated from fuel taxes provides the government with an avenue to accumulate the necessary foreign exchange reserves for debt service.
The country is under pressure to meet its debt obligations while simultaneously funding critical imports to keep the economy running. However, by placing the burden on consumers and businesses through fuel tax hikes, the government risks stifling economic activity, which could diminish its tax revenue in other areas.
Striking a balance
The challenge for the government lies in balancing the need for revenue with the economic realities faced by businesses and households. Fuel taxes are a critical revenue source, particularly in an environment where other tax bases have shrunk due to economic contraction.
However, the downside is that they create inflationary pressures, reduce disposable incomes and hinder economic growth.
To mitigate these impacts, the government could explore alternative revenue-generating measures that do not disproportionately affect essential commodities like fuel.
A more targeted approach that exempts key industries or provides rebates to sectors like agriculture and manufacturing could help cushion the blow of higher fuel prices while maintaining government revenue streams.
At the same time, policies aimed at improving energy efficiency and reducing dependence on fuel for electricity generation could lessen the overall economic impact of fuel tax hikes.
In conclusion, while the continuous increase in fuel taxes provides the government with much-needed revenue and foreign currency, the broader economic implications are significant.
Rising production and distribution costs, compounded by higher living expenses, will strain both businesses and consumers.
For Zimbabwe, the challenge remains finding a path that supports fiscal sustainability without undermining economic growth and social stability.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes this in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn
Bongani Ndlovu