EDITORIAL COMMENT : Fuel sector must end smuggling, arbitrage

Source: EDITORIAL COMMENT : Fuel sector must end smuggling, arbitrage | The Herald

EDITORIAL COMMENT : Fuel sector must end smuggling, arbitrage

Zimbabwe petroleum sector pricing policies, financing, supply chains and stock accounting need to be fixed quickly to prevent the growing risks of smuggling, arbitrage and deliberate defiance of foreign currency pricing rules.

Opportunities abound for dishonest profiteering and smuggling, yet it would now be relatively easy, thanks to the reforms of the monetary systems, to fix many of the problems in a way that makes it impossible for further cheating with very little pain to the ordinary consumer.

Smuggling is a problem, and has been a problem. We are now getting reports that fuel is even being double smuggled, with corruption extending across three countries.

It is now believed there has been a smuggling ring buying fuel in Mozambique, escaping Mozambican duties and Zimbabwean duties when smuggled into Zimbabwe and then avoiding South African duties when smuggled down south and sold there through criminal channels to dubious service stations and other users.

This was only caught when customs officers working for Zimra actually examined tankers bringing in soya bean oil and finding that the contents were petroleum fuels. How many other tankers of soya oil had come in with the wrong contents is anyone’s guess, with the only certainty that the caught tankers were not the first.

In the second half of 2018, when Zimbabwe’s official exchange rates were so far below reality, there was a huge jump in fuel purchases in Zimbabwe, with no corresponding increase in vehicle traffic.

The only explanation was that well-organised rings were buying large quantities of fuel in Zimbabwe dollars and smuggling it into neighbouring states where they were selling it for foreign currency.

That was fixed by a one-off jump in local pricing using the excise duties, but a similar temptation must have been building up during the first half of this year, with the huge premiums on the Zimbabwean black market in foreign exchange.

And even now, there are sharp differences in prices according to the formulas set by energy regulator Zera between directly-imported fuel sold in US dollars and fuel sold in local currency.

Part of that gap is explained by different tax rates, but even with the intensifying competition in the US dollar market pushing down US dollar denominated prices, there is still a practical gap of 12.5 percent even when auction rates, rather than black-market rates are used.

The possibilities for arbitrage obviously exist, with fuel bought for Zimbabwe dollars being sold in US dollars. We do not know if checks are being made and, in any case, it is very difficult to look at a litre of petrol and decide whether it was imported by the central import system or as a private import.

There are obviously several steps that can be taken to eliminate smuggling, eliminate arbitrage, and rationalise the whole system so that in the end it will not matter what currency is used.

Smuggling can be eliminated by simply checking the contents of every tanker entering Zimbabwe that could be carrying fuel, regardless of what the paperwork says.

A good sniff would work. Secondly Zimbabwe is not a fuel exporter, so no tankers of fuel should be going out over a border.

Fortunately, tankers need to use proper roads and bridges: they cannot be smuggled over mountain paths or rafted across rivers. So checking the contents of every vehicle that could be carrying bulk fuel is simple and possible.

If there is a desire to retain the present dual system of fuel imports, then legislation already exists to force all fuel to be stained.

There is even provision for the cost of staining in the price formulas. This would at least stop green coloured Zimbabwe dollar fuel being sold in foreign currency, and pumps of US dollar service stations should be delivering red.

And if anyone is selling brown fuel we know someone is mixing the two supplies.

But with the success of the auction system set up by the Reserve Bank of Zimbabwe, perhaps the time has now come to move the financing of fuel imports out of direct RBZ allocations and put it through the auctions, the oil companies having to join other bidders while the RBZ moves what it allocates from the reserves to the auctions.

With the process of price discovery now almost complete, with gaps of less than 10 percent between top and bottom successful bids and an even narrower gap for more than 90 percent of trading, oil companies should be able to get their bidding fairly accurate.

Zera could continue enforcing a pricing formula, and basing this on the average weighted rate to encourage oil companies to bid very tightly indeed.

At the same time the tax structure could be modified to make taxes equal, regardless of currency, and then the Government and the RBZ would need to enforce the recent rules of dual pricing using the auction rate, with the motorist queuing for fuel having the option which one to use.

That change and that enforcement would be necessary because otherwise the higher profits inherent in the formulas for directly imported fuel would encourage cheating.

To make matters move more smoothly, we cannot see any problem with major exporting companies with large nostro balances being allowed to hire an oil company to import their fuel, with the nostro holder paying the landed cost in foreign currency.

This would simply stop large monthly fuel orders causing unnecessary strains in the auctions.

There might be many other ways of bringing fuel into the increasingly normal Zimbabwean economy. Certainly at the moment it is easily the largest sector still in theory under the old systems, with the recent add-ons possibly causing more problems than they solve, and certainly opening the doors to arbitrage, cheating and smuggling.