Fuel price adjustments crucial to deal with arbitrage opportunists
ARBITRAGE is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms, according to investopedia.com.
On his blog available online, Martin Majaji, a member of the Institute of Chartered Accountants in England and Wales and a financial, treasury and economics practitioner based in Johannesburg (South Africa), argues that pricing and supply stability of goods and services in Zimbabwe can only be restored after eliminating the market distortions caused by arbitrage opportunities prevailing in the market space.
Arbitrage opportunities destroy real production as real economic benefits are transferred from real producers to the arbitrageurs and rent seekers. Real economic growth which creates formal employment can only be achieved by a real increase in production of goods and services in a stable macro-economic environment, he argues.
He alludes to the fact that fuel prices in the country, before last week’s price adjustments, were cheaper compared to most countries in the region and thus created arbitrage opportunities and practices which had a negative effect on the economy as a whole.
“The same three-tier forex pricing system creates arbitrage opportunities for traders to buy fuel using either bond notes or RTGS transfers and sell the fuel in US dollars in neighbouring countries and (then) trade the US Dollars for bond notes or RTGS at double (or more than) the official rate, and immediately more than doubling their profits.
“Traders can also export scarce locally produced products like cooking oil, cement, beverages, etc even at a discount into neighbouring countries. If they receive payment in US dollars, they will trade the dollars for bond notes and RTGS at more than 100 percent margin hence making huge profits from arbitrage. This could explain some of the recent spikes in real volume sales of beverage companies, cooking oil companies and cement companies leading to supply shortages in the domestic market and an increased demand for forex allocation to import more raw materials,” he writes on his blog.
Many economic commentators also conceded that the increase in demand for fuel was partly as a result of the fact that Zimbabwe had the cheapest fuel in the region (before last week’s adjustments) if one were to make use of the three-tier forex pricing system to trade fuel in the country and the official exchange rate of 1:1.
“A real-life example works as follows; a trucking company plying the JohannesburgDRC route, will ensure that drivers carry US dollars in cash. Upon arrival in Zimbabwe where diesel prices are (were) officially pegged around USD1.40, the driver sells his dollar notes at (the black market). The driver then uses the bond notes proceeds to pay for diesel at a Zimbabwean service at the marked price of USD1.40 (swipe/bond). In real terms the cost of fuel in Zimbabwe then is US$0.70 or 70c, since (if) the truck driver obtained his bond notes at a rate of 1 to 2 for his precious USD notes. The price of fuel can even be way cheaper than 70c where RTGS is used for payment after trading USD notes at the higher discounted RTGS (black market) rate.”
If the theory of arbitrage were to be fully appreciated, of course taking into account other factors, then the adjustments in fuel prices announced by President Mnangagwa last Saturday were inevitable. In fact, they are economically sound.
The President, addressing the international media in Russia last week, reiterated that the prior lower prices of petroleum products had made Zimbabwe attractive to external consumers who flocked into the country to buy petrol and diesel cheaply. The Head of State and Government indicated that black market currency dealings had contributed to a gross distortion of the fuel price, making it the lowest in the region. The new retail prices are $3,31/litre (previously $1,34) for petrol and $3,11/litre (previously $1,49) for diesel.
President Mnangagwa said: “The recent price increase was necessary and remains necessary. In our region, before two days ago, the price of fuel was about 60 (US) cents per litre, the lowest in the region. We have now brought it to the level of about US$1,30, which is the average in the region. The level of 60c per litre, even surrounding consumers of fuel would find it cheaper to come into Zimbabwe to access that fuel.
“As you are aware, we depend on hard currency (to buy fuel) which we do not produce, but (which we) earn through exports. So we have very limited capacity in acquiring hard currency. But we have enough hard currency resources for our domestic market. At the level at which now we have priced our fuel, it will stabilise the aspect of fuel filtering to neighbouring consumers.”
The President added that Zimbabwe was a country that was in transition economically and politically, and the fruits of this would not be reaped overnight.
“You must realise that Zimbabwe is going through both political and economic reforms. These do not come easily. We have introduced austerity measures and it will take time for things to settle and results to show that this is where we must go to grow our economy and improve the lives of our people,” President Mnangagwa said.
To cushion business, Government has granted tax rebates to various registered businesses so that they continue to supply goods and services at old prices without having to pass on the higher cost to consumers after the new fuel prices. In addition, the Government would soon institute an audit on how different fuel facilities had been utilised on the back of persistent fuel shortages despite Government pumping in millions of US dollars every month to import fuel.
The Head of State and Government said to curb misuse of fuel in the country, Government, through relevant departments, which include its security structures, had started on a comprehensive audit of all fuel draw-downs with a view to establishing points of leakages and promised punishment for criminal conduct.
Zimbabwe recently experienced a spike in fuel shortages as investigations showed the country had consumed almost 480 million more litres of petrol and diesel in six months between June and November last year than in the same period in 2017, a 77 percent extra, and more than US$200 million in foreign currency.
Addressing a town hall meeting organised by Global Shapers Community Harare in the capital recently, Finance and Economic Development Minister Professor Mthuli Ncube also said authorities were aware that the chaos in the sector was being worsened by the price differential for the commodity existing across borders and within the country owing to parallel market exchange rates.
“But a lot is going on in the fuel sector. We are also quite aware of the arbitrage opportunities that have been created by the price of fuel relative to its price outside Zimbabwe and also relative to the parallel market. We are quite aware that there is round-tripping either across borders or between parallel market and the fuel market. And there is a whole parallel market for fuel in the first place, where fuel is being sold, is it for $4 or $5 per litre? Those are the figures that I keep hearing. So you have got these distortions in the market that are making the situation worse. . . Of course, we have a forex shortage – that is a fact – but perhaps just through currency reforms and getting the right pricing for fuel, that will deal a blow to pricing distortions and arbitrage opportunity,” he said.
It is believed that Government was essentially subsiding the local market and paying heavily through hefty foreign currently allocations to the sector. The Reserve Bank of Zimbabwe recently doubled foreign currency allocations to fuel dealers from $10 million to $20 million per month, yet a substantial amount of that fuel was suspected to be clandestinely channelled to the black market or even outside our borders.
Zimbabweans believe the adjustments will help Government and actors in the industry to recoup their costs and be able to ensure a steady supply of fuel into the market.