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Govt changes subsidy model

06 Dec, 2019 - 00:12 0 Views
Govt changes subsidy model Professor Mthuli Ncube

The Herald

Business Reporter
Government is doing away with all subsidies that were creating distortions in the economy and will only maintain or put in place those that are meant to protect vulnerable members of the society.

For years Government has been subsidising the procurement of fuel, maize, wheat, soya bean and electricity among others benefiting both the poor and the rich.

For example, Government coffers would be used to subsidise fuel used by the elderly in Dotito, when they take a bus ride to the nearest hospital, while at the same time subsidising for fuel used by a rich executive choosing to drive a fuel guzzling Range Rover 5.0L V8 SUV.

The resulting distortions, associated with subsidies, present an additional risk to macroeconomic and fiscal stability, according to Finance and Economic Development Minister Mthuli Ncube.

In his 2020 National Budget, Minister Ncube said subsidies, in particular those on fuel, electricity and agriculture have, in the past, “led to large and often unpredictable expenses”, forcing Government to run a budget deficit that was eventually financed by excessive borrowings and in the process, putting pressure on the local currency and inflation.

Minister Ncube singled out grain supplies, saying “the current subsidy policy whereby Government funds the procurement of grain at market price and sells this to registered grain millers at subsidised price, has been open to abuse and placed a huge burden on the fiscus”.

“At times the intended beneficiaries do not enjoy the benefits of the subsidy from Government,” he added.

He thus proposed that to address the distortions, Government, will, with effect from January 2020 remove the existing grain marketing subsidies for maize and wheat, that were being provided to Grain Millers through the Grain Marketing Board (GMB).

“The intervention will see GMB selling wheat and maize at market prices, with Grain Millers having an option to either import or purchase grain from GMB,” he added.

He also reviewed and removed subsidies on electricity, wheat, soya bean and fuel resulting in an upward adjustment of prices. While this placed an additional burden on individual consumers, collectively the country would eventually make savings and remove distortions that were crippling the economy.

The International Monetary Fund’s (IMF) resident representative in Zimbabwe Patrick Imam, backed Government’s decision to remove fuel subsidies saying they are “among the worst types of subsidies to have as they are badly targeted”.

Mr Imam is of the view that subsidising fuel leads to misallocation of resources.

He said the poor are also harmed as fuel subsidies drain Government budgets of funds that could benefit the vulnerable in a more targeted way.

“These could be used to raise public spending on education and health for instance. Therefore, freeing up public funds for such needs was one of the major objectives of the fuel price reform,” said Mr Imam in an interview with our sister paper Business Weekly.

He also said fuel subsidy leads to overconsumption as people buy cars that are energy-consuming, or keep old inefficient cars on the street rather than trying to find ways to save on fuel.

This, however, does not mean Government is entirely removing subsidies but is introducing new ones that are “quantified, budgeted and targeted”, according to the Permanent Secretary in the Ministry of Finance and Economic Development George Guvamatanga.

He said Government is still subsidising public transport through Zupco as a way of cushion vulnerable members of the society from high travelling fares.

Mr Guvamatanga allayed fears that the Zupco subsidies are not sustainable saying the move was well calculated and will not burden the country’s purse.

“We know exactly how much this is going to cost us, we have done some mathematics, and we have factored in this subsidy. A subsidy if it’s quantified, budgeted and targeted, it’s a good subsidy. Safety nets by their nature are subsidies because you want to protect vulnerable members of society,” said Mr Guvamatanga.

Just yesterday, Government announced a new model to subsidise the production of roller meal, replacing the old standing one where it subsidised procurement of maize through GMB.

In a statement, Minister Ncube said: “As you may be aware, His Excellency the President Mnangagwa announced that the subsidy on maize has been restored in order to cushion the vulnerable groups of our society from the negative impact of increases in basic food prices.

“In this regard, the new subsidy model will therefore target the production of roller meal resulting in the retail price of ZWL$50 for a 10kg bag.”

Mr Guvamatanga said yesterday, Treasury will save at least $200 million per month through the new subsidy policy.

He said a reimbursement system will be implemented in order to extend the subsidy to the producers of roller meal through something similar to a rebate system.

He reiterated that the target is to subsidise for approximately 40 000 tonnes that is required by millers per month.

“Government, through GMB will purchase maize meal at market price and sell to millers at the same price. In fact, millers can even buy from the market or import, but what we will provide subsidy for is the roller meal,” said Mr Guvamatanga.

He said the previous model was inefficient and prone to abuse and arbitrage with some millers finding no reason to mill as it was quicker and profitable to resale to the GMB. “This will end the abuse of the previous subsidy model where some millers would buy and resale maize to the GMB,” said Mr Guvamatanga.

He said the “new arrangement” will, however, target just roller meal and a mechanism has been put in place with the Grain Millers Association of Zimbabwe who make up 95 percent share of the roller meal market.

“We have removed distortions on fuel and grains and there is now proof that free markets are very efficient,” he said.

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