Minister tackles subsidy distortions

The Chronicle

Prosper Ndlovu, Business Editor

TREASURY has adopted a targeted subsidy model to curb market distortions arising from the previous blanket subsidy schemes that were being abused by some sectors of the economy. 

The measure includes application of a single exchange rate system to further remove unbudgeted subsidies. Presenting his 2020 National Budget Statement in Parliament yesterday, Finance and Economic Development Minister, Professor Mthuli Ncube, said market distortions associated with subsidies present an additional risk to macro-economic and fiscal stability. In particular, he said subsidies on fuel, electricity and agriculture have, in the past, led to large and often unpredictable expenses. 

“In order to remove unbudgeted subsidies, as well as avoid their resurgence, Government will apply a single exchange rate regime throughout all sectors of the economy to avoid implicit subsidies arising from preferential allocation of foreign exchange at below-market exchange rates, as it was previously the case for fuel imports and other prioritised goods,” said Prof Ncube.

“Where subsidies are deemed essential and can be financed, these will need to be clearly targeted and reflected in the budget with adequate budgetary provisions.”

To ensure effective implementation of the proposed subsidy policy, Prof Ncube said additional measures will be taken to tighten eligibility to subsidised goods and services so that only those who are eligible could benefit. He said Government has already instituted new pricing frameworks for fuel and electricity that adequately reflect costs, including those resulting from changes in import prices and exchange rate fluctuations. 

“The pricing framework for fuel also ensures that pump prices remain comparable to those charged in neighbouring countries, so as to remove arbitrage opportunities arising from illicit fuel exports,” he said. 

The Treasury boss said the current subsidy policy whereby Government funds procurement of grain at market price and sell 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 said. 

To address these distortions, the minister said 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). He said the intervention should see GMB selling wheat and maize at market prices, with grain millers having an option to either import or purchase grain from GMB. While acknowledging that the move would force the prices of basic commodities such as bread and mealie meal to spike, Prof Ncube said measures have been put in place to protect vulnerable groups.

“In order to protect vulnerable groups of our society, Government will extend targeted subsidies on the production of roller meal, cooking oil and the standard loaf of bread. A reimbursement system will be implemented in order to extend the subsidy to the producers of roller meal, cooking oil and standard bread through tax set off arrangements where possible, and voucher schemes,” he said.

Prof Ncube also said the cushioning of the commuting public against the rising cost of transport will continue.

“Government will continue to subsidise a mass transport system, as well as capacitate Zupco to provide an efficient public transport system. In this regard, Zupco will be capacitated to purchase more reliable conventional buses,” he said.