Fuel smuggling takes toll on economic growth

Fuel smuggling in Zimbabwe is hampering Government’s revenue collection efforts – a serious threat to economic growth – despite tax and law enforcement authorities’ attempt to curb the scourge.

“The biggest challenge in the collection of excise duty is where fuel is declared as transit, yet offloaded and used in Zimbabwe,” reads an undated article published on the Zimbabwe Revenue Authority’s website titled, “IMF spearheads Excise Management Technical Assistance”.

In its 2020 annual report, ZIMRA noted that the fuel smuggling syndicate involved clearing agencies, transporters and its officers who falsified descriptions and quantities.

Meanwhile, The Herald’s investigation revealed that criminal syndicates are taking advantage of disparities in prices in the Southern African Development Community (SADC) and some hydrocarbons imported into the country duty-free.

At least six truckers interviewed said a driver from a logistics company on assignment to transport say 40 000 litres of petrol from Mozambique destined for Zambia will declare it as transit cargo at Forbes Border Post, and offloads it in Zimbabwe. He will then refill the tanker with 40 000 litres of water, seal it, declare the contraband as petrol at Chirundu Border Post to complete the acquittal process, and cross it into Zambia.

Once in Zambia, he will buy 40 000 litres of petrol on the Zambian market to deliver to the customer, making a profit with the consignment.

Taxation on fuel sums up to US$0,49 for every litre consumed locally, with duty accounting for US$0,30 for fuel imported through pipeline, while every litre of fuel imported through road haulage attracts US$0,35.

Excise duty, which is among the taxes and levies charged on imported fuel, such as carbon tax, Zimbabwe National Road Administration (Zinara) levy, and debt redemption tax, is imposed to boost the country’s economy and meet its developmental goals.

ZIMRA performance report for the fourth quarter ending 31 December 2022 shows that excise duty contributed 14,6 percent to total revenue, with fuel accounting for 71,76 percent of the tax head.

According to the Global Initiative Against Transnational Organised Crime 2020 3rd quarter risk bulletin, the illicit trade in fuel, which poses significant environmental and public-safety risks, is prevalent throughout southern Africa.

Illicit trade in fuel think tank, ENACT, in a 2019 article, states that illicit trade in fuel is a global challenge that amounts to an estimated US$133 billion a year due to theft, adulteration, fraud, tax evasion and subsidy abuse.

The article also states that proceeds from the illicit trade are often used to fund other organised criminal activities, presenting a threat to economic growth and security in the region.

An expert in the logistics industry, who spoke on condition of anonymity, said the ground is fertile for rot, adding that collective effort was required to save the situation.

“The illegal fuel trade is complex and widespread. It involves a well-knit syndicate comprising logistics companies, truck drivers and rotten apples in the system that capitalises on price differences in SADC, taxation mismatches and regulation laxity. There is so much fraud going on, like adulteration and tax evasion.

“Most of the smuggled fuel is sold on the black market at ridiculously lower prices since no duty is paid, which is bleeding the Zimbabwean economy and harming legitimate businesses,” he said.

In a 2022 article posted on LinkedIn, Cherif Bel Hadj Ali, says fuel fraud leads to loss of anticipated tax revenue and double losses on governments where certain petroleum products are taxed, while others are subsidised.

Under Zimbabwean laws, crude degummed soya oil and Jet A1 are exempted from duty, hence, forgery of import papers by unscrupulous players in the fuel sector.

Between 2017 and 2020, prices in Zimbabwe were the lowest in SADC, which criminal elements capitalised on to smuggle fuel imported from Mozambique to South Africa, Zambia and the Democratic Republic of Congo at higher returns, causing shortages on the local market. At least 42 local companies were investigated by the Zimbabwe Anti-Corruption Commission (ZACC) for fuel fraud in January 2020.

Now, the situation has changed as authorities sought to close the gap. Until recently, prices were pegged at US$1,71 and US$1,63 per litre of diesel and petrol, respectively.

According to figures from the Ministry of Energy and Power Development, Zimbabwe, on average, requires two million litres of petrol and three million litres of diesel per day, which translates to 730 million litres of petrol and 1,1 billion litres of diesel per year.

About 95 percent of the fuel is transported via the Beira pipeline route, while five percent is carted mainly by road, and rail from South Africa.

Zimbabwe’s northern neighbour, Zambia, relies on ports in Mozambique and South Africa for fuel supplies using Zimbabwe as a transit route. Since Zambia-bound fuel is said to be in transit, it does not attract duty and taxes on the Zimbabwean side, yet some of the fuel is offloaded locally.

Economist and former monetary policy committee member, Eddie Cross, said smuggling was a major problem at the country’s “porous” borders owing to corruption. He added that the situation is compounded by dollarisation, which “makes informal and criminal trading practices easy”, thus impacting negatively on legitimate businesses.

He highlighted that, although the impact of fuel fraud on the economy is “minimal”, tax evasion causes the shrinking of the formal sector and loss of jobs.

“All domestic manufacturers and producers are now feeling the threat of cheap imports and trading practices that do not pay duties or taxes at the borders,” Cross said.

Ministry of Energy and Power Development Deputy Director for petroleum, Phanuel Muverengwi, said adulteration, now “minimal”, used to be a serious malpractice in the past, but the Government has since moved in to curb it.

It involved the adulteration of diesel and paraffin, since paraffin, considered a basic commodity then, was exempted from duty and levies.

“Unscrupulous fuel suppliers would mix diesel with paraffin to take advantage of paraffin’s low price. This prejudiced the Government in the sense that paraffin, a product exempt from duty and levies, was substituting diesel, a product that attracts duty and levies. So, the Government lost revenue in that sense,” Muverengwi said.

He said it was not only the Government that lost out on revenue, but consumers were also short-changed as they were paying for poor-quality fuel that could damage their vehicles.

To curtail the subsidy abuse, the Government imposed the same duty and levies on paraffin as were/are imposed on diesel.

He highlighted that not all fuel suppliers adulterated petroleum products, or involved themselves in unethical practices, as there are “good companies” in the sector.

“Also, ZERA conducts quality tests on the fuel that is sold in the market,” Muverengwi said.

-ebusinessweekly