OPEN ECONOMY: Getting pricing policy right would be priceless

Numbers from the Consumer Council of Zimbabwe show prices over the last year have been on a downward trend.

This is often interpreted as the economy correcting itself; but we should seek better clarity than such specious conclusions.

It is inadequate to say “the economy is correcting itself”.

The economy is never wrong.

An economy is a web of interaction between market agents, in most cases under the monitoring of regulators.

So, we must take heed: There are more precise explanations to general price trends and they can only be identified by focused analysis of market agents and their regulators.

Therefore, if prices are falling, it is not the economy correcting itself; either market forces between market agents are pushing downwards or a regulatory effect exists, or both.

Immediately I can say that we lack pricing policy clarity in certain sectors.

Clarity brings clear expectations for all market agents.

Either businesses are allowed to set prices as they want or prices become subject to regulation and monitoring.

In instances where our businesses are price-makers, consumers must be allowed an expectation to shop on an open market; including globally without facing high tariffs.

In instances where businesses are subject to price regulations, consumers can understand the expectation for them to shop on a more confined market.

Such policy clarity helps to create an equitable economy between buyers and sellers.

In a more contextualised context within our economy, I will categorise three reasons why we need to get our pricing policy right.

First, without pricing policy clarity, unfortunately in certain sectors like durables, prices have been artificially high for a long time.

While an “equitable” economy between buyers and sellers is rather subjective, I think there is general consensus of profiteering concerns.

Such profiteering may have had a cumulative effect of decreasing long-term consumer demand.

Artificially high prices depress consumers’ demand in the long term, and perhaps the falling prices have become a long-term indicator of this pervasive problem.

High prices have been a strain on a market with little wealth creation.

Consumers have failed to sustain this pressure, resulting in low aggregate demand pushing down prices.

If this is the case, because all prices are traceable, regulators must make it their diligence to intervene and balance market prices with sustainable demand in respective sectors, so as to keep the economy on a growth projectile.

Second, pricing policy clarity is essential to create globally competitive price structures within our local supply chains.

Perhaps the most telling event in recent months is the global decrease in oil prices of about 40 percent, yet prices in Zimbabwe over the period saw no significant change. In this instance, it’s beneficial if regulators have a grasp of market forces, especially demand from the consumer.

Energy and Power Development Minister Samuel Undenge highlighted that oil sellers are still holding onto old stocks that were purchased at high prices.

Well, with better market demand projections, his ministry would work hand in hand with sellers to purchase stocks that would have shorter holding times, so as to stay closer to current market prices.

Prolonged holding times are uncompetitive. We miss out on opportunity windows for cheaper commodities when prices fluctuate.

That was a poor excuse by the minister.

If sellers are still holding onto stock of over six months, then our holding times are too long and uncompetitive; an issue solved by better demand projections from the local market.

For example, the Zimbabwe Energy Regulatory Authority (Zera) must be able to answer fundamental market questions like: How much fuel is expected to be used by industry in the first quarter of 2015?

A more competent regulator is necessary here because fuel costs are a great proportion of production costs for local industry, and a large chunk of citizens’ expenditure.

There are significant macro-economic interests at stake. For a country battling a $3 billion trade deficit, I’m curious as to why Industry Minister Mike Bimha has not raised concern about the effect six months of substantially high fuel costs have on the competitiveness of our industrial exports?

It seemed ironic that Zera chief executive Gloria Magombo said it was simplistic to compare Zimbabwean fuel costs to regional peers. Is the existence of a regulator like Zera not to ensure that fuel prices are indeed comparable and competitive to regional peers? If as she said, Government fuel taxes and subsidies are factors to consider, who is she leaving to answer those queries on fuel costs? It’s Zera’s mandate to correspond with Government in examining whether fiscal policy is economical, or the lower costs for industry and positive externalities surpass those intended fiscal returns.

Third, a lack of pricing policy clarity has made us miss where exactly sanctions hurt the economy.

Let’s be fair to businesses in Zimbabwe, the effect of financial sanctions on enterprise has been grossly understated.

What financial sanctions do is make money expensive!

The cost of capital for local businesses is too high.

Sanctions deprive our banking sector of global interbank platforms, making funding costs extremely high compared to other countries where money is cheaper to source.

These costs are then passed onto the commercial market.

Before business even begins, you can appreciate that the economy is already running at a higher price level in all operations.

Now, this effect on price levels is pervasive throughout the economy; high overheads, high operating expenses, high shipping (considering fuel costs too), and the pressures caused by much lower velocity of circulation of money within the economy.

I’m not saying having competent pricing policy will remove the effect of financial sanctions entirely, but clarity helps mitigate what we can by identifying cost drivers we can help ease.

Anyhow, we may demand businesses to cut prices to make the market happy or for consumer-protection, but what effect will it have on our already globally-uncompetitive businesses?

Regulators must be wary of trying to please disgruntled consumers and unintentionally pressuring an already disadvantaged business environment.

A bonus point on this matter is perhaps investigations into a procurement programme for essential commodities that require importing.

I’d imagine that for a country fighting higher costs of capital and suffering from limited access to reserves, we need a competent body that tries out hedging for necessary commodities.

Maybe even look into the global market for arbitrage opportunities.

For instance, now that oil is around US$50 a barrel on the global market, can we not lock in that price and purchase supplies at this lower cost?

We should start being actively engaged in finding lower costs wherever we can, and be opportunistic! Recent interviews by many regulators show unjustified levels of comfort!

We need cost creativity and a heightened level of awareness.

As the riddle goes, pricing policy may prove to be priceless for our economy. Let’s not underestimate this concern. At this point, lowering prices throughout the economy is an overwhelming challenge, maybe even our greatest economic obstacle to getting ourselves going again.

Let’ not leave this important aspect to lax analysis; instead an elevated understanding of our market forces and regulatory aptitude is needed.

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  • Che Gue Vhara

    What is key about a market economy is that if prices are consistantly high an opportunity arises whereby entrepreneurs see a space to make money there by introducing more supply and hence driving prices down to a normal level. The market is ultimately self correcting in this respect. Where we should be concentrating is making local producers and manufacturers more competitive. In order to stand any chance of competing on any level we need to increase agricultural output. Why ? The reason is two-fold firstly if we can lower food prices we can lower wage demands from our workforce because they will accept lower packges if the cost of living is slashed. Secondly purely economic, more supply lower prices and hence competitive against imports which have the disadvantage of transport costs and yet we still cannot compete because we are not producing on a large enough scale and certainly not enough judging by our balance of payments.
    We seem to be spending a lot of money propping up farmers. This is fine and well as long as lessons are being learned but at what point do you cut farmers who are not performing off and allow new efficient players into the market.
    For so long as we have inefficiency at a primary level we will be an expensive producer and hence an expensive wage bill.
    At the beginnning of the land reform program we had minimum monetary requirements for applicants in order to ensure they had the financial capacity to farm the areas they had applied for. This made a lot of sense. However, somewhere along the way we have lost that and thought on an idealistic level instead that everyone should be treated equally. This is brave but unfortunately a little too simplistic and dreamy.
    Business is about capacity, not only in terms of skills but also finance. If one is not qualified/talented enough to do a job it doesn’t matter how much money you are thrown there is an inevitable end. In many ways we are impoverishing some indiginous farmers without realising it, burdening them with debts they will never be able to pay. Every year they can afford smaller and smaller hectarage as they slowly go out of business. At the moment this is compounded by bumper regional harvests and hence lower prices. It is about time we put less pressure on the fiscus for agricultural funding after all people have not had 15 years to prove themseves as farmers!
    Let us be realistic on this cornerstone of our economy because nothing else will fuction to its full potential until we have efficient farmers on the land. I am not saying we need whites back. Purely that we need those who are capable to be given bigger areas to farm. Those who are inefficient or not using the land allocated at all need to move on.

    • Chris

      Hi Che,

      You right in many ways. Can’t give much feedback beyond that. Thanks.