The Sunday Mail
Dr Gift Mugano
In recent weeks, we noticed ridiculous price hikes which have left the ordinary people and workers poor. In extreme cases, prices have gone up by over 200 percent. In moderate cases, prices have risen by an average rate of 50 percent. In response to this anomaly, Government, in its wisdom, has set up a committee whose mandate is to deal with this menace.
As we are preoccupied with this matter, it is important to understand the causes of price hikes. My observation is that the price increases are coming from rent-seeking behaviour by some sections of the private sector, shortage of cash and structural rigidities.
Shortage of foreign exchange
It is in the public domain that the Reserve Bank of Zimbabwe is failing to cope with demand for foreign exchange to import merchandise and key inputs required in manufacturing. Official statistics show that the RBZ has a backlog of foreign payment amounting to US$700 million.
Against the background of this backlog and shortages of foreign exchange, companies are acquiring the scarce forex from the parallel market or from cash-rich brokers who have taken over their procurement or supply chain process.
The brokers charge a premium for foreign exchange. Retailers/manufacturers, because they use a cost-plus pricing model, pass on the prices to consumers, resulting in price hikes.
Rent-seeking behaviour
Inasmuch as it is understood that there are severe shortages of foreign currency, the magnitude of some price increases, especially those exceeding 100 percent, cannot be justified as coming from fundamental challenges the country is facing. It is a case of mere rent-seeking behaviour or profiteering or sabotage.
This is counter-productive as it will in the very near future result in the collapse of the same businesses as consumers who are getting poor daily will fail to cope.
In my view, it may look like business as usual, but it is a matter of weeks before businesses realise low sales and will eventually fail to meet their obligations.
Structural rigidities
This economy has serious supply side bottlenecks and as such, we are importing commodities which we can actually produce. For example, Zimbabwe spends about US$250 million annually on soya beans, US$150 million on vegetables, US$203 million on pharmaceuticals and US$502 million on cereals.
So, collectively, Zimbabwe spends about US$1 billion on soya bean, vegetables, cereals and pharmaceuticals.
I didn’t include pampers, tooth picks, tissues and papers, which we can produce.
The compounding effect of this scenario is that since introduction of the multi-currency system in 2009, we have externalised a cumulative figure of US$30 billion through trade deficits.
The effect of trade deficits together with ever-increasing national debt, which has hit US$4 billion, has resulted in depletion of foreign exchange. Our efforts in stabilising prices should be focusing on containing both trade and budget deficits. We can contain trade deficits by making concerted efforts aimed at avoiding unnecessary imports by producing the commodities indicated above.
The budget deficits should be contained by going back to cash-budgeting and expanding the fiscal space through promotion of new investment under Special Economic Zones.
In our discussions or deliberations aimed at addressing price hikes, we must concentrate efforts on looking for ways of addressing budget and trade deficits because these are the root causes of price hikes.
We should not at any point think of price controls.
We have been through that road and our experience is that we didn’t find it good. In the same vein, business must exercise restraint and act as responsible citizens.
Dr Gift Mugano is an expert in trade and a Research Associate and Visiting Lecturer in Nelson Mandela Metropolitan University’s Department of Economics and Economic History. He wrote this article for The Sunday Mail.
