The Sunday Mail
Dr Gift Mugano
In recent weeks, we have noticed ridiculous price hikes that have left the general citizenry and workers poor.
Quite a number of product prices hit the roof.
However, the price of bread dominated discussions last week. As we are preoccupied with this matter, it is important to understand the causes of price hikes.
My observation is that price increases are coming from rent-seeking behaviour by some sections of the private sector, shortage of cash and structural rigidities.
Foreign exchange shortage
It is in the public domain that the Reserve Bank of Zimbabwe is failing to cope with demands for foreign exchange to import merchandise and key inputs required in manufacturing.
Official statistics show that the RBZ has a backlog of foreign payments amounting to US$700 million.
Against the background of this backlog and shortages of foreign exchange, companies are acquiring the scarce foreign exchange from the parallel market or from cash-rich brokers who have taken over their procurement or supply chain process.
Brokers charge a premium on foreign exchange, and retailers or 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 increase in prices of products like bread and bricks which require minimum foreign currency is ridiculous.
With respect to bread, evidence from the Grain Millers’ Association of Zimbabwe show that millers have not increased the price of flour since 2009.
Now, coming to the production economics of bread, the contribution of the cost of flour to the overall cost of bread is 80 percent.
The remaining 20 percent is shared among 17 other cost-drivers. Now, if the price of flour has not gone up and knowing that other cost-drivers are insignificant, what is it that has caused the price of bread to go up by 22 percent?
This is clearly rent-seeking behaviour.
The efforts were meant to milk households during the festive season, and this is counter-productive.
And when you hold a brick, you are holding our soil.
Brick-making is largely centred on soil, which is not imported. It requires a minimum foreign component which is fuel for transportation.
Again, the prices of fuel have not gone up significantly. On this basis, what can brick-makers proffer as explanation for a 100 percent price increase except economic sabotage?
Structural rigidities
Zimbabwe’s economy has serious supply-side bottlenecks and as such, we are importing commodities we can actually produce. For example, the country spends about US$250 million annually on soyabeans, US$150 million on vegetables, US$203 million on pharmaceuticals and US$502 million on cereals.
So, cumulatively, Zimbabwe spends about US$1 billion on soyabeans, vegetables, cereals and pharmaceuticals.
I didn’t include pampers, tooth-picks, tissues and the papers we can produce.
The compounding effect of this scenario is that since dollarisation in 2009, we have externalised a cumulative US$30 billion through trade deficits.
The effect of trade deficits, together with ever-increasing national debt which has hit US$4 billion, is foreign exchange depletion.
Our efforts to stabilise prices should focus 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.
Budget deficits should be contained by going back to cash budgeting and expanding fiscal space through promotion of new investment under Special Economic Zones.
In our discussions aimed at addressing price hikes, we must concentrate on looking for ways to address budget and trade deficits as these are the root causes of price hikes.
In cases where there is compelling evidence of price-fixing, the Competition and Tariff Commission must rein in unscrupulous companies.
For example, why are we seeing all bakeries charging the same prices as if they have similar cost profiles and business models?
This is clear evidence of price-fixing, yet, sadly CTC is doing nothing about that.
As we work on dealing with the pricing menace, we should not at any point think of price controls. We have been through that road and we didn’t find it good.
In the same vein, business must take restraint and act as responsive citizens.
Dr Gift Mugano is an economist and registrar of Zimbabwe Ezekiel Guti University. He wrote this article for The Sunday Mail.
