The Sunday Mail
One of the interesting suggestions that came out of the meeting on Friday between President Mnangagwa and the leaders of a wide swathe of business sectors was the possibility of ring-fencing the production and pricing of a small range of basic essential goods.
The proposal arose in light of reports that some in both production and retail sectors have seen the lockdown as an opportunity to profiteer, taking advantage of the need for people to buy essential needs locally rather than shop around or make other arrangements.
While that profiteering can be identified and hammered quite quickly, there was also concern that prices of some items were spiralling as a result of cost inflation, and hence the suggestion of ring-fencing both costs and prices to keep these as low as possible.
Over-simplistic price controls, that is writing down a number and proclaiming it is the price, can be counter-productive and produce distortions that lead to growing supply shortages, a flourishing black market and a higher cost of living than would be the case in a free market.
A glance at First Republic history shows what happens and explains why the Government stresses now on investment and improving supplies in a free market instead.
But it is possible to fix maximum factory, wholesale and retail prices for selected products so long as formulas are used that take into account the actual costs of every input and allowed mark-ups.
This formula-pricing removes the market forces of supply and demand from the pricing equations but does include every other factor, including fair mark-ups for those who produce, distribute and sell the goods.
It abolishes the system that some appear to follow, of calculating everything in US dollars and then converting at the last minute to Zimbabwe dollars at the black market rate, regardless of actual cost.
An example of a functioning formula is the maximum retail price for fuel fixed each month by the Zimbabwe Energy Regulatory Authority using a formula that starts with the landed cost in US dollars of the fuel at Feruka and then feeds in the official exchange rate, because the currency to buy it is sold at that rate, plus the taxes, the pumping and handling charges to get it to the Msasa terminal, a mark-up for the oil companies, a charge to deliver it to service stations and a mark-up for the service stations.
Similar formulas could work with other essential goods where joint action by the producers and authorities is possible.
Part of the suggestion of ring-fencing was to ensure producers of raw materials get the foreign currency for any imports at official rates, not what the black market sells it for.
Specific mark-ups would be added for each stage of the production and distribution chain to cover known local costs and allow a fair, but modest, profit, at least for the efficient; there is no need for consumers to subsidise waste and extravagance.
Of course, the formulas would have to add in tax, in this case VAT, but an additional suggestion was to have a zero-rate VAT on this small range of items.
This might be seen as a step back, since economic theory dislikes the distortions that selective taxes or tax-exemptions produce. But for the duration of the present emergency it makes sense.
After all, the Government has already suspended customs and excise duties on the raw materials and finished products needed in the frontline for fighting Covid-19.
Generally, the responsible elements in industry and commerce tend to agree that basic goods are not where the high profits come from. Even in a business as simple as baking, bread must cover its costs with a little extra, but the bakers’ holidays are paid for by the cakes.
Thus there is an opening for something similar to the fuel formula for a limited range of goods. This would involve the Government and producers being totally open.
The Government would see what it can do to control the prices of the initial raw materials and inputs, and the producers see what they can do to control tightly all costs in the next steps of the chain. Put in a final retail mark-up and a final price can be set, hopefully for a month at a time as is the case with fuel.
Such a system could not be applied across every one of the thousands of items on the shelves of an average supermarket, and it would be undesirable in any case to generate the incredible distortions and certain economic decline that would be the inevitable result.
But in an emergency we do not see anything seriously retrogressive or damaging in looking at the handful of the most basic goods, and working out temporary formulas and input priorities that can keep efficient producers in business but give a break to the ordinary family.
Ring-fencing prices of basics can be done
The Sunday Mail
One of the interesting suggestions that came out of the meeting on Friday between President Mnangagwa and the leaders of a wide swathe of business sectors was the possibility of ring-fencing the production and pricing of a small range of basic essential goods.
The proposal arose in light of reports that some in both production and retail sectors have seen the lockdown as an opportunity to profiteer, taking advantage of the need for people to buy essential needs locally rather than shop around or make other arrangements.
While that profiteering can be identified and hammered quite quickly, there was also concern that prices of some items were spiralling as a result of cost inflation, and hence the suggestion of ring-fencing both costs and prices to keep these as low as possible.
Over-simplistic price controls, that is writing down a number and proclaiming it is the price, can be counter-productive and produce distortions that lead to growing supply shortages, a flourishing black market and a higher cost of living than would be the case in a free market.
A glance at First Republic history shows what happens and explains why the Government stresses now on investment and improving supplies in a free market instead.
But it is possible to fix maximum factory, wholesale and retail prices for selected products so long as formulas are used that take into account the actual costs of every input and allowed mark-ups.
This formula-pricing removes the market forces of supply and demand from the pricing equations but does include every other factor, including fair mark-ups for those who produce, distribute and sell the goods.
It abolishes the system that some appear to follow, of calculating everything in US dollars and then converting at the last minute to Zimbabwe dollars at the black market rate, regardless of actual cost.
An example of a functioning formula is the maximum retail price for fuel fixed each month by the Zimbabwe Energy Regulatory Authority using a formula that starts with the landed cost in US dollars of the fuel at Feruka and then feeds in the official exchange rate, because the currency to buy it is sold at that rate, plus the taxes, the pumping and handling charges to get it to the Msasa terminal, a mark-up for the oil companies, a charge to deliver it to service stations and a mark-up for the service stations.
Similar formulas could work with other essential goods where joint action by the producers and authorities is possible.
Part of the suggestion of ring-fencing was to ensure producers of raw materials get the foreign currency for any imports at official rates, not what the black market sells it for.
Specific mark-ups would be added for each stage of the production and distribution chain to cover known local costs and allow a fair, but modest, profit, at least for the efficient; there is no need for consumers to subsidise waste and extravagance.
Of course, the formulas would have to add in tax, in this case VAT, but an additional suggestion was to have a zero-rate VAT on this small range of items.
This might be seen as a step back, since economic theory dislikes the distortions that selective taxes or tax-exemptions produce. But for the duration of the present emergency it makes sense.
After all, the Government has already suspended customs and excise duties on the raw materials and finished products needed in the frontline for fighting Covid-19.
Generally, the responsible elements in industry and commerce tend to agree that basic goods are not where the high profits come from. Even in a business as simple as baking, bread must cover its costs with a little extra, but the bakers’ holidays are paid for by the cakes.
Thus there is an opening for something similar to the fuel formula for a limited range of goods. This would involve the Government and producers being totally open.
The Government would see what it can do to control the prices of the initial raw materials and inputs, and the producers see what they can do to control tightly all costs in the next steps of the chain. Put in a final retail mark-up and a final price can be set, hopefully for a month at a time as is the case with fuel.
Such a system could not be applied across every one of the thousands of items on the shelves of an average supermarket, and it would be undesirable in any case to generate the incredible distortions and certain economic decline that would be the inevitable result.
But in an emergency we do not see anything seriously retrogressive or damaging in looking at the handful of the most basic goods, and working out temporary formulas and input priorities that can keep efficient producers in business but give a break to the ordinary family.
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