The Sunday Mail
Darlington Musarurwa
As schools open this week, most parents and guardians are smarting from another brutal wave of painful fee hikes, which has been occasioned by inexplicable price increases, particularly of basic commodities.
Of course, the temptation has been to blame the wild swings in exchange rates, especially between the RTGS dollar (a de-facto local unit) and the US dollar on the parallel market, after Government abandoned the currency peg of 1:1 on February 20.
Fiscal and monetary policies, however, vehemently disagree.
Instead, they opine that price movements should, as can be proven in other markets and jurisdictions, be decoupled from movements in the exchange rate.
But any enquiry to prove the greed or otherwise of retailers should be based on science or empiricism rather than mere conjure, lest the whole argument becomes a futile harebrained analysis.
Perhaps the whole conundrum of price increases can be symbolically deduced through the recent astronomical rise in the price of bread, which recently galloped from $1,80 per loaf to the current $3,50, and this translates to a 94 percent increase.
Here there are two things to put into perspective: since the black market exchange rate was averaging 1:4,8 last week, this would mean in US-dollar terms, bread currently costs US73 cents.
Secondly, since the Monetary Policy Statement (MPS) on February 20, which abandoned the currency peg, rates on the black market have only climbed 33,3 percent to $4,80 from $3,60 per US dollar.
Put simply, bread prices have risen at an incredibly faster pace than the black market exchange rate.
And this should raise eyebrows.
Declining operational costs
Assuming that the economy is as bad as cynics would have us believe, and bakers are aligning their prices with implied real values as dictated by black market rates, this would mean all their operational costs are growing.
Or is it?
This definitely cannot be the case.
The major costs of production — labour, electricity and water tariffs, which are now denominated in RTGS dollars — have largely remained unchanged; if anything, since the currency float, they have declined.
If, hypothetically, a company was paying a cumulative bill of US$1 000 for electricity and water, this implies that from February 20 onwards, the US dollar value of the same bill has declined to a mere US$208.
Similarly, the same has been happening to wages.
Where the same companies that are aligning prices to black market rates sincere, they would have equally adjusted wages to implied US values, which is not the case.
In any case, the current market phenomenon, where prices are adjusted to mimic legacy US-dollar prices in RTGS dollar terms, assume that the US foreign currency input costs of these businesses is 100 percent.
Clearly, this is not the case.
And this is what Reserve Bank of Zimbabwe Governor Dr John Mangudya tried to explain to the Parliamentary Portfolio Committee on Information Communication Technology on April 8.
“Not all the costs of production come from foreign currency. Sometimes in a product, maybe the import component is 10 percent, or 15 or 20 percent. You cannot use an exchange rate for determining the price of a product every day.
“You do not need to track the exchange rate on a daily basis. If your cost of production is 20 percent foreign currency, I think it would be wrong to use exchange rate as a price determining factor, which I see in Zimbabwe,” he said.
Finance and Economic Development Minister Prof Mthuli Ncube was at pains to express the same point during the International Business Conference that was held on April 24 during the Zimbabwe International Trade Fair (ZITF).
“Please, it is bad economics, very bad economics where you tie price increases directly to the exchange rate. Good economics says tie prices around a consumption basket, you don’t earn your salary to go and buy US dollars,” he noted.
So, unless retailers can provide an alternative compelling explanation, they definitely have a case to answer.
The opportunity of internal devaluation
While there is a vocal community that is calling for re-dollarisation, this surely cannot be sustainable.
We have been down this path before.
Under a dollarised environment, most companies struggled to competitively supply their products to regional markets, for the costs of production was prohibitively expensive, especially against weaker regional currencies.
Since 2016, Dr Mangudya therefore unsurprisingly pushed for internal devaluation — slashing both prices and salaries — for local products to be competitive.
Floating the exchange rate has arguably accomplished this feat in one fell swoop.
This observably is pushing more companies to export as they have regained their competitiveness.
In addition, this also explains why some prices are now considerably cheaper if their RTGS prices are converted to implied US-dollar values.
But a toxic combo of heavily discounted wages and ever-increasing prices is negatively affecting aggregate demand.
This, however, can be easily remedied by adjusting wages to sustainable levels.
Actuaries can help to determine fair wage levels that do not unnecessarily burden companies, but give workers sufficient purchasing power.
Extrapolating the level of US-dollar wages, especially during the time when they were yet to be contaminated by a frenetic creation of electronic money through unsupported RTGS balances, might help as a compass to guide the determination of new wages.
But this is really for the experts to consider.
Perhaps businesses fear that increasing wages in an environment of declining aggregate demand might not be wise, but it might be argued that this is not the typical chicken-and-egg conundrum.
It is scientifically proven that there is indeed a correlation between rising disposable incomes and consumer spend.
It all gives credence to President Mnangagwa’s May Day exhortation for companies to improve their workers’ welfare.
Last Leg of Reforms
Some manufactures and retailers, especially those that are charging their products or services in US dollars when Government has since announced that the RTGS dollar is the reference currency, have a newly found hymn that they use as a pretext to justify their abhorrent practice.
Most often than not, they argue that their suppliers are also charging them in forex.
Schools have even joined the bandwagon.
These are clearly arbitrage opportunities that are presented by the rate differentials between the US dollar and the RTGS dollar.
It is now becoming increasingly apparent that adopting a fully fledged local currency might help to deal with most of these market aberrations.
And this is coming from consumers themselves, most of whom neither earn nor access the greenback.
This reality, which seems to be the last leg of the currency reforms that started in October last year, has now become as imminent as it is inexorable.
Macro-economic fundamentals, whose highlight include Government’s $100 million budget surpluses for the eight months since September last year, also seem to be creating conditions that would ably support a viable local currency.
And market watchers such as Eddie Cross are thoroughly impressed and naturally upbeat.
Overall, it all bodes well for a local economy: you cannot fail by consistently and doggedly doing the right things. There is clearly light at the end of the tunnel.
