Why are basic commodities so expensive domestically?

The first thing you notice about the money in Zimbabwe is it is generally filthy. The bills have been passed around so many times the numbers are almost rubbed off. This certainly says something about the velocity of circulation of money in Zimbabwe.

The Ritesh Anand Column

The second thing you notice is that there are no coins. Prices are in dollars and cents, but when you pay, the stores round up and give you your change in store credit, phone credits, or sweets/lollipops.

Coins have become more readily available in some stores, but it remains an issue.
The next thing you notice is how expensive everything is.

A litre of fuel costs US$1,55, a can of coke costs a dollar, a loaf of bread a dollar, two liters of cooking oil US$4, and US$6 for a crate of eggs.

I hardly go shopping, but when I do, I certainly notice the cost of filling the shopping trolley is always changing. I’m confused. Zimbabwe’s per capita GDP is US$1 000, the third lowest in the world. The average wage is US$253 a month — and that’s for the 30% of the population who are officially employed.
All the basics — sugar, maize, eggs, cooking oil, you name it — are more expensive in Zimbabwe, kilo-for-kilo, than they are in Zambia, Botswana or even South Africa, where the average incomes are 19 times higher than they are here.

So why are things so expensive in Zimbabwe?

I believe that it’s partly a legacy of the hyperinflation era, the decade of de-industrialisation in the country; a period when prices doubled 24/7 and the shelves were empty.

It is estimated that at its peak, inflation in Zimbabwe reached 189 billion percent or 94% a day. This is the second highest rate in recorded history. The record belongs to Hungary in 1946, where inflation reached 195% a day and prices doubled every 15,6 hours.

I’m not sure that individuals as well as corporates realise the value of the US dollar and haven’t quite adjusted to the new paradigm.

It’s also due to the fact that Zimbabwe relies heavily on imported goods mainly from South Africa and produces very little domestically. Retailers have also been accustomed to making big margins due to the high cost of doing business, but also the desire to make super normal profits.

Leading retailer, OK Zimbabwe, generated over US$19,7 million in Ebitda (Earnings before interest, taxes, depreciation and amortisation) on revenues of US$483,7 million. That’s a gross margin of 17%.

Operating profit to sales, on the other hand, were a lot lower at 2,8%, reflecting the high costs of doing business in Zimbabwe.

The country has also become uncompetitive due to the high cost of production, especially labour and energy costs. Furthermore, we can never be competitive as long as government sets producer prices higher than regional averages — maize costs US$390/tonne versus US$220/tonne.

The farm gate price of milk is 64c/litre vs 40c/litre in South Africa — why? For as long as we have higher input costs, our cost of living will be significantly higher than regional averages.

Zimbabwe is also becoming increasingly protectionist, placing duties on various basic commodities. The key to recovery is not in protecting inefficient domestic industries, but in encouraging investment in the development of new industries with modern equipment and technologies. This will have a greater impact than protectionism and will make Zimbabwe more competitive in the mid to long-term.

The table above compares the prices of basic food items between Zimbabwe and South Africa. On average a basket of basic foodstuff is 34% more expensive in Zimbabwe.

Bread is almost 40% higher, while milk costs 60% more in Zimbabwe.

We pay more than 50% more for two litres of oil while eggs are 16% higher. This is even more interesting when we consider the minimum wage in Zimbabwe is around US$80 while the minimum wage in South Africa is R1 625, which is around US$145, almost 50% higher than Zimbabwe.

Average incomes in Zimbabwe are US$253 vs R27 282 or US$2 420 in South Africa. Per capita GDP in South Africa is estimated at US$6 000 vs. US$1 000 in Zimbabwe.

It’s little wonder why estimates say three milllion Zimbabweans have jumped across the border to stay and live in South Africa. One could easily argue that prices are higher in Zimbabwe due to transportation costs and duties, nevertheless, it is still a very expensive country to live in relative to income levels.

Some would argue that things are a lot better today as at least the shelves are full and you can get everything you want provided you have the money. However, its not cheap to live in Zimbabwe and life is becoming a lot tougher as the economy nosedives.

Zimbabwe needs to restore domestic manufacturing industries and do more to support the development and growth of local industries. It’s important that this is not done through protectionism as this will only serve to increase costs. Rather, government should focus on policies aimed at attracting investment to modernise and bring greater efficiency to local production.

Zimbabwe’s manufacturing industry has seen little investment over the last 25 years and is in desperate need of modernisation. Costs of production are significantly higher in Zimbabwe due to the fact that most companies are using obsolete equipment and inefficient production methods. Most industries are in desperate need of recapitalisation, new investment in modern equipment, processes and technologies.

Government should also seriously consider the creation of special economic zones, with tax benefits and incentives to attract investment. Zimbabwe needs to modernise if it is to compete on the world stage. Without this, it will remain uncompetitive, inefficient and a very expensive country to live in.