Govt price controls a sure path to market instability

Government passed a price moratorium (prize freeze) on April 22, 2020. The moratorium compels retailers and producers to revert back to the prices that prevailed on March 25, 2020. The moratorium was a culmination of meetings between the government and various industry groupings, such as the Confederation of Zimbabwe Retailers (CZR), Consumer Council of Zimbabwe (CCZ), National Bakers Association of Zimbabwe (NBAZ), Grain Millers Association of Zimbabwe (GMAZ), Oil Expressors Association of Zimbabwe, National Foods and Zimbabwe Sugar Sales, among others.

Victor
Bhoroma
analyst

The move came after the prices of fast-moving consumer goods skyrocketed in the run-up to the mandatory lockdown as consumer demand increased in anticipation of limited supplies during the lockdown. Even though the moratorium is not legally binding, the government may be tempted to enact legislation in the form of the favoured Statutory Instruments, provided compliance to the moratorium is low.

The price freeze comes in the midst of unprecedented increase in the cost of living with a consumer basket for a family of five members costing more than ZW$6 420 in March 2020 (Up from ZW$5 293 in February). The same applies for inflation which spiked from 520% in February to 676% in March 2020. The price increases are a culmination of a number of factors leading to demand-pull and cost-push inflation. The outbreak of the coronavirus and subsequent lockdowns in China and South Africa, among other source markets for Zimbabwe, meant that the supply line for the local industry and consumers is now cut or disrupted.
The Confederation of Zimbabwe Industries (CZI) pointed out that 82% of producers were experiencing supply chain disruptions which affected access to markets locally and internationally.

As a result, they could not meet local demand because of shortages of raw materials. Furthermore, a significant portion of fast-moving consumer goods retailed in the local market are manufactured in South Africa, and imported by large retail chains and cross-border traders. Cross-border traders (through cash and carry tuck shops or informal traders) offer stiff competition to formal retailers and help in augmenting supply in the local market.

The border closures have therefore resulted in a significant decline in supply and a hike in prices by retailers (both formal and informal) in response to the temporary increase in demand. In the same vein, supply chain disruptions lead to an increase in the cost of insurance, freight and inland logistics for the goods passing through the border during this lockdown period.

The local industry is also impacted by foreign currency shortages and have to rely on the black market to meet their import requirements. Increase in demand for foreign currency or further appreciation of the US dollar on the parallel market increases the cost of production and that cost is eventually passed on to the consumer.

Price controls are not new to Zimbabwe. In June 2007 and April 2008, businesses were ordered by the National Incomes and Pricing Commission (NIPC) to revert back to stipulated historic prices resulting in market distortions, company closures, hoarding and shortage of basic consumer goods (artificial and real shortage), hyperinflation and the eventual collapse of the Zimbabwean dollar. Fast-forward to 2020, the resilient local producers and retailers have mastered the art of pegging prices to the parallel market rates in order to curb any exchange rate risks and replenish their stocks profitably.

Three-tier pricing is now the order of the day with goods and services pegged in US dollar, electronic money (mobile/bank transfer/card payments) and cash price. The price freeze represents more of political firefighting taken without consideration of the cost drivers and the sustainability of such policies on the economy. The industry will, however, hope that the price freezes do not extend to market-wide price controls or enactment of legislation to enforce such. Prolonged price freezes or controls will have the following implications to the economy:

Impact on the economy

Capacity utilisation for the local industry has significantly decreased due to the current pandemic inspired supply chain disruptions and depressed demand for selected product lines. The sector closed the year 2019 with capacity utilisation below 37%, hence a number of suppliers are producing from a very low base in order to stay afloat.

A price freeze or control will result in subdued production or better still, limited supply to the formal retailers where prices are controlled. Basic goods will be channeled to the informal traders who pay cash or foreign currency on delivery. This was already happening before the pandemic led to the shutdown, but can be accelerated to unsustainable levels by the price freeze.

The informal sector plays a very limited role in terms of paying taxes, declaring income and formal banking, thus any increase in informalisation will hit government coffers and the health of the economy as well.

Market shortages

The local market is already distorted because of the excessive government controls on foreign exchange, petroleum importation and minerals marketing, and various subsidies in the economy. Price freezes or controls will lead to artificial shortages and creation of rent seeking opportunities in the supply chain. The privileged will hoard in-demand commodities from producers and major retailers for resale on the parallel market.

The cycle will lead to real shortages even in instances where supply can match demand. Commodities at risk include fast moving consumer goods such as mealie-meal, flour (and bread), sugar, cooking oil, margarine, rice, powdered milk, washing powder and soap. It will be very difficult for market equilibrium to be reached once rent seekers gain control of the local market.

Ultimately, these products will be only be available on the informal market where the government has no control in terms of prices, currency of trade, quality or illicit financial flows. In most instances these in-demand products are resold in foreign currency and the proceeds are never banked in the formal banking systems. Just as the case in 2008, foreign and local business operators take advantage of such opportunities to externalise foreign currency.

The depressed production levels, high demand for basic goods, low demand for industrial products and general economic decline in Zimbabwe calls for an urgent need to provision of business stimuli or supply side intervention to increase supply, stabilise prices and protect jobs. Price controls or freezes yield the opposite effect and lead to market instability.

The International Monitory Fund (IMF) forecasts an economic decline deeper than 7,4% for Zimbabwe in 2020, with market analysts predicting a decline between 8% and 12%. This follows worldwide economic contractions caused by a slowdown in global trade and business in the face of coronavirus.

Government priorities should, therefore, be on stimulating production through tax breaks ( tax holidays/suspensions), partial lifting of lockdown conditions in phases for industry and more importantly availing cheap foreign currency on the interbank market so that local manufacturers of consumer goods can maintain prices and their employment numbers. Any policies that harm production for the manufacturing sector will deal a double blow on the economy which is already suffering from a slump in tourism output.

Price freezes which are not backed by production stimuli or cost containment for the producer can never lead to economic efficiency. Zimbabwe has been on the price control path more than twice before with same effect on the economy (i.e. market shortages). A price moratorium is simply a change in the label from price control, but the undesirable effect on the economy is the same.

Bhoroma is a marketer by profession, freelance economic analyst and holds an MBA from the University of Zimbabwe. — vbhoroma@gmail.com or Twitter: @VictorBhoroma1.

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