Nadeem Azad JEETUN
29 August 2007
Port Louis — Inflation is the talk of the town. Prices are rising with unprecedented vigour, basic necessities such as milk and rice, food items such as fish and chicken, petroleum products, freight rates, electricity have all gone up.
The population complains for what should have been a one-off now resembles an endless Tour de France. While some argue that this is the price to pay for economic progress, it is important to understand where the 10.7% inflation comes from before attempting to tackle the problem.
There are three major types of inflation, namely demand-pull where a rise in aggregate demand pushes up prices, cost-push where an increase in the price of factor inputs leads to higher cost of production and subsequently higher prices, and lastly built-in inflation which involves the wage-price spiral. That is, workers constantly try to keep their wages up to match increasing prices which again leads to higher cost of production and prices.
In the Mauritian context, we are dealing mostly with a cost-push and built-in inflation. Rises in the price of petroleum products and freight rates have repercussions on the cost structure of firms which in turn raise prices if they cannot absorb increasing costs. In fact, a recent survey carried out by the Mauritius Employers' Federation pointed out that 52% of Mauritian companies will increase the price of their product or service due to the recent change in price of petroleum products.
Furthermore, our economy has a very high propensity to import, import of goods and services represents nearly 81% of gross domestic product (GDP), and when prices of basic necessities such as milk and rice hike on the world market, it is bound to have supply shocks on the Mauritian economy.
In the same way, the recent compensation to employees reflects the shaping built-in inflation where obligatory payment to workers will lead to increased cost of production and prices of related goods and services while also be fuelling demand-pull inflation.
Government approach to inflation has been direct; the Monetary Policy Committee has raised the repo rate from 8.5% to 9.25% in order to discourage excessive consumption and borrowing while providing an incentive to save. Another major, and even more important aim of the rise in interest rates is to stabilise the rupee vis-à-vis other currencies.
Adding to this, the competition bill, provided for in the Budget, is destined to break down on monopolistic practices, inefficiency and exploitation of consumers.
While it is still too early for the measures implemented to take full effect, they have already been met with some degree of success. It is predicted that there will soon be stability for the rupee and consumption is being constrained according to a recent survey from the PluriConseil cabinet.
Eliminating wastage, a priority
Therefore, to say that nothing is being done would be wrong, but to say that more can be done is an understatement. Inflation is not purely a monetary phenomenon and while monetary policy will help, in our case, measures taken are likely to suppress the symptoms but they do not tackle the underlying problem faced by the economy, which resides predominantly in a cost-push inflation.
The cost-push inflation is being caused by a combination of factors: currency depreciation, rising wages, increasing price of imported goods and rising cost of inputs on the world market. While the rupee has stabilised recently, not only by the increase in interest rates but also favourable international conditions affecting major currencies, other sources of inflation still remain unattended.
To deal with increasing costs of production, private sector firms as well as parastatal bodies should be run as effectively as possible. Spare capacity exists and there is scope for productivity improvement. While 52% of firms in the MEF survey agreed upon a rise in price due to increasing costs, 48% of firms still believe that raising prices is not necessary. Eliminating any form of wastage and making optimal use of all resources at hand should be a priority.
Raising prices might be the easiest solution for most firms; it is certainly not the best solution for the economy. The prices of milk, rice, cosmetics and pulses have already gone up and it is vital for producers to realise that any other change in price will further contribute to inflation.
The price of imported goods from our traditional suppliers is also on its way up on the world market. To alleviate shocks on the economy, domestic producers can import cheaper products from new suppliers in developing countries. For instance, if milk from Australia is now too expensive, an alternative would be to import it from Argentina, Uruguay or even Kenya.
While demand for these new products might be low and unprofitable at first, given the high degree of consumer loyalty and the conservative Mauritian society, it will serve its purpose, offering cheaper milk on the market. Whether consumers will adapt to new products is not a question of choice, it is more a question of time and necessity.
The Government could also come forward and provide incentives for local production. The Cream Bell project for milk was already a step away from expensive imports and it is a pity that it was not implemented. Nevertheless, the attempt remains positive as it shows that we have the potential to produce some consumer goods locally.
With the right incentives and correct policies, other sectors can be developed as well. Subsidies, tax exemption, facilitation of business finance and investment in the capital, necessary to promote domestic production will all play their part. In the face of inflation triggered by rising prices of imported goods which are mainly basic necessities, the trend should be away from imports and more towards local production. Both of these measures, efficiency and import substitution will put a downward pressure on inflation.
Rising prices hurt business on the domestic market
It is unfortunate that our wage policy is not in line with our monetary policy. The built-in inflation which involves the wage-price spiral has recently been exacerbated by the paradoxical Additional Remuneration Bill 2007. While compensating employees for the loss in real income due to rising inflationary pressures, it is very likely that business will be affected even if it has been linked to productivity. Rising wages will increase costs which may in turn lead to a further increase in prices of goods and services. The bill, in favour of employees, might backfire on the economy and on the inflation crisis we are finding hard to solve.
We can all complain that prices are constantly on their way up. We can also blame each other or international factors for the ordeal we are going through. The fact remains, none of all this will help. Inflation, if let loose, can have severe repercussions on an economy and its people.
Rising prices hurt business on the domestic market but also lead to a loss in our comparative edge on the international stage. To the people, double-digit inflation does not only take away purchasing power, it allows you to lose faith in your Government, to lose hope of a better future.
The Government and the private sector have work to do. Efficiency, productivity, import substitution are all words with a heavier weight in a basket of measures. While rising prices on the world market is a global phenomenon which is out of our control, the way we adapt to the change is something we can very much influence.
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