Zimbabwe: Exchange Stability Must Come With Price Discovery

17 September 2020

By now, with an almost dead-steady exchange rate for six weeks for the major industrialists and importers of high-priority goods, we should have been seeing more than the “steadiness” in prices many talk about: we should have started seeing some significant reductions.

When prices were soaring in the few months to the start of the auctions, the reason given was that industrialists had to import their raw materials using black market currency and so did every importer, regardless of the priority level of their imports. Thus prices had to track the replacement cost of stock.

This made sense, although it was extremely painful as the exchange rate used to calculate replacement costs soared past $100:US$1 to end up somewhere near $120:US$1 for some goods and services.

In the early days of the auctions there was some doubt, again understandable if not justified by the facts, that stability would be hard to achieve and that the bulk of foreign currency might well have to be still sourced on the black market.

But as the black market rates were not rising, at least prices were largely kept stable.

However, since the beginning of August, six weeks now, the exchange rate generated by the auctions has floated around in a very narrow band of between $80,47 and $83,40, rising marginally for three auctions and falling marginally for three.

Just as critically, for all but the first auction in this six week run, all valid bids have been accepted and even in the first August auction over 90 percent were allotted.

So we are in the position where importers of goods and services listed as category 1 and category 2 on the import priority list are as close to guaranteed as possible in this imperfect world of getting their required foreign currency and getting it at a price they can predict very closely.

Stocks acquired when the black market was flourishing and needed to be used must now be exhausted. The stuff on the shelves has been its imported content bought with auction currency.

This excludes some luxuries and other non-priority imports, but these are for a start not included in the long lists of goods whose prices are monitored by ZimStat and so are not used to calculate inflation figures.

Some Zimbabwean industrialists have taken the plunge in the last week or two and started cutting prices as they feed the new foreign currency cost into their pricing models, but many have not.

Those that have must have noted an increase in volumes.

Anyone pushing a trolley around a supermarket will notice that a significant fraction of Zimbabwean shoppers now look at prices first, with some checks down to make sure that an apparent bargain is not cheap because it is half the mass, although there is brand loyalty that supports some of those who feel they can take advantage of loyal customers.

But the effects are noticeable if you are a supermarket shelf packer. You will spend a lot more time hauling boxes or the lower-priced goods to the shelves than the higher-priced. And people should think seriously why so many imported products left the shelves.

It was not Government bans or anything like that, rather it was the growing price gaps.

How long brand loyalty, for near identical products, can be used to keep prices higher than they need be in the present economic climate of reduced real household income is a moot point.

Where there are significant differences in quality or taste any market will generate price gaps, but where the product is as basic as bath soap or ordinary rice it is difficult to understand gaps exceeding 20 percent and in some cases even 40 percent or 50 percent.

But at least a capitalist economy is, in some areas, generating this difference as suppliers break ranks, re-cost using actual costs and then go for volume.

But for some products these market forces are not able to operate. We either have a monopoly, a near monopoly, a combination or at the very least finance managers encouraging their market people to track what the competition is doing.

One example, that everyone notices, is the identical prices that the three major bakers charge, and by identical we mean down to the nearest Zimbabwean cent.

It insults the intelligence of consumers to persuade them that each business has identical costs, to the nearest cent.

Retailers tend to get the blame, but there are so many retailers that setting up a retail price-fixing ring in Harare, for example, would probably need the hire of the City Sports Centre to find a seat for every shopkeeper, and even then social distancing would have to go by the board.

But for some products one chief executive can set the price. In others two or three people can quietly meet, or phone each other, and there are regrettably few products where a foursome on a golf course cannot rig a market.

Perhaps we are reading too much into the Mutare address of one manufacturer that has led to the reduction in prices, but the fact remains that the managers of that particular company live too far away from Harare golf courses to have cosy relationships with their competitors.

Government action is necessarily limited.

Price controls do not work very well, except to create shortages, and the days when the Zimbabwe Government can issue decrees are long gone.

But there is a competition authority that could be beefed up. Efforts can be made to encourage other investors to step in and provide competition.

If the European Union (EU), which has a highly competitive market and lots of former national companies that have spread their wings, has to climb into price-fixing rings then we can as well with a far more basic economy.

Consumers can take action, individually, by supporting the companies that do take competition seriously.

The Consumer Council of Zimbabwe (CCZ) could be more aggressive.

Creating lists of products with their prices and the results of quality tests would be a big start to helping consumers figure out just what they are paying for.

It would certainly help end a situation where people pay more for nothing significantly extra.

Price gaps should reflect quality gaps, not the differences in the greed of shareholders or the efficiency of managers, and even then consumers need to know what they get for an extra dollar.

Editorial Comment: Exchange stability must come with price discovery

B y now, with an almost dead-steady exchange rate for six weeks for the major industrialists and importers of high-priority goods, we should have been seeing more than the “steadiness” in prices many talk about: we should have started seeing some significant reductions.

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