Allow market forces to determine prices – Report

THE Government has been called on to liberalise the exchange rate and allow market forces to determine prices.

The recommendations are part of a report from a study by various government agencies including the Competition and Tariff Commission, National Competitiveness Commission and Consumer Protection Commission.

The study’s objectives included assessing pricing disparities of basic commodities, investigating cost drivers to the recent price hikes, monitoring the movement of basic commodities while tracking the impact of the recent removal of import licences and duties on basic commodities.

According to the report, liberalising the exchange rate was unlikely to lead to increases in prices as manufacturers' prices were pegged in US dollars and indexed to the parallel market.

In its findings, the study noted that price increases have been witnessed in local currency terms while they have remained fairly stable in US dollars.

“The price increase was huge in May when the local currency depreciated by 34%, indicating that the price increase was exchange rate induced,” the report states. 

“The blended inflation index does not give an accurate position on inflation since the formal sector uses local currency to price products.” 

In its assessment of the impact of cost drivers to the recent price hikes, the study indicated that US dollar denominated cost drivers were relatively stable compared to those charged in the local currency.

It said this indicated a positive relationship between the depreciating exchange rate and increases in local currency denominated cost drivers.

On the movement of basic commodities into the informal sector, the agencies indicated that lower prices in the informal market were a result of local manufacturing giving discounts for US dollars and attractive trading terms in cash purchases over local currency purchases.

“It therefore forces suppliers to charge a higher Zimbabwe dollar price to formal retailers given that it is depreciating on a weekly basis both on the official and parallel market.

“There is strong evidence of smuggling of some basic commodities such as tooth paste, washing powder and bathing soap into the country. These products are finding their way into the informal market,” the agencies noted.

They said the current liberalisation of basic commodities will further strengthen price stabilisation for basic commodities in US dollar terms in the informal sector.

But this will more likely not stabilise local currency prices of basics since pricing models of local manufacturers were heavily linked to movement in exchange rates.

“Removal of duty and licenses on imports of basic commodities will harm the local industry, particularly those producing maize meal, toothpaste and washing powder.

“This primarily stems from the finding that these products are not competitive against imports. For maize, the producer price set by the government of US$325 per tonne is higher than the US$200 per tonne currently prevailing in countries such as South Africa and Zambia,” the report said.

The agencies called on government to carefully manage large payments to contractors to avoid surges in local currency liquidity.

“The Reserve Bank of Zimbabwe (RBZ) must monitor all sources of money supply growth to contain exchange rate movements. Exchange rate movements are heavily linked to pricing models of manufacturing companies.

“Reverse the opening of imports in the short run to protect the gains once realised by the local industry on the following products; mealie meal, tooth paste and washing powder as this have a negative impact on NDS1 aspirations on domestication of local value chains,” the agencies added.

They noted that there was also a need for the Zimbabwe Revenue Authority (Zimra) to strengthen measures to combat smuggling of imported goods into the country.

“Furthermore, Zimra should also undertake post clearance audits to ensure that foreign goods sold on the local market properly follow customs procedures,” they said.

The recommendations came after vendors in Zimbabwe’s major cities and towns had invaded all strategic points, including verandas of big retail shops, selling a variety of goods including basic commodities in foreign currency.

There were also allegations that the biggest suppliers for vendors were retailers.

Reports also indicated this week that big retail shops were refusing to transact in the local currency citing various excuses.

Consumer Council of Zimbabwe (CCZ) executive director Rosemary Mpofu confirmed problems being encountered by shoppers.

“CCZ of late has been receiving consumer complaints from the transacting public, among them retailers charging some products exclusively in US dollar and rejecting the Zimbabwe dollar,” she said.

“At times, consumers are advised that either the mobile network is poor or there is lack of connectivity, and non-functioning swipe machines in a bid to harness as much forex from consumers.” 

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