Government inquiry into price hikes makes breakthrough – Catches itself as main regime-change culprit

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Just as officials blame rising prices on political sabotage by big business, a new inquiry by the government itself is pointing elsewhere – at the government itself.

Last week, Cabinet announced that it would conduct an inquiry into why prices are raging – saying it needed an “evidence-based” approach to the crisis. The study was undertaken by government agencies, which include the Competition and Tariff Commission, the National Competitiveness Commission and the Consumer Protection Commission.

The team has spent the week speaking to businesses and consumers, and their verdict is out: government is driving money supply, and it needs to free the exchange rate. As for the decision to lift duty on basic goods imports, this will only destroy Zimbabwean industries and reverse the growth of local brands, which have come to dominate store shelves.

Here are key takes from the report:

On the exchange rate

“Liberalise the exchange rate to allow market forces to determine prices and attain efficiency,” the report says. “This measure is unlikely to lead to increases in prices as manufacturers’ prices are pegged in US$ and indexed to the parallel market.”

The survey found that the exchange rate is the biggest cause of the price hikes, with manufacturers preferring USD payments because they do not see the local currency holding value.

Who is driving money supply?

The report points to payments from the Government to contractors, and central bank’s payment of the Zimdollar component of surrender requirements for exporters, as a source of money supply growth.

“Government should carefully manage large payments to contractors to avoid surges in local currency liquidity,” says the report.

On RBZ, the report recommends that the bank more closely monitors all sources of money supply growth to contain exchange rate movements.

“Properly fund the RBZ to purchase export surrender which appears to be a major driver of money supply growth. All surrender purchases must be done in a money supply-neutral manner. We recommend that the Ministry of Finance and Economic Development publishes the amount that will be allocated to the Reserve Bank for this purpose and how this will be raised by the Ministry.”

Currently, exporters keep 75% of their export earnings in USD, and 25% is paid in Zimdollars. Last week, government dropped a requirement for 15% of any local USD deposits to be paid out in Zimdollars, a measure that had forced RBZ to print Zimdollars to pay for that component.

What about foreign goods?

Government has opened the gate for the import of basic goods, a way to punish what officials see as “indiscipline” by businesses.

But the survey says this is suicidal: “Removal of duty and licenses on imports of basic commodities will harm the local industry, particularly those producing; maize meal, tooth paste and washing powder. This primarily stem from the finding that these products are not competitive against imports. For Maize, the producer price set by government of US$325/ton is higher than the US$200/ tonne currently prevailing in countries such as South Africa and Zambia.”

The report found that local goods now dominate shop shelves, and warns that allowing imports will reverse this trend. It recommends: “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.”

Lifting import restrictions won’t save the Zimdollar anyway. It may, in fact, increase demand for USD.

The report finds: “There is also likelihood of further depreciation of the Zimbabwean dollar as parallel market activities will increase as consumers exchange their ZWL to foreign exchange for them to be able to purchase imported goods. The net effect of this policy will likely be the acceleration of dollarisation in the country.”

Why are formal shops losing to informal retailers?

The informal traders pay manufacturers in USD upfront, while formal supermarkets pay in Zimdollars.

Says the report: “The formal retail shops are mainly sourcing their products in Zimbabwean dollars and settlement of accounts can be done in 15-60 days, which then discourages manufacturers and wholesalers of products to supply to the formal markets, especially when the Zimbabwean dollar is losing value.”

Because of the official exchange rate is overvalued, it is more expensive for consumers to buy in a supermarket than to buy outside from a street trader.

Source: NewZwire