Editorial Comment: Price disparities boost competition

Source: Editorial Comment: Price disparities boost competition | Herald (Opinion)

The continued near-total stability of the foreign exchange rate, with weekly movements of a small fraction of one percent, implies first that the markets reckon the Government can hold the line on money supply, with the Reserve Bank making sure it hands out weekly figures showing the reserve supply continues to fall, and secondly that the system can cope with any “Christmas surge”.

For the first, there were some concerns that the civil service pay negotiations could see the Government falter and agree to a non-sustainable increase. But as they progressed most in business came to the conclusion that while Government would go for the affordable maximum, it would be affordable.

The low-level damage to the economy, outside the tourism and hospitality sectors, meant that tax receipts would be rising in nominal terms, as inflation of the first six months of the year worked its way through the system with private sector pay awards producing more PAYE, greater spending producing more VAT, and even businesses recovering and paying more tax.

As a reality check, most businesses could also compare Government pay awards to what they had been granting to their own staff and come to the sensible conclusion that the percentage of national wealth going on civil service pay was remaining fairly constant.

So that fear has had zero effect on the exchange rate.

Bidders are continuing to bid within extremely narrow ranges with only the odd maverick trying for a modest bargain at the low end and the odd scared importer feeling a higher bid is required.

The other danger for those who remember the first attempt to set a market-related exchange rate, would be a Christmas surge in foreign currency demand.

The memories of 14 November 1997 do linger, and apparently linger in Government and Reserve Bank of Zimbabwe circles because a lot of effort has been put in place not to run a repeat.

That failure 23 years ago had two sources. First, the Government broke all budgets and dumped its remnants of fiscal discipline, which had not been very wonderful anyway at that time, in a huge single award for war veterans, instead of following the advice of its own experts and using a phased programme that incorporated a lot of productive investment and business guarantees.

Secondly, the bid system in place allowed anyone to seek official foreign currency for pure consumption, importing luxuries and unnecessary goods that could be resold at a high profit.

In fact, the actual crash, so anecdotal evidence suggests, was triggered by a single large order by a major retailer pretending to be a wholesaler.

But it was an accident waiting to happen with fiscal indiscipline creating the money supply, an exchange rate mechanism that was being “managed” at an unsustainable level, and “Christmas”.

The present auction system avoids the two main problems. For a start it is market driven, not managed, so the stability is real, not some metastable state that can be destroyed by a serious push.

Secondly bidders can only bid to pay bills for goods and services on the set priority lists, and these are totally dominated by the requirements of the productive sectors although some consumer goods that are essential, but which are not made in Zimbabwe can slide through.

This time round, with money supply kept tight, both through fiscal discipline and careful monitoring of the liquidity in the system, and through an open market, but only for priority imports, the dangers are non-existent.

So it is difficult to understand why the odd product suddenly surges in price. The odd small rise, as a business that uses more electricity for each unit of production than most, could be tolerated, although even here Zesa power, even after the two recent rate increases, is a lot cheaper than what comes from a generator and Zesa has managed to achieve a near continuous supply.

When the lights go off people phone Zesa faults, rather than sigh about load shedding.

Beef prices traditionally rise in the last three months of each year as a result of how many farmers manage their business. As the rain starts falling, and the grass starts growing and turning green, it makes sense for a farmer with underweight cattle to hang onto them for a couple of months and fatten them for free on natural grass, so supply falls.

What is slaughtered at the start of the rainy season are cattle that have been getting expensive supplementary feed, so they tend to be a bit pricey. It balances out in the end though. Other farmer-supplied products, like vegetables, also hit their price peaks about now.

They have been grown under irrigation and so are also pricier to produce and a little bit scarce. As the rain-fed produce moves into market stalls, prices adjust downwards. Last year’s drought just made the pressure on beef and vegetable prices worse.

But, while almost everyone in business has been battling to keep prices constant or near constant, relying on rising volumes to build profit and reduce the share of fixed costs assigned to each unit, a couple have decided on a riskier course.

One major maker of cordials, for example, suddenly last week jumped their prices more than 25 percent, with no announcement, no explanation. They just gave a new wholesale price to their retailers and some have gone as far as wondering if the price jump had anything to do with the final phase of schools re-opening, since the products are very popular with schoolchildren.

However, that company faces risks. Other producers of similar products have kept prices stable, and so presumably if you look at shopping trolleys outside the far north-eastern suburbs are picking up market share.

And one producer, who entered the market with a single product retailing for almost half the old price of the affected brand, has obviously found it hard to keep up with demand. Shelves tend to empty fast as a new delivery is made.

As our economy grows, and as we make it ever easier to start a business or expand a business into new areas of production, competition will increase. The hard times this year have seen an acceleration in the move away from brand loyalty towards wallet loyalty.

Consumers will at least try the cheaper brand and if the quality is acceptable will continue with it.

Some local producers of products that used to be imported have learned this lesson, having entered the market with a product slightly more expensive than the cheapest import, and then had to cut prices to grab at least some market share.

Captive consumers are becoming a rare species and market forces will win out. And treating customers as dummies is going to be bad news.