Is multi-tier pricing the problem or symptom?

As Zimbabwe’s central bank tries to calm the problem it caused in the market through the introduction of bond notes in November 2016, questions have been raised on whether the multi-tier pricing system is worth the fight or it’s only a symptom of deep-seated macro-economic problems in the country.

By Victor Bhoroma

The three prices in the local market are for the United States dollar, bond notes and bank transfers or mobile money.

Most retailers or traders openly discount their stock by more than 40% if customers are buying using the dollar and revert to the displayed prices if a customer mentions other less preferred payment methods such as EcoCash, transfers and the like.

Retailers and various producers in the country have resorted to charging three different prices for their stock to cushion themselves against punitive exchange rates.
Most producers risk failing to replenish their stock as the foreign currency situation worsens.

Others are trading in losses in anticipation that the situation will normalise soon.

The Zimbabwean government tabled legal procedures to criminalise the use of a multi-tier pricing system by service providers in the country, blaming it for fuelling a surge in price hikes for goods and services in the market.

The bill was expected to go through the Senate before Parliament closed for the 2018 general elections.

For a long period from February 2009 to mid-2016, the dollar and the South African rand had dominated economic transactions in a somewhat liberal market.

Offshore payments for raw materials and equipment, dividend remittances and imports of basic products ceased to be a problem.

The economy experienced the best growth rates in sub-Saharan Africa between 2009 and 2013, with real growth rate in (gross domestic product) GDP reaching an all-time high of 12% in 2012.

Zimbabwe experienced deflation (general fall in prices) for large parts of 2014 and 2015 with year-on-year inflation rate as measured by the Consumer Price Index (CPI) at minus 0,49% in February 2014.

The black market had disappeared and market forces were working independently to adjust prices as the economy recovered.

Soon after the announcement to introduce bond notes in November 2016 by the central bank, the dollar vanished in the market to confirm Gresham Law of bad money chasing away good money.

Since 2013, Zimbabwe’s domestic debt has surged to over $6 billion, growing at an average of 0,8% of GDP each month.

The multi-tier pricing system generally reflects the level of confidence that producers have in the economy and the exchange rates that prevail at the time for the currencies in circulation.

To expect retailers or producers to accept the bond note at par with the dollar when imports are valued in dollars is to ignore key fundamental aspects that led to the problem in the first place.

The major causes of the current mismatch in exchange rates are shortage of foreign currency to fund production and the increase in money supply that has outpaced the economic growth rate (monetary inflation).

The main difference between the 2008 bearer cheques printing scenario and the current one is that money supply is growing through increases in real time gross settlement (RTGS) values, which may be difficult to track for the public.

The effect is, however, the same, as too much money is chasing too few goods and local currency depreciates.

The worsening RTGS position has been driven by government spending on agriculture funding through the overdraft at the central bank and other financial securities

RTGS values increased from $3,2 billion in 2016 to $5,2 billion at the end of 2017.

The increase of around $2 billion largely emanated from Treasury Bills (TBs) and Bonds issued for government projects which include the financing of command agriculture and civil service bonuses.

So the key question is, is the multi-tier pricing system the problem or symptom? Will criminalising it solve the fundamental problems in the country?

Criminalising multi-tier pricing is almost the same as effecting price controls to producers.

To survive such policy, producers resort to other illicit means or withhold their produce until prices rise.

This may actually fuel the black market for basic goods and put pressure on the central bank.

Government expenditure on agriculture and the civil service bill are expected to grow in 2018, with salary increments across the entire civil service anticipated before and after elections.

All signs point to issuance of more TBs and a huge demand for foreign currency.

Zimbabwe’s solution to the economy does not lie in monetary solutions, but in supply side interventions.

With an average trade deficit of $2,62 billion since 2013, the country is not producing enough to meet demand thereby relying on imports for raw materials and finished goods.

The current account deficit may even be higher than recorded, as the bulk of the trade transactions happen outside the formal banking channels and some goods are smuggled into the country from neighbouring countries.

With most producers relying on imports of raw materials and equipment that require foreign currency, the current multi-tier pricing system will be hard to chase away.
To ensure the black market goes away, a stronger currency is required in the short term.

But that on its own will not solve the current account deficit, which will require growth in production capacity.

Once production capacity improves, the import bill can be reduced through import substitution and exports can grow.

The growth in exports can plug a lot of problems such as the current foreign currency shortages, building offshore reserves and improving industrial capacity utilisation, as manufacturers will be able to re-tool freely without the intervention of the central bank on what deserves more priority in foreign currency allocations.

Once there is a trade surplus or 80% in industrial capacity utilisation, monetary interventions will be sustainable.

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