In a recent study conducted by the Competition and Tariff Commission and National Competitiveness Commission, the underlying causes of price disparities in basic commodities, the impact of import duty removal, and the cost drivers behind the recent price hikes were investigated. The findings shed light on the undeniable truth that Zimbabwe’s government policies, particularly reckless money printing and a managed exchange rate, have played a pivotal role in the country’s economic turmoil.
In an attempt to stabilize Zimbabwe’s exchange rate and macro economy, the Ministry of Finance and Economic Development has implemented several measures, including the lifting of restrictions on importing basic goods. This move has allowed for the importation of eleven essential commodities, namely maize meal, rice, milk, flour, salt, cooking oil, sugar, petroleum jelly, toothpaste, bathing soap, and washing soap.
The comprehensive study, carried out by various government agencies, delved into the pricing disparities of basic commodities, identified the driving factors behind the recent price hikes, monitored the movement of essential goods within the informal sector, and assessed the impact of import license removal and duty abolition on price stabilization.
Key Findings of the Study:
One of the notable observations is that the prices of basic commodities in Zimbabwe have skyrocketed when denominated in local currency (ZWL), while remaining relatively stable in the US dollar informal market. This stark difference indicates that the primary driver of price increases lies in the exchange rate fluctuations. Furthermore, cost drivers linked to the US dollar exhibited more stability compared to those charged in ZWL, suggesting a direct correlation between the depreciating exchange rate and the surge in ZWL-denominated cost drivers.
The lower prices witnessed in the informal market can be attributed to local manufacturing discounts offered for US dollar transactions, as well as the attractive cash purchase terms associated with these transactions. Additionally, it has become evident that basic commodities, such as toothpaste, washing powder, and bathing soap, are being smuggled into the country and finding their way into the informal market.
While the removal of import licenses and duties on basic commodities may contribute to price stabilization in US dollar terms within the informal sector, it is unlikely to have the same effect on ZWL prices. This is due to the pricing models adopted by local manufacturers, which are heavily influenced by exchange rate movements. Consequently, the removal of import duties and licenses could have detrimental consequences for local industries engaged in the production of commodities like maize meal, toothpaste, and washing powder, as they struggle to compete with imported alternatives. To compound the issue, the government-set producer price for maize meal is higher than that of neighboring countries such as South Africa and Zambia.
Based on these findings, the report puts forth the following recommendations:
- Liberalize the exchange rate to allow market forces to determine prices and foster economic efficiency.
- Provide adequate funding to the Reserve Bank of Zimbabwe (RBZ) to ensure the neutral purchase of export surrender, thereby maintaining a balanced money supply.
- Implement careful management of substantial payments to contractors to prevent sudden surges in local currency liquidity.
- Monitor all sources of money supply growth by the RBZ to effectively control exchange rate fluctuations.
- Temporarily reverse the decision to open imports for mealie meal, toothpaste, and washing powder in order to protect the gains made by local industries and promote the domestication of local value chains, aligning with the aspirations of the National Development Strategy 1 (NDS1).
Additionally, the Zimbabwe Revenue Authority (ZIMRA) must strengthen its measures to combat the smuggling of imported goods, as this practice poses a threat to the country’s reindustrialization efforts. Furthermore, ZIMRA should conduct thorough post-clearance audits to ensure that foreign goods sold in the local market comply with proper customs procedures.
The joint study conducted by the Competition and Tariff Commission and National Competitiveness Commission has provided a clear understanding of the factors contributing to Zimbabwe’s price hikes. The findings underscore the undeniable truth that the government’s own misguided policies, specifically wanton money printing and a managed exchange rate, have played a significant role in the economic turmoil faced by the nation. It is imperative for the government to heed the report’s recommendations and take decisive actions to rectify the situation, fostering an environment that promotes economic stability and growth.