Should Govt panic over price hikes?

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Clive Mphambela
Government has hit the panic button over recent spikes in the price of most basic goods, and in typical fashion has reacted by setting up an ad hoc committee to investigate and make recommendations into the recent rises in consumer goods prices.

I have repeatedly warned in this series that these sort of interventions by the Government are more harmful than they are useful. Understandably, Government’s role is to worry about the welfare of the people and from that angle, the authorities have a legitimate interest in seeing that basic goods not only remain available in the market, but also remain affordable.

However, without putting the root causes of the recent price spikes into sharp context, we are likely to have an inappropriate policy response from Government.

The genesis of the current upward spiral in prices is the rapid expansion of money supply which can be traced back to the beginning of 2014. Since that time money supply growth measured on a monthly basis or annual basis has consistently outpaced growth in GDP. In simple terms if we assume that GDP growth is a proxy for productivity growth in each year, when one compares annual money supply growth to GDP growth there must be a relationship.

However, when money supply begins to expand much faster than GDP growth we are bound to have inflation in the economy. There is now too much money chasing too few goods.

The question then is, should Government panic over recent price increases. My gut feel answer in NO. There is absolutely no need for Government to fret over the recent price increases for a number of reasons.

One of the main reasons is that the Zimbabwe economy has just recently come out of a three-year deflation spiral which was borne out of cautious spending by consumers which resulted in depressed demand and low capacity utilisation.

Local producers were squeezed for margin and many companies were not profitable. The expansion in nominal money balances in the economy has triggered the demand for both local products and imported substitutes.

This in turn has resulted in increased demand for foreign exchange which unfortunately is mostly available on the unofficial market at hefty premiums. It is the foreign exchange premiums that are fuelling price hikes as resellers of goods try to price their stocks at anticipated future replacement values rather than current replacement value.

In other words, retailers are charging prices of the goods that are on the shelf based on the cost patterns that they anticipate will be prevailing when they have to replace the stocks in future, and not on historical costs. So the economy is pricing in inflation expectations and this is what has caused the recent rapid rises in prices.

The reason government needs not panic is therefore very simple, such pricing models are hardly sustainable for a long time. Sooner than later, consumer resistance on its own will force a correction of the prices.

This is exactly what happened in 2009 after adoption of the multi currency basket. There was a short term spike in prices but competition and consumer resistance kicked in and what followed was a very long period of sustained price stability. In fact for the better part of three years, some prices were falling and consumers were singing Ebenezer.

Secondly when government panics, as it is now doing, the authorities normally react in an unstructured and haphazard manner. These reactions cause further market distortions, hindering normal self-correction mechanism in the market.

The result is that the market will over react to government intrusion, supply chains are disrupted and shortages result, leading to even higher prices. My singular recommendation is for Government to allow the market to establish its own equilibrium.

Thirdly, Government interventions in the commercial space fly directly in the face of its stated objective of creating a liberalized environment which is conducive for commerce. I am not at all advocating for Government to allow the blatant abuse of consumers by the business sector, but I am saying, there is no investor locally and abroad, who will want to pour in money into an environment where there is micromanagement of the business sector by the state.

If the new economic order is sincerely intended, then Government’s role must be restricted to managing the macro-economic policy space. In this regard, I posit that Government does not need to be setting up committees to investigate the micro dynamics in the various value chains. What the state should instead be doing now is to address the macro-economic disturbances that have caused upsets at the micro level.

The policy tone of the President at his inauguration was very appropriate, timely and far reaching. However, when government starts setting up command structures to look at pricing of goods, we should get worried. Instead, government should recognise that what is happening in commerce today is a direct result of certain actions and inactions on its part. Recent price rises are not a result of a sinister plot against the Government from any quarter.

They are also not a result of any ulterior motives by business, market indiscipline but a response to the macro economic situation whose genesis is excessive Government expenditures which have led to macro-economic disturbances.

Price rises will not be contained by decrees and threats and fines and so forth. Government should instead stop printing and injecting new money into the financial system. Money supply growth must be curtailed and this must be done fast. A large chunk of the huge pot of RTGS money in the economy should either be sterilised or put to productive use.

Interest rates must be allowed to rise so that savings can attract a real rate of return. This will stop households and companies dishoarding cash and therefore driving up prices of goods.

These seem like impossible suggestions but they are the most reliable solution to the inflation crisis facing the economy.

On a positive note, the economy and the Government needed a bit of inflation, but not too much. As I write, Government tax revenues particularly from VAT, have been rising in tandem with rising prices. Rising prices may also ultimately mean better corporate performance in 2018, improving collections from corporate taxes.

The writer is an economist. The views expressed in this article are his personal opinions and should in no way be interpreted to represent the views of any organisations that the he is associated or connected with.

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