ADAM Smith’s market theory of the “invisible hand” could soon be rendered inapplicable in Zimbabwe by interference from the central bank and economists may as well shelve their books to face an uncommon market phenomenon, only peculiar to this country.
Smith in his book Wealth of Nations proffered a solution to micro economics, concluding that prices were determined by no other factor but demand and supply.
In Zimbabwe, it seems there are several market forces that determine prices.
Before the market was graced by bond notes, a surrogate currency said to rank pari pasu with the United States dollar, the market was generally stable with not much price hikes.
But as uncertainty and mistrust crept in, initially due to cash shortages and later due to a new currency, the business community reacted by mobilising hard currency from the informal market due to shortages in the banks.
This, apparently, meant prices had to be altered to cushion businesses from an exchange rate that began emerging on the black market.
Pricing distortions subtly crept into the market, worsening as the liquidity challenges intensified, with even sectors the central bank had indicated that it would favour in foreign currency allocation failing to get the money for raw material imports.
A multiple tier pricing system then emerged, a phenomenon that has been condemned by the central bank which has threatened stern action against alleged offenders.
This action, clearly, would be tantamount to obstracting the “invisible hand”.
Analysts said invoking the law would be tantamount to addressing the symptoms, neglecting the bigger problem which is a cash and foreign currency crisis that has affected demand and supply.
The central bank may not have the ability to reposition the market on the straight and narrow since the Zimbabwean problem had gone beyond government control, according to analysts. Market forces, they said, were essentially responsible for the current pricing regime in the economy.
Businesses are being forced to be ‘innovative’, buying hard currency on the black market, with the cost eventually borne by the consumer.
Economist, Headache Makura, said the introduction of bond notes had eased the cash crisis but failed to deal with the supply side where prices are a crucial factor.
“This is simple economics; bad money is driving out good money. Although the bond notes helped to ease cash shortages, our industry relies on hard currency which is dwindling in supply,” said Makura.
Makura, a consultant at Economix Global Advisory Services, said the price increases were a product of market distortions.
“It’s just business, nothing sinister because businesses are buying cash and all this adds to costs,” Makura added.
An increase in petrol prices of US$0,04 at the beginning of the year, coupled with the slowly disappearing US dollar, connived to usher in a new wave of price increases that Zimbabweans may have to endure for the near future.
Although the price increases may not be pocket drilling, consumers are beginning to feel the pinch.
The Financial Gazette’s Companies and Markets (C&M) spoke to Isah Mutarisi during his grocery shopping in one of the major retail outlets.
“Life is tough but we just have to live each day as it comes,” Mutarisi said as he walked around the shop with his trolley.
Consumer prices in the country rose on an annual basis for the first time last month since September 2014.
The 0,1 percent increase was partly due to a 1,3 percent advance in prices of food and non-alcoholic beverages, which account for a third of the basket.
Another consumer who spoke to C&M said the price increases were insignificant and could not alter monthly budgets.
“Although prices are increasing, it is not as bad as 2008 and I think the situation will not deteriorate to what we have already experienced as a country. There is really no cause for alarm,” said Percy Maguraushe.
Price increases have also been recorded in hardware and electrical appliances.
Prices of prescription drugs have also soared amid shortages.
Marginal price increases are affecting average income earners. Outside one big retail outlet in the central business district, truck owners could be seen milling around with little business, while cart owners were slowly relocating downtown where business is reportedly booming.
Pseudo wholesalers in the downtown area of Harare are allegedly selling wares banned under the various import restrictions, trading at relatively lower prices. The imports are smuggled into the country.
Confederation of Zimbabwe Retailers (CZR) president, Denford Mutashu, confirmed price increases on grain products like mealie meal and fresh produce due to the incessant rains.
Mutashu said retailers were only transferring to consumers costs passed on to them by manufacturers.
“Retailers do not set prices, but prices are a factor of the manufactures. Manufacturers are getting hard currency on the informal market, thereby transferring costs to the retailers. We simply pass on the cost to the consumer, but it’s not our wish,” Mutashu said.
Mutashu said some banks were not honouring their commitment to support the manufacturing sector by not following the foreign currency allocation priority list.
“Banks should support manufacturers by funding the nostro accounts. This will help ease pressure,” said Mutashu.
Mutashu said retailers could not do anything to change prices. He said there was need to support the manufacturing sector in order to strengthen the supply of goods in the economy.
This would have the effect of pushing down prices, he reasoned.
Local retailers are heavily dependent on South Africa for supplies and late payment of goods by up to two months has led some suppliers to shun Zimbabwean traders.