Fear can generate self-fulfilling prophecy

31 Dec, 2021 - 00:12 0 Views
Fear can generate self-fulfilling prophecy The Reserve Bank of Zimbabwe (RBZ)

eBusiness Weekly

Although there was a high level of price stability towards Christmas, the gloves have come off as new stock moves, with the “usual suspects” leading the way in inching up prices.

There are a lot of reasons and possible explanations for this phenomenon. One curious factor, that has been becoming ever more common, is the growing gap in prices of near identical products depending on who was the manufacturer. This is true even when the whole gamut is locally made, suggesting that efficiency and profit margins are becoming ever more major factors.

While brand names have value, which is why they can be bought and sold, there are likely to be limits on just how valuable a brand name is, especially in the modern world where everyone has to give consumers a lot of information, so making possible a quality comparison when deciding whether to follow the brand or follow the wallet.

The growth in competition, and what looks like a strong trend to end what could have been seen as price rings, will push Zimbabwe into a more normal business environment. Price is a factor when people buy, and could well become an ever more important factor. 

This is especially true where price has been used as the main attraction for a particular brand. You can get a product with say 10 brands. Some will have brand-name support, but some sell largely on their price, like being the lowest price. So when the brand, which has been dominating sales among the price conscious, suddenly shoves up its price and is no longer the cheapest, then people move to the new cheapest.

So you can get a producer doing rather well suddenly seeing sales dry up. Anyone making the fact that they are at the lower end of the price range a major selling point has to then maintain that position, at least until they have built up their own brands and brand loyalty.

Many Zimbabwean manufacturers have used price as a way of competing with imports. Under modern trade rules and the growing influence of regional and continental trade pacts this is required since protective tariffs are no longer allowed. As we have noted, for some products there is an interesting level of protection offered in the dual exchange rate, whereby the local manufacturer can buy foreign currency for raw materials, even when these are 100 percent of the materials used in the product, and the direct importer has to source currency on the black market. But even that will not last forever.

Another reason for rising prices is global inflation. Many countries have seen some inflation as they battle the economic costs of Covid-19, often having to spend more money on social services and payments and in a lot of cases helping harder-hit businesses stay open. So rising money supply has led to rising inflation, but nothing what a Zimbabwean could call serious.

Perhaps the largest rise is when we come to petroleum products. The huge slump in demand and the consequent fall in prices, despite some attempt to cut back supply, are now being reversed, with demand rising but producers being careful about how they respond when it comes to opening the taps.  The worst of this process was in natural gas, where prices were rising to very high levels although some changes in production, especially in Russian supplies to Western Europe, are now at least capping that price spiral.

But these two factors are dwarfed to a large extent in Zimbabwe by the availability of foreign currency, the exchange rate, both at the auctions and on the black market, and the money supply, both temporary and long-term.

The problem is that many businesses have learned to survive, and perhaps even thrive, by attending to these factors rather than to improving efficiencies and watching costs like a hawk. 

While the black market did not perform to generally perceived expectations in December, with something like a 50 percent devaluation of the local currency expected in that market, it certainly was not static. This was despite that large sum pumped into the markets through the civil service bonus. 

That foreign currency bonus both reduced black market demand, by giving the largest single group in the formal sector their own access to foreign currency, and the supply side, since a lot of those same civil servants would be have been selling at least some of their currency to arbitrage exchange rates when making purchases. Even the horrific margins between the sell and buy prices on the black market would still allow some arbitrage so long as other formal sector goods and services were somewhere in the equation.

But there were pressures, some regrettably from the formal sector. 

Some businesses, with the auctions closed for three weeks during what is the traditional year-end shutdown in manufacturing, still had money flowing in and wanting to fix its value were dipping into the black market. 

Some were justifying this as a move to hedge against what is widely expected to be a continuing movement in auction rates when the auctions re-open, and in any case a problem of converting allotments into allocations once a month’s worth of bids are produced in just one week. But considering the prices in the black market this sort of precaution appears excessive. 

This does bring up the information gaps in the formal market. The Reserve Bank of Zimbabwe works on signals, largely by choosing at the actual moment of auction a minimum bid. 

The auction is not a perfect market. If all currency inflows were disposed of through the auction, or through the interbank market at the auction rate, and if all foreign currency purchases were made through these formal systems it would be very close to a perfect market, although it is unlikely at this stage that there would be free outward movement of capital. This market would have zero export retentions.

Even that can be fixed in a market by having a double market, as the South Africans had for much of the later period of apartheid when they were dealing with disinvestment and thus maintained what were in effect two currencies, the commercial rand which balanced imports and exports and the financial ran which balanced incoming and outgoing capital movements.

But the commercial rand was only stable because of major controls on what could be imported, with imports of made-up manufactured products and percentages of local content in almost every item strictly regulated.

But in Zimbabwe at the moment only around 40 percent of export earnings end up on the auction, and bidders are limited to purchases of priority goods. This means that the normal auction control on low bids simply cannot work since almost every item that bidders are trying to buy is needed. Hence the Reserve Bank working on a signals system. 

But the trouble is no one really knows what is the underlying strategy. When the auctions opened the Zimbabwe dollar was allowed to drift down quite fast. It then went super-stable for several months, underwent what amounted to a modest devaluation at the beginning of this year, and then returned to superstability until October when it was suddenly allowed to move south quite quickly, but with patches of level lines on the graph.

The Reserve Bank has already found in the auctions, although it took a bit of time, that some bidders do not have the money in the first place and we also see, with this attitude of let’s stock up on the black market, that some have quite large sums in local currency and tend to regard this cash as not really real money.

All this speculation, conversion of expectations into reality and other problems did stop the continuing fall in inflation rates, and created those fears that every Zimbabwean business has when it comes to inflation, fears that all too often covert to self-fulfilling prophecies. 

So the fiscal and monetary authorities have their work cut out. Obviously the auction system must work efficiently and we simply cannot have delays between allotment and allocation. This might, at a push, require measures to increase the proportion of export earnings available for sale, which would create its own problems but these might not be as bad as the alternative.

Continued progress requires growing confidence in the local systems and the local currency, and that requires continued vigilance by the authorities that things are working.

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