Fiscal policy, not panic, must influence pricing

08 Feb, 2019 - 00:02 0 Views

eBusiness Weekly

A lot of businesses are confused over pricing, and others are panicking, although so far as we can see neither confusion nor panic is justified as the Government is still determined on a tight fiscal policy and is still determined to fix the fundamentals.

Prices are rising, largely as many foreign payments for supplies are made at parallel rates, but this is predictable and for many businesses imported materials and components are a modest fraction of their costs, so even a four-fold rise in one cost might well produce a 25 percent rise in the final cost.

It would seem to us, considering the stability in parallel rates for the last few months, that following normal costing formulas would suffice for most businesses. These formulas will produce a final cost of an item or a service and with the application of the profit margin and the taxes you get the final selling price. Trying to fix a final price in US dollar cash is likely to lose any company a lot of customers. They all know what is reasonable and what is not.

Keeping customers happy is something businesses need to remember is the only key to long-term viability. People will understand some price rises, and we would encourage businesses to explain their price rises carefully so that they are seen to be reasonable. But those who go off the rails will find themselves sitting on stock without buyers. A glance through any decent supermarket will quickly show which items are moving well and which are stuck on shelves and an examination of pricing will show any observer why.

A good example of how to do things both wrongly and correctly comes from our largest company, Delta, which is back in top spot on the Zimbabwe Stock Exchange following Econet’s split into two large companies now occupying the second and third places and both more than three times the size of number four.

Delta had a major panic and decided to sell everything in US dollars cash. The reaction was immediate and adverse. It quickly became obvious to Delta’s management that they had overacted and read the signals wrong, very wrong.

But then Delta calmed down and applied the considerable talent in that company. Yes, some prices had to rise. But the rises were reasonable and moderate and customers generally see the point. So Delta is assured not just of immediate viability but for long term growth. No customer likes a price rise but when it makes sense and when it is carefully explained, and in this second outing Delta took some trouble to explain, then customers will not react angrily, threaten boycotts or start figuring out how to replace the product or find a decent alternative.

One concern we have noted throughout the business world is the general acceptance that Zimbabwe will have its own currency once again sometime in the next 12 months. And some people are very twitchy about this, remembering the appalling mess we made of it last time we had our own currency.

But the present fiscal and monetary authorities are behaving quite differently. Finance and Economic Development Minister Prof Mthuli Ncube appears to making a fetish of balanced budgets, a long overdue and vital reform required in the top echelons of Government. And despite all the pressures he is holding to that course. The civil servants came in with huge demands and gave notice of a strike. The Minister held his ground; he was prepared to find some extra money, but far below what was asked for, and coupled with the superior political skills of President E. D. Mnangagwa the Government has managed to make it clear to its staff that there are limits but that within these limits, and with a willingness to capitalize many benefits, the Government will go all out to make life easier. And that has been coupled with action plans to implement promises, again something often lacking in the past.

The rises will not break the budget. The Finance Minister will be getting a bit more VAT and PAYE from the general rise in many things, and he has that windfall of the higher duties he needed to impose on fuels to bring that sector into line. The take from the fuel taxes will probably be in the region of the income from the new 2 percent transaction tax this year even with the severe drop in fuel consumption already noted as almost everyone starts taking energy efficiency a lot more seriously. But if the Government had been slack then the budget would be broken, despite the fuel tax.

Economists are already noting that Prof Ncube and his President are using their tax regime for a second purpose, besides just balancing the books. The new taxes in the last six months have been on consumption, helping the tackle that very serio0us problem that Zimbabweans want to consume without producing. Every country that has moved from poverty for the majority, even if there has been a well-heeled elite, to decent middle-income comfort has worked from the opposite premise, that they need to produce more than they consume.

So fiscal policies are in place already to prevent abuse of a local currency.

The second plank is how RBZ Governor Dr John Mangudya has handled his bond notes. He has resisted every single pressure, political and popular, to switch on a printing press. And we assume that if there is a local currency then the ATMs are unlikely to hum. In fact Zimbabwe appears to have moved out of the era of banknotes with just about everyone now quite happy with electronic transfers. We are fast reaching a stage when banknotes might be like postage stamps, available but not really in much use and we cannot see the RBZ wanting to go back to a paper-rich past.

We would note that any currency is actually a unit of account. Banknotes and coins are simply a way of moving fairly small sums conveniently, like paying a kombi fair, but do not have value in themselves, at least not in their own currency area. Premiums for bond notes have now largely vanished, if anyone wants evidence of that, as Zimbabweans have come to realise that real cash in hand is the balance in their mobile wallet and demand bank account.

So we can safely assume that whether we retain the present system or go all the way to a full local currency the fiscal and monetary authorities will retain their very firm tight policies. And quite right too. So for those who might be concerned we ask a simple question: What changes would there be if the Government and RBZ introduced a new local currency tomorrow but retained their present fiscal and monetary discipline. And when any business person thinks through that question they will quickly find the answer is: Not very much difference at all.

So let us all be calm and clear. Let us read the signs, not listen to Twitter messages sent by twits, and as a result we can make sensible and rational decisions.

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