Clayton Masekesa in CHIMOIO ,Livingstone Marufu in HARARE
Price distortions in Zimbabwe, particularly on basic consumer goods, have given rise to arbitrage opportunities as many Zimbabweans in the eastern border town of Mutare are smuggling products such as bread to neighbouring Mozambique, it has been established.
Prices of some products in RTGS terms are cheaper if you convert using the parallel market rate than what is obtaining in the region. On the other hand, prices are beyond reach for the ordinary consumer whose salary has not changed and moreso for the tourists whose transactions on international cards are rated at 1:1 on the US dollar.
Zimbabwe is currently battling a currency crisis, with the current dysfunctional currency regime, largely dominated by RTGS. This has distorted pricing mechanisms in an ailing economy, resulting in multi-tier pricing which has in turn increased inflationary pressures, chillingly reminiscent of the 2008 situation. Zimbabwe’s local dollars, over the past few years, filtered into the market through Treasury Bills running into billions and bond notes which are largely seen as a local currency, prompting the emergence of black market rates.
Hard currency has been wiped out of formal circulation as government insists local dollars trade at par with with the US dollar.
To avert shortages of key raw materials and imports like flour and fuel, government has subsidised imports, creating room for arbitrage as black market rates remain far lucrative.
For instance, the pump price for petrol was $1,33 per litre which translated to less than US$0,50 on the streets. This saw unscrupulous dealers smuggling fuel into neighbouring countries where they sold it for hard currency.
These dealers also smuggled Mazoe to Botswana in search of foreign currency. Likewise, the country is now facing bread shortages due to a severe foreign currency crunch, despite recent deliberate efforts to expand its wheat imports to Turkey, among other sources. Early this week, Zimbabwe bakers increased the price of bread by 70 percent from $1,45 per loaf to $2,50, citing the constant rise in the cost of inputs.
At $2,50 per loaf, the country’s bread is selling for an equivalent of just about US$0,60 based on prevailing black market rates, making the foreign market more lucrative.
As local bakers battle to meet demand, it has emerged that the currency situation has become a boon to informal traders who smuggle bread and other essentials in short supply in Zimbabwe across the border to Mozambique.
This has given rise to a conundrum within the manufacturing sector on whether to price bread according to the black market rate or the level of inflation in the country.
Sifelani Jabangwe, the president of the Confederation of Zimbabwe Industries (CZI), told this publication that business should take consumer power seriously in modelling their businesses.
“Businesses should realise that there are no US dollars stashed in consumers’ home and people don’t have much forex as purported before, therefore they should peg their prices in local currency,” Jabangwe said.
“If it means they are rating them against the US dollars, let them, but the danger of multiplying the prices of goods by three or four is that salaries have remained stagnant and the spending power continues to shrink. That is the reason why volumes and margins are thin despite prices increasing by 350 percent,” Jabangwe added.
In some instances, products from Zimbabwe are cheaper than what is obtaining in the region even after factoring in price increases.
Eyewitness accounts say while bread is in short supply in Zimbabwe, there has been an escalation in bread smuggling across the Mozambican border despite the sharp increase in its price locally.
As a result, Mozambican towns of Machipanda, Manica, Chimoio and even Beira now enjoy different brands of bread smuggled from Zimbabwe.
Business Times visited Mozambique last week and found that bread varieties from Zimbabwe have flooded the Mozambican informal market where they are selling at a relatively higher price (70 meticals or US$1,20) than in Zimbabwe.
The smugglers buy the bread in Zimbabwe at $2,50 bond notes (which is about US$0,65).
Some players in the Zimbabwean informal sector get the bread through their syndicates and transport them to Mozambique through legal and illegal entry points. Investigations revealed that most of the bread is smuggled into Mozambique by employees of bakeries in Zimbabwe working in cahoots with couriers.
Herbert Mutasa, a Zimbabwean trader in Chimoio, said Zimbabwean bread was selling fast in the town, hence the relatively higher price. According to him, “Zimbabwean bread tastes better than local Mozambican bread and it is also easily accessible. It is the reason why I am here because Zimbabwean bread gives us more profits.”
Naituve Chicolate, a trader in Mozambique, said: “Zimbabwean bread sells fast and you realise quick profit margins. It is another business opening which we cherish.”
Other traders in Chimoio, however, did not disclose how they get the bread from Zimbabwe, saying it would jeopardise their business deals.
“We have people who cross the border to get the bread for us at a cost,” one trader said.
However, Manicaland police spokesperson, Taviringwa Kakohwa, said the police was not aware of the bread smuggling as they had not received any such reports. “But if that is happening, it is a crime,” he added.
To check any abuses, authoritative sources from retail shops in Mutare say they have now limited two loaves of bread per customer.
Business Times learned yesterday that the manufacturing sector and the baking sector will soon call for a dialogue to see how best they can price their bread to avoid arbitrage.
“Arbitrage thrives on mispricing allowing people to make money. Unfortunately this is the current situation faced by businesses who can’t increase prices beyond a certain level,” said market analyst Fiona Chigwida.
The price distortions are said to have eaten deep into the margins of local firms battling to stay afloat. PPC, for instance, reported a single digit growth in volumes in the nine months to December because consumer spending power was strained after the group increased prices. Jabangwe said the market should regulate itself and determine the prices.
Farai Mutambanengwe, chairman of the Small to Medium Enterprises Association, noted that companies which were increasing prices were doing so at their own peril as consumers simply won’t buy products which are beyond their reach.
While commenting on Simbisa’s move to reduce its prices, Mutambanengwe said: “First is that people simply do not have the purchasing power that the dollarisation advocates are purporting. Salaries are denominated in RTGS/bond, and they are struggling to rise. So if you price non-essentials using exorbitant rates, people simply don’t buy. And the definition of ‘non-essential’ has been lowered to include things like bread and butter.
“Second is that when all is said and done, RTGS is money and is the money that is in circulation. Innscor’s pricing strategy was clearly aimed at pushing people to use USD, and there was a lot of speculation that there was plenty of USD under people’s mattresses and pillows.
If you run a business – no matter how successful – and you think you can make it purely on USD receipts, think twice. This giant has just failed.
“The important thing is that the rest of us can use Simbisa’s experience to shape our own strategies going forward,” Mutambanengwe added, a warning businesses in the country will have to take seriously.
A two piecer at Chicken Inn now costs $7 or US$2 which is cheaper than it’s equivalent at Chicken Licken which costs 48 rands (US$3,50). The price of chicken cuts has also gone down with most retailers the 2kg pack at $10 from around $15-$16.
In the long run, analysts say that the two and three tier pricing will have different effects on consumer behaviour depending on the products given the income and substitution effects.
Generally business that sell essential commodities like medical products or other primary needs will survive on charging USD while consumers will keep their dollars for those essential products.
To deal with the currency conundrum, the country’s most senior central banker, John Mangudya, is expected to give direction in his forth coming Monetary policy, slated for mid February.