Mthuli: Basing your prices on the exchange rate? You are profiteering

Fin Min Ncube says traders basing prices on forex rates are profiteering
(pic: Reuters)

With one eye fixed on the exchange rate, panicky Zimbabwe’s business owners have been raising their prices to keep pace. Finance Minister Mthuli Ncube says these businesses are doing it wrong; focus on inflation forecasts, he says, and not on the forex market.

“That is profiteering,” Ncube said on Wednesday.

Inflation stands at 59.4%, and is expected to run higher over the coming months. Over recent weeks, prices of commodities have risen sharply as more businesses base their prices on the value of the US dollar on the black market, where US dollars have firmed to around 1:4 from 1:3.5 against the RTGS dollar a month ago.

On the official interbank market, the rate on Wednesday was 3.03 on the US dollar, some 21% down from its rate at the launch of the market on February 22. Authorities had expected the currency to weaken and inch closer to the black market rate, but the latter has firmed even faster.

Hoping to squeeze US dollars out of consumers, some businesses are pegging their RTGS prices at levels that imply even higher US dollar rates. Other traders are discounting prices on US dollar purchases.

A sign for the times: A Harare restaurant offering a 70% discount on US dollar payments

Ncube says all this is no way for a business to price its products and services. As long as salaries remain static, who will buy the products, Ncube asked.

“We have been, as Treasury, watching the price increases. I want to hasten to say to those in industry, the retailers, that it is not correct, it is actually bad economics to link price increases to the exchange rate. That is not how you do it,” Ncube said.

“It is profiteering. Are they also going to exchange-link salaries of their employees? If not, where is the demand going to come from? Inflation is your guide to raising prices and not the exchange rate.”

Ncube has forecast inflation, currently at its fastest pace in ten years, to end the year at 10%. It is an ambitious target, given rising fuel costs, a damaging drought, the currency crisis and Ncube’s failure to cut spending deeply enough.

On a monthly basis, prices increased 1.67% in February, compared to 10.75% the previous month, and this is why Ncube believes inflation will cool off. He sees the slowdown starting in September, which would be almost a year after the start of the price spikes.

“This is also my message to those in industry. The employees in industry who negotiate with their employers in industry, should be guided by inflation considerations and not the exchange rate. That is how you do it. And, thinking about it, if you look at month on month inflation, that has been on a downward trend, so really the demands that we are seeing whether in the form of price hikes or wage demands justify that they should all be driven by the typical cost of a consumption basket rather than the exchange rate,” says Ncube.

The pricing Ncube is speaking against, however, reflects the major issue confronting government; the collapse in business confidence over the past six months. There are many that do not share Ncube’s optimism on the direction of inflation, and for them, forex will remain a hedge. For those forced to buy foreign currency on the black market, the forex rates remain the guide on how to price their products. Ncube disagrees.

“Price increases should be driven by concerns about inflation, it is about the consumption basket, because when you earn a salary, the first thing you do is not to look for forex, forex is not consumption, it is not cooking oil, it is not salt, but you go and buy salt, you go and buy cooking oil. So the consumption basket and its cost should drive the thinking around price increases and around wage negotiations,” Ncube said.

Ncube is trying some moral suasion to calm prices. Yet, for the many businesses shut out of the new interbank market, which is still starved of the free flow of funds they were promised, the black market will continue to feed their fears, and their prices.