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Kudzanai Sharara
The decision by the country’s monetary authorities to abandon the 1:1 parity between local money and the US dollar means there is a need to have a re-look at how Zimbabweans relate to money.
On February 22 2019, the Reserve Bank of Zimbabwe abandoned the long-held peg between the local currency and other global currencies anchored by the United States dollar (US dollar).
This was done through the introduction of the RTGS$, which, in basic terms, is a combination of bond notes and electronic balances in banks and in mobile wallets.
It was also done through the introduction of an Interbank Foreign Exchange market, where currencies can formally trade on a willing-buyer-willing-seller basis.
In other words, market forces would determine the exchange rate of the day.
At the start of the interbank market, the RTGS$ value to the US dollar was put at 2,5:1 and it stayed there for a while before gradually surging to Friday’s rate of RTGS$3,0120 to US$1.
But what does this mean to the ordinary man?
We can start from earnings, the wages and salaries. While since their introduction, one could formally exchange bond notes at 1:1 with the US dollar, it is no longer the case following the floating of the exchange rate.
For one to get US$1, one now needs more RTGS$, at least three, using Friday’s exchange rate, as opposed to an equal measure of 1:1 needed before.
What this means is that while the nominal number of one’s salary remains, for example RTGS$900 or 900 bond notes, in US dollar terms that salary is now US$300 meaning the value of income has depreciated or come down three times.
To put it differently, if one could take 900 bond notes and buy three products valued at US$300 each in the past, one can only buy one product now, using the formal exchange rate.
In financial terms, it means the disposable income has weakened drastically.
What does this mean to
product pricing?
All prices that still carry their nominal value prior to the liberalisation of the exchange rate, no longer carry the same value as before, in US$ terms. If a product was priced at 300 bond notes before 22 February and still carries that price now, that product has become cheaper in US dollar terms.
To put it differently, if an employer was paying 300 bond notes (US$300) in wages prior to the 2019 Monetary Policy Statement, and still pays the same wage now, in real terms that employer is only paying US$100, meaning the cost of doing business, at least the cost of labour has come down significantly.
The same can apply to utilities and any other costs of doing business whose nominal prices have remained where they were prior to the liberalisation of the exchange rate.
This explains why utilities such as ZESA are calling for an upward review of the prices of power.
Even for those that have had an upward adjustment, but not aligned to the new exchange rate, the cost of doing business has now become cheaper.
Should businesses price
their products using the new
exchange rate?
The market has seen some businesses adjusting their prices to the going exchange rate, but that should not necessarily be the case.
Unless the cost of business, wages for example, have also been adjusted by a factor of three, there is no justification that prices must also go up by the going exchange rate.
A pricing model, that tracks the exchange rate, without consideration to the cost of production, will result in some businesses making more than super-normal profits.
The reality is that, cost lines, as long as they have not tracked the exchange rate, have become cheaper, and should be reflected by the pricing of products.
Online Reporter