eBusiness Weekly
Economy Uncensored with Tapiwanashe Mangwiro
The country is in an unfamiliar territory of a strengthening local currency if not the first time since 2019 when the local currency was introduced.
Seven weeks ago the country was at the peak of a turmoil with the parallel market running away causing heavy price increases in shops as the premium between the parallel rate and the official exchange rate increased.
As a result, the country saw high June inflation figures as USD prices also shot up as the base price was the local currency then divided by the official currency leaving exorbitant prices in foreign currency.
However, over the last four weeks, the Zimbabwe dollar has been fast regaining its value against the US dollar.
Last Tuesday, the local currency firmed to below $5 000 for the wholesale foreign currency exchange auction with the retail rate pegged at $4 998 against US$1 from $5 251 the previous week.
As of yesterday, on the wholesale foreign exchange auction for banks, the Zimbabwean dollar further strengthened as the weighted average rate was pegged at $4 537 against US$1.
This was a further indication of the market’s positive response to a series of policy interventions put in place by monetary authorities to mop up excess local currency liquidity.
Furthermore, rates on the black market have continued to drop to as low as $7 000 to USD1, from as much as $10 000 to US$1 experienced last month.
If you walked in any shop be it a furniture shop or a grocery shop, you have been greeted by a massive discount sign of price slashes and the question is, “What is happening?” and this piece will try to do exactly that.
To begin explaining what is happening, we will look at the theory of discounts, and the ratchet effect in economics on prices.
Theory of Discount
The final product price is roughly the sum of manufacturing cost, transportation cost, inventory or warehouse cost, packaging cost, delivery cost, operation cost, branding cost and operating profit.
In general, discount comes into picture when a company wants to load off inventory and one might ask why a company would load off the inventory. The answer is simple, product shelf life.
Any product has a shelf life, medications have an expiry date, fashion has trend expiry.
Another reason for the discount is to bring new customers and at times companies want to expand its reach.
It also helps a company to establish the brand identity.
So far, the theory of discount sounds fair and good. However, there is an evil part of the discount theory as it is manipulative, deceiving and phony.
Sellers and advertisers know that discounts excite people. Unfortunately, they use the same to trick customers. They publish product price way to high and offer 50 percent-90 percent discount on the same, in a nutshell, they are not offering the discount.
The Ratchet Effect
Ratchet effect in economics was first introduced by Peacock and Wiseman in 1961 when they studied the public spending trends after times of crisis.
However, the effect has grown beyond that as we can see in many economic components.
The ratchet effect in consumption is one such example. Suppose people are spending too much money on goods and services and over time, this would lead to high inflation.
However, those who were spending continuously would find it difficult to hit a break and stop making purchases or even reduce it. As a result, the Government will try to increase the interest rates on borrowing to decrease consumption.
If the Government reverses the consumption pattern, the money supply in the economy would eventually decrease, which is another macroeconomic issue. It might reduce business profits and lead to salary cuts. These are the sparks of reversing the direction of the ratchet.
What is happening now?
The country is seeing the strengthening of the Zimbabwe dollar and as a result prices had to respond as they are pegged to the official exchange rate.
OK Zimbabwe, Pick n Pay and TV Sales and Home have been advertising huge discounts this week.
Companies have now realised that the dollar is strengthening and they might lose more if they do not cut prices that they were charging. Like in the “Discount Theory” shelf life and profit margins have taken effect on the prices to be charged.
However, as the theory depicts, the discounts are not coming because retailers love us, but they need to clear stocks and cut losses made by the strengthening local dollar.
Going forward, the ratchet effect will come into effect as they cannot continue reducing prices to cut losses but will need to maintain the lowest price possible for them to be a going concern.
As a citizen under these conditions is when you have the power to purchase because as the local dollar continues to strengthen, the discounts will end up looking like an insult as the prices will continue being high.
Tapiwanashe Mangwiro is a resident economist with the Business Weekly and writes in his own capacity. @willoe_tee on twitter and Tapiwanashe Willoe Mangwiro on LinkedIn.
