Prices are sticky downwards!
There is an air of excitement blowing across Malawi following the kwacha’s gain in value against the dollar and other major trading currencies such as the South African rand and the euro.
Today, the kwacha is trading at around K335 against the dollar from about K420 before April 2013. The kwacha’s gains have largely been attributed to weak demand for foreign exchange at this period of the year when the country is also selling tobacco, the main cash crop that wires in about 60 percent of foreign exchange earnings.
Secondly,the kwacha’s outstanding performance is also attributed to the tight monetary policy with the liquidity reserve requirement at 15.5 percent and the Reserve Bank of Malawi’s benchmark base lending rate at 25 percent. This has consequently seen an illiquid money market and commercial banks preferring the local unit to the dollar.
In apparent direct reaction to the kwacha’s new-found stability, some companies have “passed on the benefits of the appreciating kwacha” to consumers through price cuts. Notably, People’s Trading Centre has reduced the price of its bread whereas Illovo Sugar (Malawi) Limited has also reduced the price of sugar by about five percent.
Last week, the Malawi Energy Regulatory Authority (Mera) also announced an average two percent reduction in pump prices of petrol and diesel.
Malawi is a free market economy; hence, it came as a surprise last week to hear government urging manufacturers and service providers to cut their prices or face “appropriate punishment” if they fail to do so.
To a greater extent, I found this warning misplaced and unwarranted. It also reflected a rather narrow view of what determines prices. There are several factors that are considered when pricing goods and services. The kwacha’s value is just one of the ingredients. For example, there is the cost of electricity, water, labour and, above all, the price of money—commercial bank lending rates at play.
From the above list, one sees that electricity tariffs went up by about 31 percent not so long ago, so did water tariffs by a considerable percentage too. The cost of borrowing in commercial banks is also above 40 percent and wages and salaries for employees have, in some cases, been adjusted upwards to somehow mitigate against the rising cost of living.
Economists say that prices are sticky going downwards; hence, it is unlikely that all prices on the local market will follow the dollar. It is only those whose pricing is based on automatic pricing mechanism (APM) who are rightly expected to follow the dollar. We have already seen fuel prices going down, albeit at a rather negligible rate compared to the rate of appreciation of the kwacha, and pay television rates by MultiChoice Malawi.
It is like the biblical story in Matthew 19 vs 24: “Again, I tell you, it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God.”
Put differently, without committing blasphemy, I would say it is easier for a camel to go through the eye of a needle, than it is for all prices to come down simply because of the appreciation of the kwacha. That is being too simplistic.
For prices to go down, there are all the above outlined factors at play.
The threats issued by government are, therefore, counterproductive. They could also be a recipe for chaos if not carefully communicated.
