SPEED-Notes-2011-004 Price Fixing
The government’s decision to mitigate adverse effects of subsidy elimination and world price of foodstuff increases on the most poor families is well justified. The proposed legislation aims at using fixation of maximum profit margins of wholesalers and retailers as the instrument to mitigate these effects. This measure assumes that profit margins are excessive and can be reduced with instruments of direct intervention.
Important issues to take into account:
- The fixation of maximum limits to profit margins is an administration of prices. Administered prices affect immediately the equilibrium of prices and this implies always and in all cases in a reduction of supply, often pushing transactions to the parallel/black market, at higher price levels. This would be contrary to the intended result.
- Controlling profit margins and prices is an impossibility that is well known in Mozambique.
- The majority of wholesale and retail markets supplying the poor are very competitive. Hence, their profit margins will be paper-thin and should not be affected by this new legislation.
- The majority of traders serving the poor will have enormous difficulties complying with the legislation and will, therefore, face repeated fines by government officials. This will increase costs and could generate corruption through supervision.
- Examine the supply chain of basic foodstuffs, in particular cereals, to identify their cost structure and possible triggers for price increases – for example, red-tape or non-competitive practices.
- Exempting import duties and VAT on cereals will reduce the domestic price. This would reduce government budget revenues, but it is far more efficient than a subsidy.
- In addition to action on the supply side, the best way to protect the poor is with a safety net instrument, not through administration of prices and margins.