There are two intriguing things I encountered in the past week that I will like to use to ease you into this exciting read.
First, I saw a post on social media that read, “if you imported goods with USD10,000 in January 2022 on credit from a Chinese producer, you owed them ¢62,512.19 at the time of importation. If you haven’t paid them yet, you would now need ¢134,722 to pay that debt”. That post struck a chord and got me thinking, how do businesses, traders, and shop owners cope with the fast depreciation of the Ghana Cedi in a sustainable way?
The second, happened when I had a phone conversation with my aunt who owns a provisions shop in Accra two days after I read that post on social media. She said, “…these days, selling is no more profitable. You buy the stuff from the market and by the time you go back to stock up, you have to use your capital, your profit, and even add up extra money because the prices would have jumped so high“. This statement got me reflecting on the post I read on social media and I started thinking again , how do businesses cope with this extreme price uncertainty? Who ultimately bears the cost? And why is this even happening in the first place?
As someone with a Biological Sciences background, I should ideally be writing about something related to Biology. Perhaps, about the very biological phenomenon that inspired the heading for this piece, the jumping genes, a set of transposable genetic materials that was discovered by Barbara McClintock in 1951. Well, for some reason I happen to be writing about something that seem to be jumping much quicker than the genes Barbara McClintock discovered. Join me let’s embark on this informative read to find out the answers to the three questions I asked earlier.
First, let’s talk about why this is happening:
If you are living in Ghana, you would have heard or read about the word ‘inflation’ several times in the past weeks, and most of the time, come across it within a context where the depreciating value of the Cedi is being discussed. Inflation, as I’m going to explain, is the root cause of the jumping prices we’re experiencing. Basically, inflation occurs when prices of goods and services rise, thereby decreasing the ability of consumers to purchase or afford more goods and services. During times of inflation, a unit of money buys fewer goods and services as inflation rises, and usually, this is also reflected in the exchange rate of the Ghana Cedi to the dollar. Given that this article is not aimed at explaining the complexities of how inflation itself occurs, I will not bore you with those details. At the beginning of this year, the Ghana Cedi exchange rate with the dollar was ¢6.20, now it exchanges at about ¢15.00. The rise experienced here is also one of the practical manifestation of inflation. With this basic understanding in mind, let’s discuss how this generates the jumping prices.
With the Ghanaian economy heavily dependent on imports of both finished products and raw materials, any rise in the exchange rate of the Cedi to the dollar brings about an increase in the prices of goods. For instance, if a company imports steel to produce utensils, and per the first scenario given at the beginning of this piece, they paid ¢62,512.19 for $10,000 worth of steel, today, they would need ¢$134,722 to buy that same $10,000 worth of steel. This would mean pricing their utensils higher so they can afford their raw materials. This part would probably seem obvious to most of you readers.
Now let’s zoom into how this specifically affects prices in a way that is unsustainable for consumers;
The interesting part of the of increase in exchange costs and cost of importation discussed above, is the decision by most companies to hedge against the price increases due to how rapid the cedi-to-dollar rate is changing. For instance, at the beginning of this month the Cedi exchanged against the dollar at ¢10.50, but currently, it does so at about ¢15.00. This means, if the utensils company described above imported steel at the beginning of this month at exchange rate, they will be buying steel in November for a rate well above ¢15.00 to the dollar. Meaning, they are likely to end up using all their profits to secure the November purchase, and may even ran at a loss. Knowing this, companies now price to hedge against the falling Cedi. That is, if they imported at ¢10.50 exchange rate at the beginning of October, they hike up the product prices substantially as if they imported at an exchange rate of ¢18.00 to ¢20.00 . That way, even if the Cedi depreciates further as the days go by, their revenue would still be enough to cater for the next purchase and still give them some profits as well.
This also means, customers face shockingly high increases in prices instantly even though the product at the time, ideally ought to be cheaper. Simply put, for the company who imported $10,000 worth of products in January not to ran at a loss by October, they have to price their goods so high that their revenue would be enough to pay for the goods in October. That is if ¢62,512.19 exchange cost would have meant that one product would cost about ¢7.00 each, because they know that the exchange cost would go up to about ¢134,722.00 or even more, they sell them at about ¢20.00 each even though at the time of the sale, the price isn’t reflective of market prices.
This approach taken by businesses to hedge against the rising cost of importation is the genesis of the jump in prices we see in Ghana.
NB: This price hike is not static. Meaning, businesses adjust their prices upwards if they feel of fear that the exchange rate will be worse than they had anticipated. This is what causes the constant upward trajectory we see with prices of goods.
Secondly, let’s chat a little about how wholesale shops, traders and retail shops like that of my aunt, respond to the price hikes from the producers;
Before that, you need to know a little bit about how the relationship between producers, wholesale shops, and retail shops work. Given that the producers depend on both wholesale shops and retail shops to reach consumers, and also that wholesale shops depend on retailers to empty their warehouses, there is a strong incentive to make sure that business is good and profitable for all entities captured in the supply chain described above. With this backdrop, let’s proceed to analyse the response.
In an ideal situation, producers, who are mainly found to be in constant communication with their wholesale shops, quickly indicate to their wholesale managers anytime there is a price surge and they have to adjust their pricing. This is done to ensure that the wholesale shops quickly adjust their prices upwards or else they risk not making any profit from the ongoing sales. A similar communication is carried out by wholesale shop managers to their respective retailers. This is usually done in good faith, but also to ensure that all entities captured within that supply chain have good and profitable business at the end of their sales.
This approach, if used, usually leads to a gradual rise in prices. Given that in an ideal, situation exchange rates are pretty stable, these communication of price increases usually do not happen and even when they do, do not communicate substantial increases hence, do not prompt any increase in product prices at all so consumers don’t feel it.
However, within the current situation, the speed with which the Cedi is depreciating means that those calls are made very often to send price hikes down the supply chain. To cope with this, retailers and wholesalers have also started using substantial price hikes as a strategy to avoid any losses when they go to restock. As I found out from my conversation with my aunt, she has to overprice the goods in her shop by 4 to 5 times the normal profit margin to effectively hedge against the rapid price increase on the market. So when a friend lamented on her WhatsApp status yesterday, that a bottle of sunflower oil she used to buy for ¢30.00 is now ¢85.00, I thought to myself, the ¢85.00 price now is most likely not the actual cost of the product, but rather the projected cost of the product for probably the next one month. In essence, we are paying for how much products would cost in one or two months time, TODAY!
There are at least 3 steps of substantial hikes that are cumulative and simultaneously ongoing. First is the hikes by the producers who import so they can hedge against the falling Cedi, which is further hiked by wholesalers who need to hedge against losses the next time they go to stock up, which is then further hiked by retailers who also need to hedge against losses the next time they go to stock up.
Now for a second, just pause to think of the fact that there are usually 2 or 3 wholesalers to be travelled through, before several retail levels, before it gets to the shop near you where you buy your products from. Meaning, these hikes happen cumulatively and simultaneously across over 10 levels before it reaches the everyday customer. The very reason why I wasn’t shocked by the sunflower oil price jump from ¢38.00 to ¢85.00 in a matter of weeks.
These price hikes, from producers, to wholesale shops, to retailers, is how inflation and depreciation in currency leaks its way through the pipelines of a supply chain to the everyday customer. Unfortunately, this leak grows bigger as the Cedi depreciates and for innocent customers who have no choice but to purchase available goods at available prices, the harsh reality of inflation in Ghana is gradually becoming unbearable. To survive, we are literally forced to pay the future cost of products today, and even more unfortunately, with income that wouldn’t even be enough if we had the luxury of going back in time.
The writer, Andrews Terku Terkpertey , is a former student of KNUST who read BSc. Biological Sciences, and also a former president of both the KNUST Debate Society and the KNUST Biological Sciences Students Association.