In 2022, the Executive took advantage of the enormous surplus of foreign exchange flows to lower the exchange rate and, with it, inflation. This seemingly good policy was extremely harmful for two reasons: 1) for consumers, as it was not sustainable; 2) for companies, because it reduced their competitiveness.
By Heitor Carvalho
Q
When a policy that affects prices is unsustainable, the result is always more inflation due to psychological aspects!
When the pressure is to reduce prices, prudence always acts to halt the decline; When the pressure is to increase prices, prudence always acts to reinforce the increase.
This is what we warned about since the analysis of the 4th Quarter of 2021 and that is what happened: reducing prices supported by a short-lived increase in oil prices could only result in an uncontrolled increase in prices in the future! The future arrived in June 2023.
On the other hand, the 2022 exchange rate policy effectively promoted imports in the face of domestic production, which lost competitiveness and dismantled some economic coordination that was being created. Entrepreneurs were forced to stop buying domestically to lower their prices, buying imported final and intermediate products. Competitiveness and integration of domestic production were reduced.
At the end of June 2023, the State (Government and BNA) found an unorthodox but effective way to halt the decline in the exchange rate: oil companies were forced to sell on the Bloomberg platform without discrimination against transaction partners; As they could not transact with some of the buyers under penalty of sanctions in their countries of origin, they abandoned the platform and started selling directly to the BNA. Thus, the supply of EM on the platform became completely dominated by the State (Treasury and BNA), which, in practice, fixed the exchange rate.
If this was an effective policy at first, its extension is proving to be harmful. Without EM flows into the foreign exchange market, the exchange rate is increasingly unsustainable, forcing demand to be administratively reduced. The BNA once again lost the initiative and followed the parallel foreign exchange market. There will be a point when an unsustainable distance between the two rates will be covered by bringing the official rate closer to the informal rate, as already happened in October 2019!
Even worse is the attempt to administratively alter the demand for foreign exchange, preventing imports.
Since June, Superior Instructions were given to Ministries not to issue import licenses for products already produced in the country. In the minds of most people, this is the right commercial policy to protect domestic production.
We believe that, on the contrary, it is an extremely harmful policy, the effects of which are already visible. Coordination failures (changes in customer/supplier relationships have long lead times) and reduced and irregular domestic productivity (depending on many random factors) are, in the absence of imports, creating shortages and raising prices, even when the exchange rate remains stable. This is not the way to protect either domestic production or consumers!
a) Because existing national producers do not have incentives to become more competitive, that is, cheaper, which will create monopolies and subject consumers to monopolistic conditions and prices.
Our market is limited and can be supplied by a small number of companies for each type of production. If we prevent external competition, the few domestic producers will easily agree on prices and conditions that they will impose on consumers. We will be creating monopolies!
b) Because it limits the emergence of more businesses. No serious businessman can accept putting his money in an environment in which a State official can limit the freedom of choice of his suppliers, unless he thinks he can condition his decisions. The attraction of long-term investment will be minimal, and without it, domestic production will not grow to prevent shortages.
c) Because it creates conditions that encourage corruption through the direct relationship between the State agent and the importer. The honest will see how others succeed and will copy them. Even worse, entrepreneurs will develop more skills to obtain advantages in the corridors of ministries than to do their business, which will worsen competitiveness, reproducing the model of State-dependent entrepreneurs!
d) Because it encourages resistance to the entry of new operators by those who already exist and hold power and influence. Existing operators will naturally resist the entry of new competitors. Existing entrepreneurs, accustomed to an over-protected market, will not be able to export in significant volumes, expanding the market, and, consequently, will resist greater internal competition by all means.
e) Furthermore, if the criterion is the prohibition of what is already produced, we will never have production of what is not yet produced, whose necessary protection will always be non-existent.
f) Because, by reducing our international competitiveness, the devaluation of the Kwanza will increase, which will affect the entire economy, in a negative spiral that will be difficult to stop. Without taking into account the ups and downs of oil revenues, the exchange rate depends on the variation in internal productivity compared to external productivity. If we do not follow the increase in external productivity, the exchange rate will constantly deteriorate, increasing prices!
g) Because the ban will determine identical responses from other States, isolating us from the world. These exacerbated protectionist policies have been the worst obstacle to our regional integration in SADC, strongly conditioning our development! How do we hope to make entry into the SADC free market compatible with an effective import ban? Do we think we will be allowed to do this?
h) Finally, because no one becomes competitive without competing. Competitiveness is gained by competing! It would be the same as wanting our football clubs to gain competitiveness in Africa by banning them from going to African competitions. It is the most complete nonsense!
Imports have a very important role to play in the competitiveness of the economy and in reducing prices. A national businessman must be protected to be able to face external competition, competing!
The protection of domestic production, to be effective, is done through market mechanisms: the exchange rate and regressive customs fees.
The national market, in addition to advantages such as language, culture, etc., can be protected. There is no better market to learn to compete in!
The exchange rate must ensure that external products enter at a price slightly higher than that of our best producers. The worst domestic producers will be forced to quickly follow our best producers and they will improve to maintain their market share, reducing prices, allowing the exchange rate to be reduced and the process to restart. Customs duties serve to protect industries that are initially less competitive. In general terms, this process guarantees the protection of consumers, productivity, internal production and employment, allowing us to gain competitiveness to overcome national borders and export. This is the process we need to implement URGENTLY. Unfortunately, that is not what we are doing!
Cinvestec.com