Is it a market failure that is responsible for the current high commodity prices or does the government’s lack of economic measures to counteract the ongoing speculation play a role?
July 08, 2022 — The whole country is busy debating about dredging and resumption of the Jonglei canal while the country’s fuels and commodities prices are rising on daily basis for example the price of 1 litre of fuel was 480ssp in May and now is 900ssp per a litre which reflects an increase of 53% within two months.
Is it a market failure that is responsible for the current high commodity prices or does the government’s lack of economic measures to counteract the ongoing speculation? Here is how the Government can fix the situation.
The current upsurge in commodity prices in the country has left many confused as to what could be the cause. While the majority of the public attribute the cause to high fuel prices, a certain section attribute it to the ongoing war between Russia and Ukraine which has enfeebled the global trade system as mentioned earlier by the central bank governor in his update communique.
Despite all these divergent views, one question that is yet to be answered is, whether it is a market failure that is responsible for the current upsurge in fuel and commodity prices? And how can the government fix the matrix?
The upsurge presents sufficient proof of market failure, which is a general term describing situations in which market outcomes are not Pareto efficient. Market failure also means “An imperfection in a price system that prevents an efficient allocation of resources”. In this definition, reference is made to the importance of the price system being able to reflect the true costs and value of a product, with natural monopoly, imperfect competition, asymmetry of information and externalities cited as examples of imperfection. In the case where a price system cannot adequately reflect the true value of the good or service, a market failure may occur because resources may be allocated inefficiently.
Market failure on the other hand means the distribution of goods and services is inefficient in a free market economy. In a typical free market like in South Sudan, the prices of goods and services are determined by the forces of demand and supply, and any change in one of the forces results in a commodity price change and a corresponding change in the other force. It is this change in price that leads to price disequilibrium and that is what is currently happening in south Sudan. Market failures always necessitate the rationale for government intervention.
What are we going to do? Soaring fuel and commodity prices should necessitate the rationale for government intervention. Here is what I believe the government of South Sudan can do to fix the soaring fuel and commodity prices in the country.
First, recently, the Minister of finance and Central Bank governor said that the government cannot do anything about the “skyrocketing” fuel prices across the country. The minister in his statement was right because the price (of fuel) is determined by the international price of crude, the prevailing insurance and freight rates, refining margins, dealer commission and the exchange rate. Nevertheless, the government can employ a policy intervention by financing a subsidy or tax reduction on fuel imports through its budget process.
Secondly, the government of South Sudan can take more steps to curb rising commodity prices by cracking down on the hoarding and speculation of commodities by the rational producers and wholesalers; this is a key step in ensuring stable commodity prices on the market in the short term given that fact this season the rains started late and harvesting is expected in the short-medium term that could ease commodity prices further.
In the third step, The government can closely monitor commodity price changes, strengthen regulation of the futures and spot markets and crack down on market violations such as hoarding to maintain normal market order.
The government in the past has failed to crack down on hoarding tendencies that manipulate the market by creating artificial scarcity of basic household commodities like maize floor, fuels, soap, sugar, and salt among others. Government can firmly go against such importers and wholesalers who hoard basic commodities to create scarcity on the market of such basics.
The government needs to identify what a country calls a basket of goods. South Sudan can use its methodology, define its basket of goods and assign different weights to each item in the basket. This makes sense because people living in different places will have different everyday needs and priorities. The items in the basket change almost every year to better reflect the current needs and wants of consumers. You cannot do as a country without identifying basket goods that your citizens can’t do without them. One of which is fuels and public transportation. These are things that constitute the consumer price index which is a measure of inflation.
The government needs to scrap the fees imposed on containers coming to South Sudan in Mombasa which is 1500$ per a container and traders are adding this to the final consumer which is this case your citizens hence increase in price of goods.
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