In the wake of the rising prices of commodities on the global market, could the Government of Liberia’s effort to keep the price of rice low present more problems than she is able to handle?
For the last several months, especially since the Russian invasion of Ukraine, the price of rice and other commodities have been increasing rapidly but the Government has apparently made a decision to subsidize the price so that consumers do not feel the impact.
From speaking with my non economist friends, the landed cost of a 25kg bag of rice is approximately $15 but the Government has been working with importers to ensure that they keep the price at $13. Under this arrangement, Government is paying the importers $2 per every 25kg bag of rice they import.
From our “back of the envelop” calculation, the Government has to pay approximately $2 million every month.
Under this arrangement, the rice importers are making no profit: they are only breaking even.
Well, without profit motive, will business people (capitalist) have any incentive to continue importing especially when the global increase in the price of commodities will not abate any time soon?
How long can Government continue this subsidy? If the landed cost increases to $17 per bag, will the Government continue to pay the difference? What if the landed cost went to $20?
Well, that is not my main concern. My concern here is that could this subsidy be creating arbitrage opportunity whereby profiteers can buy the rice at $13 and then flip it in Guinea or Sierra Leone for $30?
This will mean that rice will always be in short supply on the Liberia market becsuse we are supply Guinea and Sierra Leone and importers do not have incentives to continue importing.
Government is unable to properly man the borders and so this is bound to happen.
Government could go bankrupt doing this and importers who are supposed to be making no profit will not be able to continue doing this. Bearing in mind that money has a cost and so if they are borrowing money to import the rice but making no profit then this is a problem. The free market doesn’t work like that.
While as a non economist, I have no solution, I think we are headed in a direction that will cause us some problems. I would have created a situation whereby the people begin to appreciate that the price of rice is headed north and that we we should all brace for this. Maybe allow the price to slip gradually even if efforts are made to keep it lower. For example, if the landed cost is $15, I would have worked with importers to take the price to $14 while I eat the $1 per bag. This would have sent a message to consumers that prices are headed north but we are making efforts to keep it low.
Hopefully this situation doesn’t persist for long time and that global markets can adjust sooner because if not, the consumers might experience a “shock” in the price rather than a gradual increase to which they would have adjusted.
Again, I am a non economist who is talking to my non economist friends.
2 thoughts on “Could the Rice Situation Create a Perfect Arbitrage Opportunity?”
Chief,I believe that our Government could set up a program locally for rice sustainability for the market. That very 2million monthly that she is contributing could be use to fund growing rice and putting the less fortunate brothers and sister to work, while creating a livelihood for them. The nation may face the pain of rice price increase today but than, use that pain to grow their stable food. Better still, maybe we Liberians need to graduate from ” if I don’t eat rice everyday, I haven’t eaten ” and look on the nutrition bar and select other affordable options to include in our weekly consumption pattern to substitute for rice. For a start Government could suggest a second stable food. Just maybe….Two opportunities for Liberian 1. Is for them to grow their own rice that could sustain them, and minimize the importation of rice. That means, business war. The rice importers won’t like the sound of this.2. Leave the dependency on rice and find options, can we turn cassava into something close to rice or could I eat rice twice a week and find other replacement for the remaining five days of the week. I believe God is showing us something. That is my one cent opinion. Sent from my Samsung Galaxy smartphone.
I love your analysis on the issue of the 2 millions dollars diversion subside on the rice importation the idea of investing the $2m in growing rice locally; is a welcoming idea and I think the government should buy in this idea to ease the the issue of rice shortage.