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.