1 Empirical Evaluation of the Degree of Price Transmission from the Border to the Consumers in Mozambique Xavier Cirera and Virgulino Nhate

2 Objectives The gains of international trade depends of the degree of price transmission to the economy (SADC countries undergoing major integration from January Will this results in gains to the consumers? Only consumers will gain if the reduction of customs duties are transmitted to the consumers). The high transaction costs and the monopolistic behavior in the distribution side can act as the barriers for price transmission Objectives: Quantify the degree of price transmission from the border to the consumer To decompose the most relevant factors which contribute for price determination of the tradables Find if the price transmission is the same at all main markets in Mozambique

3 Theoretical Background Law of one Price (LOP) Establish that in absence of any barriers to trade, costless trade and perfectly functioning markets, prices of the same good in different countries should be the same when converted in the same currency. Violations to the LOP are due to: Goods are not homogeneous There are costs in trade and arbitrage not always happen (transportation, taxis,...) Prices rigidities Imperfect competition

4 Theoretical Background Evidences of violations of LOP : Literature about Exchange Rate Pass-Through (ERPT) – The degree of transmission of the exchange rate – complete ERPT indicates perfect competition or constant margins Evidences indicates ERPT incomplete – imperfect competition ERPT to consumer prices is less compared to the border ERPT is great in small countries Pricing to Market (PTM) – Krugman – some evidences that export companies use the monopoly power to discriminate prices in different markets Evidences of asymmetric transmission and non-linear (threshold models)

5 Evidences The recent literature is concentrated in the import side and the tact that the prices at the border are much sensitive to changes in the exchange rate than the consumer prices. Three potential explanations: i) The existence of non-tradable in the CPI ii) Existence of imperfect competition in distribution sector - double marginalization – distributors adjust the profits and margins to expand the market Theoretical Background

6 Methodology Estimation of equation based on the LOP – differences in prices are due to barriers to trade, transportation costs and the commercialization margins This study is concentrated in the border prices – CIF unit prices – leave aside the exporter behavior Products selection – more than 20 products mainly agricultural products – assure homogeneity 3 markets – Maputo, Beira e Nampula

7 Methodology (cont.)

8 Data Products – Sample from CPI basket (INE) – more than 20 products Consumer prices – Monthly CPI Maputo, Beira and Nampula Unit cif price – average monthly of unit price (value/net weight) of imports in the customs border post of the province – customs data base Transportation costs – average distance between the customs border post and the market Variables of the equation (5) defined at provincial level – the CIF price and the CPI also defined at same level

9 Taxes – customs taxes and the VAT – really paid in the border post – take in account the exemptions – customs data base provide this information Exchange rate – official rate – two series rand e dollar – Not weighted rate but the majority of imports are expressed in rands CPI – series of CPI aggregated by INE Commercialization margins – Problem- no data!!! Observations of the three markets: 25 products e 1140 observations. Maputo 24 products and 696 observations, Beira 18 products and 324 observations and Nampula 8 products e 104 observations. Unbalanced panel Data (cont.)

10 Results – pooled

11 Results – Maputo Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%

12 Results – Beira Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%.

13 Results – Simetric ERPT Standard errors in brackets, * significant at 10%; ** significant at 5%; *** significant at 1%.

14 Main Results The tests indicates existence of product specific effects – can be specific margins or other characteristics ERPT almost complete and robust – constant margins? Transmission of CIF unit price too low – adjustment of margins? And constant for exchange rate change? Transmission of border taxes low – but small variation within and between Elasticity of transportation costs negative – bad quality of the proxy (distance) or the transportation costs is not significant Symmetric ERPT Results looks the same for the tree provinces in analysis

15 Policy Implications Importance of stabilizing exchange rate Competition policy in the distributor sector Discussion Points Problems: Lack of the data of commercialization margins Cointegration – short run estimation – problems of working with unbalanced panel with many gaps Homogeneity of the products in the sample

16 THANK FOR YOUR ATTENTION