At the core of the sugar issue in Tanzania is the basic economic principle of supply and demand in action. When the supply side of the equation is unable to produce and distribute the demanded quantity in the market, the result is a deficit. In the sugar industry nomenclature, there is a gap sugar because the domestic factories are not able to produce the needed quantity. There is a need to interrogate why the domestic factories are not able to bridge the 100,000 tones deficit.
It is only by identifying and fixing what is broken in this supply side of the sugar production function that the supply – demand gap can be bridged sustainably. In a market economy governed by the free interplay of market forces of supply and demand, when demand is higher than supply prices will automatically go up. The price will go above equilibrium and market-clearing price. When prices go up for a sensitive product like sugar, a number of closely related, self-reinforcing and far-reaching issues do emerge as partly outlined in what follows.
When there is market failure in the shapes of inability to equate supply with demand and therefore inability to have market clearing price, interventionist states tend to intervene. Economically the aim is to correct the market failures. What we have seen in the case of sugar is the government setting indicative sugar price at the 1,800 Tshs mark per kilogramme. Even with this price, the commodity is selling anywhere from 2,500 Tsh and above. This indicates that the indicative price is not realistic. A section of sugar traders are of the view that the indicative price is not practical as is below the production, distribution and storage cost. If these views are true, charging this price implies charging below cost. Elementary economics implies that this is loss making which is bad economics for private sector that is profit motivates.
Win-win indicative price
In order to reach at a win- win indicative price, the state should have applied inclusive, consultative and participatory approaches in reaching at this figure. Elementary pricing economics theory requires that profit making entities charge a price that will cover all the production, storage and distribution costs plus a ‘reasonable’ profit margin. If price cannot give a positive profit margin, rational economic beings (homoeconomicus) will not sustainably undertake economic activities.
What we have also seen in the sugar saga in Tanzania is hoarding. Economically, hoarding is the practice of hiding goods and/or services thereby creating artificial scarcity in the market. Artificial scarcity leads to higher prices and therefore higher profits when all other factors remain constant. From economic thoughts, the hoarding of sugar can be a result of a number of factors. One is indicative prices. If the sugar indicative price is in reality below the production cost of the existing stock of sugar then it can be among economic explanatory factors for hoarding. It can then be a necessary evil by the profit motivated – and correctly so – private sector. Hoarding can also be caused by speculations in anticipation of higher prices in the future. Before blaming and cracking on hoarding one needs to consider these economic realities however uncomfortable they may look. Reactions in emotions and in search for cheap popularity rather than considering the basic economic realities outlined here may not fix what is broken.
Economics of sugar import
As part of state intervention in the sugar matter in Tanzania, there have been reports on importation of gap sugar to bridge the gap. Whether imports by the government directly or through issuing import licenses to traders – including social security funds – imports are costly to the economy. Imports imply parting with the rather scarce foreign currency with the many negative results of this action. It also implies exporting jobs, incomes and government revenues. As a short term solution however, this may be a necessary to correct the market failures. In the medium to long term period however, sugar importation may be bad economics especially in these ages of nurturing industrial economy. There have been reports that sugar can be imported and sold in Tanzania at a price below 1000 Tsh per kilogramme. If true, this is good news to consumers but very bad one to domestic producers especially those seeing the indicative price of 1,800 Tshs a kilogramme too low for them to make profit.
There have been reports of confiscation of hoarded sugar. From economics and business point of view, this will affect not only the sugar dealers but also all those in their normally many and long value chains. These include financial institutions they transact with, their direct and indirect employees, transporter, suppliers and sub contractors and many more including the government especially if the government had revenues accruing from their transactions.
The core issue of the sugar problem is arguably economic. Simply, supply is not meeting demand. Economic solutions to supply the quantity demanded will solve the issue sustainably. Short of that it may re-occur now and then. For the learning nation that Tanzania is supposed to, this should not be case.