Legislating cement pricing is detrimental to Ghana's economy

Ghana's Trade Minister has recently proposed legislation to control the pricing of cement production within the country. A significant step in this direction was the establishment of a nine-member committee to monitor and coordinate the local cement industry, in accordance with the Manufacture of Cement Regulations (LI 2480).

This committee, inaugurated in Accra on April 5, 2024, is chaired by Professor Alex Dodoo of the Ghana Standards Authority (GSA) and includes representatives from various governmental and industrial bodies, such as the Ministry of Trade and Industry, Ministry of Environment, Science, Technology and Innovation, Environmental Protection Agency, Ghana Institution of Engineering, Association of Ghana Industries, Chamber of Cement Manufacturers of Ghana, and an expert in cement production nominated by the Minister.

During the inauguration, Trade and Industry Minister Kobina Hammond emphasized the committee's role in appraising, evaluating, and approving local content and participation plans and reports from cement manufacturing entities.

The committee is also tasked with promoting the production, wholesale, and retail of cement and its components. According to LI 2480, cement manufacturers are required to register with this committee. Regulation 11 of LI 2480 clearly states, "A person shall not manufacture cement in the country unless the person registers with the Cement Manufacturing Development Committee in accordance with these Regulations."

Furthermore, those who fail to register will not be granted a license to manufacture cement under these regulations.

While these measures may seem to aim at regulating and stabilizing the cement industry, the broader implications of such price control strategies must be carefully considered. Price controls, in general, often fail to achieve their intended outcomes and can lead to a host of unintended negative consequences. This article explores why legislating cement pricing is a flawed decision and how it undermines the fundamentals of a free market economy.

Historical Context from Other Countries

Price control measures have been implemented in various countries throughout history, often with the aim of making essential goods more affordable. However, these attempts frequently backfire, leading to economic turmoil rather than stability.

Venezuela is a notable example. In the early 2000s, the government introduced price controls on basic goods, including cement. This led to widespread shortages, as producers could not cover their costs at the mandated prices. The result was a thriving black market, severe supply disruptions, and a decline in overall economic health.

Similarly, Zimbabwe experienced disastrous outcomes from price controls in the 2000s. The government’s efforts to curb hyperinflation through price caps on goods, including cement, resulted in empty store shelves and an economy in free fall. Producers either reduced output or shut down completely, unable to sustain operations under the artificial pricing regime.

These examples illustrate the dangers of price controls: they often lead to scarcity, reduced quality, and economic inefficiency. Ghana's proposed legislation risks replicating these adverse outcomes, stifling the cement industry and harming the broader economy.

The Principles of a Free Market Economy

At the heart of a free market economy is the principle of supply and demand. Prices are determined by the interaction between buyers and sellers, reflecting the true value of goods and services. When the government intervenes to set prices, it disrupts these natural signals, leading to inefficiencies.

Supply and Demand: In a free market, prices fluctuate based on availability and consumer demand. If cement prices rise, it signals producers to increase production or new entrants to join the market, ultimately stabilizing prices. Conversely, if prices are artificially kept low, producers lack the incentive to produce more, leading to shortages.

Price Signals: Prices act as indicators for resource allocation. They help businesses decide where to invest and how much to produce. Interfering with these signals can result in misallocation of resources, where investments are driven by regulation rather than market needs.

Competition and Innovation: Free market competition drives innovation and efficiency. Producers strive to improve quality and reduce costs to gain market share. Price controls dampen this competitive spirit, as producers are less motivated to innovate or optimize their operations.

The Case of Cement Manufacturers in Ghana

1. High Inflation

Ghana's cement manufacturers are operating under incredibly challenging economic conditions. This critical situation is underscored by the country's recent economic history, where inflation soared to a 22-year high of 54 percent in December 2022. Although inflation has since moderated to 23 percent, it remains significantly higher than that of neighbouring countries, which have managed to maintain inflation rates in single digits. This persistent inflationary pressure is not an isolated incident but rather a symptom of broader economic turmoil driven by fiscal imprudence and monetary policy failures.

2. Currency Depreciation

The cedi, Ghana's currency, has experienced severe depreciation, losing over 50% of its value between September 2022 and April 2023, with an additional 18% decline in 2024. This devaluation has had a profound impact on cement manufacturers, who rely heavily on imported inputs like clinker. As the cost of imported goods has surged, manufacturers are facing significantly higher production costs. This situation is further compounded by an import-dependent economy, where the increased expenses on raw materials strain the industry's finances, making it even more challenging to maintain affordable cement prices.

3. The Burden of High Borrowing Costs

One of the most significant challenges facing cement manufacturers is the prohibitively high cost of borrowing. The financial struggles of manufacturers are compounded by the steep interest rates on corporate loans. Data from the Bank of Ghana reveals that the average Annual Percentage Rates (APRs) for corporate loans are alarmingly high, with banks such as First Atlantic Bank Limited and Stanbic Bank Ghana Limited reporting APRs of 43.64% and 50.92% respectively. On average, the cost of borrowing hovers around 40%.

These elevated interest rates reflect the banks' response to the heightened risks in the lending environment, driven by economic instability, high default rates, and the negative impacts of the domestic debt exchange. Nonperforming loans (NPL) stood at a worrying 24.6% in 2023, further illustrating the precarious financial landscape that businesses must navigate.

4. IMF Conditionality and Operating Costs

Adding to the financial woes of cement manufacturers are the conditions imposed by the International Monetary Fund (IMF). The IMF has mandated an upfront weighted-average electricity tariff adjustment of at least 29%, significantly increasing the cost of operations for manufacturers. This, coupled with the constant rise in fuel prices and other operational expenses, places an enormous burden on the cement industry.

The cumulative effect of these economic pressures makes the proposed price controls on cement even more problematic. With such high borrowing costs and operational expenses, cement manufacturers need the flexibility to adjust prices to sustain their operations. Legislating fixed prices would constrain their ability to cover costs and invest in maintaining or expanding production, potentially leading to a decline in quality and availability of cement in the market.

In this context, it becomes clear that the challenges faced by Ghana's cement industry are deeply rooted in the broader economic issues plaguing the country. Effective solutions should address these foundational problems rather than imposing price controls that could further destabilize the industry.

Potential Negative Impacts of Cement Price Legislation

Legislating cement prices can lead to several detrimental effects on the market and the economy:

Market Distortions: When prices are set below the market equilibrium, demand exceeds supply, causing shortages. Conversely, if prices are set too high, it leads to surpluses that the market cannot absorb.

Reduced Incentives for Producers: Cement producers may find it unprofitable to operate under fixed prices, leading to a decrease in production quality and quantity. This can also discourage new entrants from joining the market, stifling competition.

Black Market Emergence: Artificial price caps often lead to the development of black markets where goods are sold at higher prices. This not only undermines the official market but also fosters corruption and illegal activities.

Negative Impact on Foreign Investment: Investors seek stable and predictable markets. Price controls introduce uncertainty and reduce profitability, making Ghana less attractive to foreign investors looking to invest in the cement industry.

Alternative Solutions for the Government

Instead of resorting to price controls, the Ghanaian government can explore several alternative strategies to support the cement industry and ensure affordability for consumers:

1. Encouraging Competition

Reducing Barriers to Entry: The government can create a more conducive environment for new cement producers by reducing bureaucratic hurdles and lowering startup costs. Streamlining the registration and licensing process will encourage more players to enter the market, fostering healthy competition that can naturally drive down prices and improve quality.

Supporting Small and Medium Enterprises (SMEs): Providing financial and technical support to SMEs in the cement industry can diversify the market. This could include offering low-interest loans, grants, and training programs to help smaller firms scale up their operations and compete effectively with larger companies.

2. Improving Infrastructure

Investment in Transport and Logistics: By improving transportation infrastructure, the government can help reduce the costs associated with the distribution of cement. Better roads, railways, and ports will lower transportation costs, enabling manufacturers to reduce prices without compromising on profitability.

Upgrading Energy Supply: Ensuring a reliable and affordable energy supply is crucial for cement production. The government can invest in energy infrastructure to reduce power outages and provide incentives for cement manufacturers to adopt energy-efficient technologies, thereby lowering production costs.

3. Incentivizing Local Production

Subsidies and Tax Breaks: The government can offer subsidies or tax incentives to local cement producers to reduce their production costs. This financial support can help manufacturers absorb some of the costs associated with currency depreciation and high borrowing rates, allowing them to keep prices competitive.

Encouraging Local Raw Material Use: Promoting the use of locally sourced raw materials, where possible, can reduce dependency on imports. The government can support research and development initiatives aimed at finding local alternatives to imported clinker and other materials.

4. Strengthening Market Regulation

Monitoring and Fair-Trade Practices: Instead of direct price controls, the government can focus on ensuring fair trade practices within the cement industry. This includes monitoring for price gouging, anti-competitive behaviour, and ensuring transparency in pricing. Regulatory bodies can be empowered to enforce these standards and protect consumers without distorting market dynamics.

5. Enhancing Financial Support

Access to Affordable Credit: The government can collaborate with financial institutions to provide more affordable credit options for cement manufacturers. This could involve setting up a special fund or guarantee scheme to lower interest rates and improve access to capital for production expansion and technological upgrades.

Insurance and Hedging Mechanisms: Providing insurance schemes and promoting the use of financial hedging instruments can help manufacturers manage risks associated with currency fluctuations and raw material price volatility. This financial stability can, in turn, help stabilize cement prices.

Conclusion

By implementing these alternative solutions, the Ghanaian government can create a more sustainable and resilient cement industry. Encouraging competition, improving infrastructure, incentivizing local production, strengthening market regulation, and enhancing financial support are all strategies that align with free market principles. These measures can help ensure the availability and affordability of cement while fostering a healthy economic environment for both producers and consumers.