1/ Everyone is feeling the effects of inflation,whether it affect our daily lives or our professional ones.
Is it a natural and justified phenomena considering the devaluation of the LBP in the exchange markets, or are there other factors ? A thread 👇
Is it a natural and justified phenomena considering the devaluation of the LBP in the exchange markets, or are there other factors ? A thread 👇
2/ First we'll tackle imported goods, since those are paid for with foreign currencies and the inflation on those items have been substantial
3/ Prices of imported goods have shot up quite a bit and the justification being given to the general public is : "The LBP/USD rate is now at ..." . While there is some truth to this statement, it hardly justifies all the price increases.
4/ When a product is imported, the importer needs to transfer funds to supplier, and in our current CC, these would require fresh funds acquired at the sorraf market price. But that's where the use of fresh funds stops.
5/ Next, the items would need to clear customs, where both tariffs and VAT are paid in LBP at the OFFICIAL exchange rate. The products will then be transferred to their warehouses and stored until sold.
6/ Most of the expenses the importer will incur after that will be in the local currency. Energy, payroll, petty expenses and most importantly all gvt related expenses such as direct taxes,VAT and social security
7/ So let's assume a product that used to be sold on the shelves at $10 had $0.99 of VAT , 3$ of margin the landed cost of the item would be around 6$ , of which 0.6$ were VAT (at the entry) and 1$ was customs tariffs . So the import invoice would be around 4.5 $
8/ Now let's turn that into LBP at respective rates (official and sorraf @2500) for every chunk of the costs : $4.5=11250 LBP , the rest : 0.99+3+0.6+1 = $5.6 -> 8500lbp . Total = 19750 LBP . Initial pre-crisis : 15150 lbp so price increase of 30%
@2500 9/ That's what the real impact of currency deval coupled with CC should have had. Obviously most of the imported product are being sold in USD or LBP at market price , so this particular item would be priced at 25000 LBP a 65% increase
@2500 10/ Considering most importers usually hold anything between 3 months to 9 months of stocks, products are being priced at stock replenishment costs, which would be fair if they followed the calculation shown above.
@2500 11/ Some importers are acting as if there was no tomorrow and are literally trying to transfer both the cost of the products being imported and the profits they will generate.
@2500 12/ Even on the gvt related costs, they will pocket the difference between the official rate and the market one.
Is it legal ? of course it is (absent a forced monopoly). Is it morally acceptable? i'll leave it to others to judge
Is it legal ? of course it is (absent a forced monopoly). Is it morally acceptable? i'll leave it to others to judge
@2500 13/ The second aspect of inflation is related to local production, and here there is another layer of complexity. While, generally speaking, the vast majority of local manufacturers have tried to keep price increases to a minimum, most raised their prices as well.
@2500 14/ The average raw-material needs across all the manufacturing sectors is around 30% , so the average cost increase on that front would be around 20 % (after applying a 66% increase in LBP/USD rate). There is also ~3% increase due to spare parts and repairs.
@2500 15/ If we consider the average margin at around 25% after all expenses are accounted for, the increase should be around 17% so our test product should be priced at 17725 LBP .
@2500 16/ The main issue pushing local manufactured goods beyond a 17% increase is due to an over-correction caused by uncertainty.
@2500 17/ Most of the B to B products (packaging,labeling...) are still being priced in USD because those are disproportionately affected by raw material costs (up to 75% of the production cost).
@2500 18/ Even if packaging only makes up for a small part of the cost of the final consumer product, most of the manufacturers dealing with this conundrum of paying in fresh USD for these services are jacking up their prices without proper calculations out of panic.
@2500 19/ Can any of this be fixed? No easy answer here, but mostly yes. Prices that have been artificially raised will go down because of market forces. With more products being produced locally, importers will have to price competitively or exit the markets altogether.
@2500 20/ On the B-B level between local manufacturers, more and more deals are being made where the raw-material part is paid separately, we are adapting.
@2500 21/ One last thought : If @Hassan_B_Diab delivers on the raw-material financing he pledged, local manufactured products should return to pre-crisis prices, reducing substantially inflation
