Romania’s government endorsed on June 30 the emergency ordinance to regulate staple food prices over a 90-day period. The declared purpose of the ordinance is to achieve affordable prices for basic food goods. 

The analysts’ expectations diverge, however, depending on the interpretation of the somewhat ambiguous text of the ordinance.

On the one hand, some criticised the text along the fundamental economics theory, arguing that capping the prices (in principle) leads to scarcity; and they warned that retailers could hike the prices of non-regulated goods.

This is indeed what theory predicts for the outcome of capping prices. However, it is more likely that the ordinance will have no impact whatsoever. It may be rather a political marketing move of the Social Democrats, who recently took over the government and must highlight their concerns for the low-income households (a significant segment of the electorate). The Romanian government is thus mimicking similar policies in Europe, more or less successful depending on their architecture. 

Specifically, the ordinance just passed by the government allows food processors and retailers to add 20% on top of direct expenditures (raw material for food processors or the product itself for the retailers) and indirect (overhead) expenditures. The firms involved in the distribution of the goods subject to the ordinance can only add a cumulated 5% margin on their direct and indirect expenditures.

Accounting experts explain that no retailer charges a 20% margin on top of all direct and indirect costs – meaning that the ordinance is not binding, so it will have no effect.

iulian@romania-insider.com

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