The ongoing foreign currency shortage in the country is threatening to cause more havoc to the economy than anticipated. Even though consumers are now reacting to the change in prices for basic commodities such as bread, flour, cooking oil, fuel and rice; the issue had been brewing for a long time in the run up to the crucial July 30 harmonised elections. Various stories of misplaced allocations of the little generated foreign currency were highlighted in the local media. The Zimbabwean government is known for importing top of the range luxury vehicles, extravagant spending on foreign trips, booking foreign airlines, preferring foreign university packages for its officials and medical treatment in South Africa or the Far East among other lifestyle related expenses. Local suppliers of such goods and services can only dream of what would have been if millions spent abroad were diverted to them. A few glimpses of the foreign currency problem manifested in September 2017 and early this year with fuel, drugs and cooking oil shortages. The apex bank quickly found solutions to shortage fears for basic commodities by allocating more foreign currency to those commodities. A number of foreign bank facilities had to be sought to boost the country’s foreign currency liquidity position.
However, the fundamental aspect of unsustainable allocations of the scarce foreign currency on consumptive and lifestyle related goods and services has continued unabated. It has become apparent that the balance between allocations of forex to consumptive goods against imports of value adding raw materials is failing. Giant manufacturers such as Delta Beverages, BAT, National Foods, Sable Chemicals, Nestle and United Refineries among others have cried foul over the foreign currency crisis. Other sectors feeling the heat include pharmaceuticals and fast moving consumer goods retailers. The allocation of foreign currency to consumption related goods and services presents challenges to the local industry as consumers always find cheaper alternatives in imports compared to what is produced locally. It is a fact that Zimbabwean producers cannot compete with their South African or global peers in terms of cost of production, therefore excessive bias towards allocating more forex to consumptive imports hurts the local economy. Local agents and arbitrage seekers can also quickly take advantage by substituting local products with cheap imported ones. The country has been through these cycles in the last 20 years and it is not sustainable for the local economy.
Demand for foreign currency by the industry is expected to surge as the local market prepares for increased consumer spending in the festive season. Market shortages in real and artificial terms are starting to creep in thereby pushing the inflation rate north. Forex becomes an issue because bulk of the raw materials used by the local industry are imported with fuel, electricity and spares topping the list for non-consumptive imports. However, the country spends over 50% of its foreign currency on goods and services that do not add value to the industry such as refined foodstuffs, cereals, cellphones and accessories, entertainment, second hand vehicles, clothing and general merchandise mainly imported from the Far East.
Zimbabwe’s Trade deficit narrowed from $2,38 billion in 2016 to $1,48 billion in 2017. The 38% decline is mainly attributed to foreign currency shortages, increase in exports as a result of RBZ export incentives and a weaker local currency in Bond notes which meant that fewer goods could be imported into the country. However, the value of smuggled merchandise that also demands huge sums of foreign currency should not be excluded in the statistics. The country has a cyclical inflow of foreign currency due to its dependence on agriculture exports of tobacco and other yesteryear horticultural exports. The bulk of export earnings are received between April and August after harvesting. Thereafter the dry season starts from September to March of the following year.
It has become critical for the government to channel more foreign currency to imports of raw materials that add value to the local economy through value chain demand, tax payments, employment creation and export earnings. Local production contributes to GDP while allocating more foreign currency to consumption reduces that GDP for an economy that desperately needs growth. Deliberate strategies should be made to discourage importation of finished goods especially those available locally, while at the same time local producers of strategic raw materials such as ZISCO Steel and Sable Chemicals should be capacitated. For each of the imported goods and services (save for fuel and high tech equipment), the government can find local suppliers that have folded because of imports. Without a clear policy on foreign currency allocations, the central bank will fight critical shortages and inflation rate daily in a juggling exercise. At some point the juggling will become unbearable and the bomb will explode on the economy.
Victor Bhoroma is business analyst with expertise in strategic marketing and business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, mail him on email@example.com or Skype: victor.bhoroma1.