PHILLIMON MHLANGA
Feeling the heat of Zimbabwe’s deepening economic crisis, local companies have pressed the panic button indicating it has become abundantly clear that they are struggling to stay afloat, a situation which may force many to shut down this year adding to an expanding corporate grave yard.
Zimbabwe’s economy is battling hyperinflation with the inflation rate above 500% in January.
The costs and stress are rendered mostly on the doorsteps of local firms and citizens where margins of survival are now very minimum.
Foreign currency is in short supply and finding it has become one of the nightmares for local companies.
The interbank market, industry players indicated, is not efficient resulting in them failing to get the foreign currency from that market.
The deterioration of the situation has in some way compelled companies to source the foreign currency for the importation of critical raw materials from the black market where premiums are higher.
In turn, companies pass on the costs to consumers. Companies have also been buffeted by sharply rising operational costs, among many challenges. Costs are expected to continue soaring this year, something which is expected to unsettle businesses further.
Exacerbating Zimbabwe’s crisis, the local currency has been on a free fall as well against the greenback.
On the one hand, the soaring cost of the greenback has in turn made the importation of the critical raw materials even more expensive, meaning most plants and equipment in Zimbabwe have remained out of service due to lack of imported spare parts.
On the other hand, most workers’ purchasing power has been eroded as wage and salary increases have lagged far behind prices of goods and services which have risen sharply in recent months.
Rental costs are outpacing wage gains by massive percentages points. Health care costs have grown more than five times in recent months. The closure of firms or downsizing, will result in many workers being thrown onto the streets. So dire is the situation, that the Confederation of Zimbabwe Industries (CZI) and the Employers Confederation of Zimbabwe (EMCOZ) have warned of more company closures this year.
“The economy continues on its roller coaster journey. It’s bumpier. A lot of work need to be done, the economy is in a difficult place which is likely to result in more company closures this year,” Henry Ruzvidzo, CZI president said.
EMCOZ president, Israel Murefu, concurred with Ruzvidzo.
“In the first quarter of 2020, the macroeconomic environment is still challenging for local enterprises,” Murefu said.
“Firstly, erratic energy and fuel supply has immediate and direct negative impacts on working time, production and capacity utilisation.
Secondly, uncontrolled inflation has the ability to decimate value of the local currency and profitability.
Murefu added: “The challenges of foreign currency are expected to remain. The constrained consumer spending habit, the negative impact from the monocurrency are all are also taking a toll on business.
The crisis is expecting a worse situation in 2020.” Zimbabwe’s economy plunged into recession last year.
And about 78% of companies predict that the economy will be in recession again this year, according to the CZI survey released last week.
The manufacturing sector is expecting capacity utilisation to further decline to 27% this year.
Last year it declined to 36% from 48.2% in 2018. This demonstrates the failure of both government and private sector efforts to arrest deindustrialisation mainly due to the absence of funding to bailout struggling local companies.
Other challenges are the serious energy challenges, rising inflation, and depressed consumer spending.
About 88% of companies highlighted they were facing difficulties to access foreign currency from the interbank market.
They said the interbank market was not efficient. The Zimbabwe National Chamber of Commerce chief executive officer, Chris Mugaga concurs: “The fear of business is that headwinds are now very threatening.
We are experiencing escalation in prices (of raw materials, goods and services), foreign currency and cash shortages, sustained real wage compression, contraction in economic activity across key sectors.
“Industry capacity utilisation has also declined significantly. If you see government subsidies alone eating about 15% of the national budget, we should be worried.
There is also a problem of government issuing too many Statutory Instruments (SIs). Between January and December last year, government issued 258 SIs in a year. This is almost like a day with an SI. This is a threat to investment. It’s something government need to work on.” Mugaga said there is need for an effective interbank market, a uniform exchange rate and the removal of all distortions.
While business has pressed the panic button, the Reserve Bank of Zimbabwe (RBZ) sparked arrow by suggesting contrasting views about the economic situation.
They appear not to see the severity of the situation. RBZ deputy director of economic research, Nebson Mupunga said industry was responding to “noise”.
“For other countries, it took a lot of time to move out of dollarization and some never. But in Zimbabwe, we have achieved this within a short-time which has not been done anywhere else in the world. What is needed now is to sustain it.
The country is implementing a number of policy reforms to re-balance the economy,” Mupunga said. “The majority of industries are crying about low demand in this country.
It’s because the Zimbabwe dollar is in the hands of few because of the (poor) distribution.
This has created noise or temporary shock exchange rate, which the companies are responding to and quickly pass it on to pricing of their goods and services, meaning purchasing power erosion.”
RBZ governor, John Mangudya, echoed Mupunga’s sentiments saying the full de-dollarisation was likely to take about five years.
“The bank believes that the macroeconomic signals that include fiscal and monetary disciple, prospects of positive economic growth and lower inflation are improving to support a gradual de-dollarisation process within a timeframe of five years.
This is in line with other countries’ experiences on dedollarisation,” Mangudya said.
“De-dollarisation is measured by the foreign currency deposits as a proportion of money supply.
It went down to 37% by December 31,2019 from about 50% in June 2019. Foreign currency denominated loans in the banking sector stood at 22% of total banks’ loans and advances as at December 31,2019.
The use of the local currency for transacting purposes has also continued to go up, reaching a total amount of ZWL$459.6bn from 189m transactions for the full year 2019.
These measurements of the proportion of the use of the local currency in the economy show that the country is on the right trajectory to dedollarise.”
Zimbabwe ended a decade of dollarisation in June last year.
But, there is still rampant United States dollar denominated sales in the informal sector, which is said to be more than 60%. Even the formal sector, prices are linked to the greenback.
This has left businesses calling for redollarisation of the economy. Several industrialists and economists, however, said the RBZ was out of touch with the situation on the ground.
“To say industry was responding to “noise”, I guess the point is an academic dysfunction between what is on the ground and what RBZ believe.
If they (RBZ) believe we have de-dollarised, then we have a very serious problem,” Dairibord Holdings Limited Zimbabwe group chief executive officer, Anthony Mandiwanza said. Busisa Moyo, the chief executive officer of United Refineries agrees with Mandiwanza saying: “That’s why we find a challenge in credibility.”
Moyo, who is also one of President Emmerson Mnangagwa’s advisors added: “We are talking up here and the reality on the ground is down here.
The truth is business trenches are tough at the moment.”
These sentiments were shared by several economists.
The Ministry of Finance and Economic Development’s acting deputy director of economic affairs, Elson Chuzu, said: “The situation is very complex.
We experiencing foreign currency shortages. Inflation is being driven by parallel exchange rate and money supply developments.
We expect extreme shocks such as drought.
It’s a difficult environment, because without external support, we can’t do much reforms.
We are experiencing depressed aggregate demand. We need to address the electricity issue.”
He added: “Inflation is too high. It’s not good for business. So, we are working with the Reserve Bank of Zimbabwe so that we contain money supply.
This year, we will see growth if everything goes according to plans.” Government projects the economy to grow by 3%. While this year’s future is expected to be brighter in the global economy, which is expected to grow significantly, several economists painted a gloomy picture for Zimbabwe.
They said there is no growth to talk about. “Uncertainty remains very high in Zimbabwe,” the World Bank (WB) senior economist, Stella Ilieva, said.
Zimbabwe’s economy was in recession last year. The economy contracted by -7.5%, according the WB. The situation this year, is expected to worsen.
The WB, which initially forecast a 2.7% growth this year, now expects another recession this year.
Ilieva said the WB was currently reviewing projections they made early January this year about Zimbabwe’s economic growth in 2020.
“Uncertainty remains elevated. Risks for recession in 2020 are very high as another drought is looming. With drought, there will be negative impact in almost all sectors.
Poverty is likely to further increase, requiring more social spending,” Ilieva said.
“Opportunities for growth prospects hinge on three pillars. These are stabilising prices of goods and services and remove distortions, boosting firms’ productivity and enhancing trade openness and integration.”
Another economist, Joseph Zim firms press panic button, RBZ blames inflation expectations John Mangudya Mverecha said: “Zimbabwe faces elevated corporate distress conditions.
There is escalation in prices and inflation. There is also growing foreign currency and cash shortages.
Private consumption has significantly declined. There is significant austerity induced contraction in aggregate demand.
There is also sustained wage compressions. They are now between 18% and 20% lower than what they were last year. We really face huge challenges. The situation is likely to worsen this year.”
To deal with the problems, Mverecha recommended several stability measures that need to be put in place.
“We need to deal with inflation expectation. We need to anchor inflation expectations and there is need to control money. There is need to have an efficient and effective interbank market.
There must have a uniform exchange rate, remove all pricing distortions and stabilise fuel prices,” Mverecha said.
“It’s not enough to reduce money but the rate of reducing is key. There is need to review foreign exchange threshold, review of all subsidies, stabilise energy sector and have a micro and sectorial policy coherence. If we don’t do that, we will escalate the situation.”
University of Zimbabwe’s senior economics lecturer, Phineas Kadenge said: “Our economy is not performing well because of exogenous factors.
It’s because of government’s bad policies. Look at the annual inflation rate, other countries in the region have a single digit inflation rate while ours is three digits at 521% at the end of January.
Exchange rate is unstable, and is likely to continue this year.
“While government is claiming budget surpluses, we as the people continue to have deficits in our pockets.
We cannot expect this economy to grow, aggregate demand has gone down sharply. Inflation is an expression of what’s happening to money.
The economy is in deep trouble. You find we have people in the Ministry of Finance and the Reserve Bank of Zimbabwe who are trained and professional economists.
Every time, you hear them telling us things, which they also don’t believe, you can see their facial expression.” Kadenge, an economist added: “In normal cases, if one sells something today, he or she should be able to buy another thing next week or next month with the same money.
But, in our case in Zimbabwe at the moment, if you sell a cow today, you will be lucky to buy a chicken tomorrow.
Our economy is shrinking. If the economy in normal cases grow by 10% and money supply grow by 10%, there is no problem.”
He continued: “But in our case, the economy contracted by about 7% last year and government expects it to grow by 3% this year which I don’t think it will happen because of inflation expectations.
But, money supply increased by about 255%. That’s a huge problem.
Even when we are pricing, we always want to take care of the increase in inflation rate. There is serious uncertainty in this economy. People don’t have confidents in our money.”
Minister of Industry and Commerce, Sekai Nzenza remains optimistic: “There is absolutely no doubt that we are going through a bumpy road.
I must accept that inflation remains very high. There is also uncertainty in the market.
But, I still have confidence that Zimbabwe will be out of this.” Business is also demanding finality to labour reforms.
Labour lawyer, Rogers Matsikidze, said: “It’s taking a toll in industries and far from what we agreed. It’s like we move five steps forward but 10 steps backwards.
They have created a draft bill with the Labour Court without power. It’s a decision which cost companies.
The problem is with draft persons (at the Attorney General’s Office).” Matsikidze added: “We will have a Bill that does not meet our standards. The Tripartite Negotiation Forum (TNF) should take over the process. If that Bill goes to Parliament like that, it will be a disaster.
The Labour Minister should refuse to take it to Parliament in its current form.”
