By Admire Mavolwane
TO a large degree the monetary policy, introduced and implemented by the central bank has so far been successful in taming the inflation scourge and stabilising the official exchange rate
On the other hand, fiscal policies, especially those dealing with the real sector, which “should” normally be the domain of the Minister of Finance appear to be non-existent or ineffective.
The 2005 budget is silent on government’s position or any proposals to arrest the slow death and resuscitate the manufacturing sector. It is the obligation of the authorities to provide an enabling environment for the real sectors of the economy.
According to the recent CZI Manufacturing Sector Survey, economic policies pertaining to the sector have tended to be less coherent and at best remained prominently stop-gap and ad hoc, hence the increasing vulnerability of the sector.
Based on the Central Statistical Office (CSO) figures, volumes of manufactured output peaked at 108% in 1996 and have trended downward ever since, with accelerated decline being recorded in 2000.
In 2003, output declined by 11,8% whilst 2004 should witness a further negative growth rate of 8,5%, according to the Minister of Finance. Fortunes are expected to improve in 2005 with output forecast to decline by only 5%. No timetable was set as to when the nation could expect industrial output to revert back to positive real growth.
The downturn in manufacturing could in part be ascribed to the slump in agriculture, which has occurred since 2000 and the production constraints brought about by shortages of foreign currency.
The other reason could be the lack of investment. Most companies, listed that is, have suspended capital expenditure, with only the likes of Delta, Cairns, CFI, M&R having embarked on expansionary programmes, otherwise the bulk of the capex has been confined to repairs and maintenance.
Public investment, especially infrastructural development has been put on hold, with a mere $5 trillion earmarked for capital spend, out of the $27 trillion forecast expenditure in 2005. The end result is that the existing and increasingly aged capital stock has come under severe pressure, hence the decline in output.
A number of entities have also failed to weather the storm of high interest rates and the collapse in aggregate demand, and have “exited” the industry.
The problems affecting manufacturing, whilst as acute as those affecting the financial and mining sectors, appear not to have received the same attention as those of the latter. This could explain the authorities’ apparent lack of concern.
However, corporate results from listed companies in this sector provide a window through which the challenges faced by the industry could be glimpsed. Recent financials from PowerSpeed, Gulliver and PGI, which we review this week, bore witness to the decline in the fortunes of the sector.
Starting with PowerSpeed, sales for the 12 months to September 30 grew by a below inflation rate of 312% to $56,8 billion, whilst operating profits increased at a better rate of $324% to $15,5 billion.
Operating margins, although under severe pressure, were more or less maintained at last year’s levels improving by a percentage point to 27%.
Financing costs increased considerably from $178 million to $2,3 billion. This was as a result of an upsurge in borrowings. As at September 30, the debt stood at $5 billion, of which $1,6 billion attracted concessionary rates, whilst the balance is in the form of BAs.
Attributable earnings of $9,3 billion were realised, up 272% on the prior year.
For Gulliver, with full year volumes declining by almost 30%, turnover grew by 232% to $23,3 billion, a far cry when compared with average inflation rate from October 2003 to September 30 this year of 384%. To compound it all, the company had to make a hard decision to pull out of some export markets which were rendered unviable after the appreciation of the local currency unit in January. The exports foregone in this period were worth US$500 000.
Profitability was negatively impacted by a massive deterioration in margins, with a 10 percentage point decline at gross profit level from 44% to 35%.
At operating profit level, where expenses growth, at 342%, was ahead of revenues, margins came off from 23% to 7%. Consequently, operating profit growth was a disappointing 7% to $1,743 billion.
Out of these profits, $1,708 billion was remitted to the banks to fulfill interest commitments. Thus profits from operations, before non-recurring items, of only $35 million were realised. The disposal of 50% of residential suburbs saw the company booking in a profit of $840 million, which resulted in the group achieving a bottom-line of $967 million, reflecting a year-on-year gain of 6%.
The six months to September 30 results from PGI were dire to say the least. Turnover increased by a paltry 92% to $127, 7 billion, reflecting the negative impact of the static exchange rate and “fire sales” in other divisions as the group tried to grapple with the then ballooning interest burden.
An operating loss of $11,5 billion was recorded compared with a $25,2 billion profit in 2003. Of the three divisions, Trading posted a profit of $9,9 billion, problem child, ZimBoard contributed negatively to the tune of $14,2 billion, out of sales worth $11, 6 billion, whilst the Glass division achieved $14,2 billion in sales and an operating loss of $1,9 billion.
At group level the company paid an interest bill amounting to $33,3 billion and consequently made an attributable loss of $46,8 billion.
The fact that the trading division posted a profit, whilst the other two manufacturing units floundered serves to underline our concerns. The thrust in our view should be on the development of policies that foster the growth of manufacturing and exporters, rather than pumping all available resources into the inadequately structured agricultural sector, which is increasingly becoming a black hole.