This is inevitable, for even those with immense financial ability and expertise are affected by the innumerable imponderables and unforeseen occurrences that impact upon economies, and therefore upon financial perceptions, policies and actions. Regrettably and unavoidably, economics is a very impure science, for it is often impacted upon by the unforeseeable and unexpected.
For example who would, just a month ago, have anticipated the immense volcanic eruption which occurred in Iceland having devastating economic consequences upon almost all of Europe, and even further afield? Similarly, only a few months ago, none could have authoritatively forecast the devastation of the Haiti earthquake and, subsequently, that in Chile? In like manner, most Ministers of Finance cannot always foreshadow actions of political colleagues and opponents, let alone the economic repercussions that will arise therefrom.
However, in his first year of office, and notwithstanding that his very diverse and considerable skills do not have a pronounced foundation in the field of finance, Tendai Biti has generally had sound perceptions of the circumstances of the Zimbabwean economy, of the needs of that economy, and of policies to address those needs. He has done more right than wrong, and was a key player in achieving those first phases of economic recovery in 2009. Although that recovery was minuscule in relation to the nation’s needs, it included elimination of the most severe hyperinflation ever experienced anywhere in the world, with Zimbabwe benefiting from deflation last year. That recovery was also evidenced by restoration of commodity availability in most shops, by the virtual elimination of currency black markets, and a marked decrease of other black market operations. Various other facets of tentative economic recovery became evident as 2009 progressed.
Nevertheless, in giving an overview of the first quarter of 2010, Biti got it wrong! Although understandably concerned that Zimbabwe is again experiencing some inflation (but not markedly so) he ascribed blame for that inflation to Zimbabwe’s industrialists, in effect alleging that they are resorting to unjustifiable profiteering. Whilst such an allegation may have validity in respect of an isolated few, it has no substance insofar as the vast majority of industrialists are concerned. The reality is that that majority is desperately struggling to survive, operating under exceptionally constrained circumstances. Admittedly, many have had to increase prices, but only because of no alternative but to do so if their enterprises are to survive. The survival difficulties confronting the manufacturing sector are many, including:
=Recurrent losses of production as a result of frequent interruptions in electricity supply. Many hours are lost each week due to scheduled load-shedding by Zesa, compounded by further supply interruptions on occasions of unscheduled load-shedding, or of system faults sustained by Zesa. These production losses are not matched by reduced expenditures, for fixed operational costs and overheads are unavoidably sustained notwithstanding the absence of production. In some instances, losses are exacerbated by goods in the course of manufacture being irreparably damaged when plant and machinery ceases to operate due to the electricity cuts. Manufacturers have no alternative if their businesses are to survive, but to recover all costs from their selling prices and, with lessened production volumes and consequential lesser sales, the price of each unit must unavoidably be increased.
=During the intense hyperinflation era of 2008, consumer demand crumbled to minimal levels, purchasing power having been almost wholly eroded. As a result, most manufacturers sustained very considerable losses, and those losses grievously depleted their capital resources. Such limited resources as they were left with were further decimated by the 2009 currency redenomination, and subsequent demonetisation of Zimbabwean currency. In order to continue operations, industry had to turn to the money market for working capital facilities. However, that market has very limited funding ability due to various factors including minimal access to foreign lines of credit. Continuing political and economic instability, intensified by recurrent foolhardy, racialistic, and economically destructive policy statements have been an ongoing deterrent to foreign financiers making lines of credit available to the Zimbabwean money market.
=Because funds are scarce on the money market, they are available to industry at exceptionally high costs (in some instances, establishment and drawdown fees, interest, and other allied charges aggregate to considerably over 100% per annum, exponentially greater than prevailing elsewhere in the world). Again, the manufacturer has no alternative but to pass on those finance costs to consumers, by building the cost recovery into selling prices.
=Yet a further burden afflicting industrial viability is the continuing magnitude of charges by parastatals (including Zesa and TelOne), local authorities and other public entities. In most instances the charges are considerably greater than prevailing elsewhere with the region, and therefore impact negatively upon industry’s ability to be export market competitive. This therefore further reduces production volumes, necessitating higher selling prices for manufactured products.
=Volumes, and quality, of production are also adversely affected by wide-ranging low levels of worker morale. Workers are understandably demoralised by continuing financial constraints, their incomes being below the Poverty Datum Line (PDL), notwithstanding some negotiated wage increases. Employers cannot afford to pay more, but employees and their dependants are struggling to survive. The intense loss of worker morale has impacted massively upon productivity, and upon maintenance of quality standards, further undermining the viability of manufacturing operations.
=Another brake on industrial viability is, in many instances, the magnitude of imports of competitive products from the Far East (although often disguised as of South African manufacture in order to benefit from Sadc duty-free entry into Zimbabwe). Those imported products benefit not only from the frequent evasion of import duties, but also from very immense governmental export subsidies. As a result they are unfairly price competitive against locally produced goods.
These are but a few of the tough operational constraints upon Zimbabwe’s manufacturing sector, forcing price increases and consequential inflation. Until government does the right things to resurrect and achieve economic recovery, the reality is that it is fuelling inflation, not industry. Hence Biti’s criticism of industry was misguided (possibly due to misinformation by some of his advisors), and the culprit responsible for inflation is government itself.
By Eric Bloch