HomeOpinion‘High production costs fueling inflation’

England prepared for aerial assault

BUILDING inflationary pressures, more than a year after the central bank’s printers went silent, have exposed the country’s unenviable economic position and the lethargy in industry and commerce.

Money-printing was blamed as the main driver to Zimbabwe’s record inflation, which was estimated at above two billion percent in mid 2008 before statisticians and authorities lost interest.
The right medicine, economists suggested then, was to stop printing notes and adopt a more stable currency, especially the United States dollar or the South African Rand.
This advice was partly followed in February last year when instead of a wholesale adoption of the US$, multiple currencies were introduced in the country’s payment system.
Partial dollarisation proved the right medicine as it fought inflation overnight, presumably paving way for an economic rebound.
However, 14 months later, inflationary pressures have started building up and they threaten to drown the few successes realised as a result of the adoption of multiple currencies.
For many Zimbabweans, inflation brings memories of the time when prices of mainly basic commodities changed daily and nothing was affordable.
This also brings memories of government response to high inflation, especially the price slashes in 2007 when retailers were ordered to sell commodities lower than the marked price.
Price slashes resulted in empty shelves as producers either withdrew or held on to their stocks citing uncompetitive prices which were set by government.
Threats of increased inflation are, however, coming at a time when Zimbabwe is using multiple currencies, one of the medicines that steered the country from hyperinflation to deflation.
It is also coming at a time when there is a government of national unity (GNU) which has exercised restraint when dealing with business unlike the populist and radical approaches President Robert Mugabe’s administration used.
This leaves the authorities grappling for rational and legitimate solutions to the threat of high inflation.
Many are wondering what role government would play at a time when the currency in circulation is issued by other authorities, especially by the USA and South Africa.
The Reserve Bank of Zimbabwe (RBZ) which should take initiatives to fight inflation has its hands tied as it now plays a peripheral role since the adoption of multiple currencies.
RBZ would have used various instruments, through monetary policies and increasing or decreasing money supply to fight inflation but this disappeared with the adoption of multiple currencies.
This has left economists and the ordinary citizens asking what has gone wrong and the likely consequences.
For economic commentator John Robertson, the recent trend is a reflection of the contrast between a very strange situation, in 2009 and the reality this year.
Robertson postulates that the rate of inflation is likely to continue growing as it will be a comparison with a very small figure registered last year.
For Robertson, the rapid increase in inflation rate is only a “mathematical aberration” and “it is not very serious”.
It is a reflection of what is happening in the economy where government has failed to raise votes of credit because it has gone on “self inflicting damage and then carry on to behave badly” in the eyes of the international investors and businesses.
“There is lack of confidence,” added Robertson. “There is lack of money because of the issue of confidence. The banks outside the country do not have confidence to provide equity capital (to their subsidiaries in Zimbabwe).”
As a result of the liquidity crisis, there is no money for government to fix all the other things which would create an enabling environment for competitive and efficient production.
Economist Ranga Makwata said there is an external source of inflationary pressure, especially because most of the products on the shelves are imported.
“Most of the products we have are from South Africa and the strengthening of the rand means that the cost for raw materials also goes up,” said Makwata.
The rand has firmed in the last 12 months and this has increased the production cost for local industries which use the US dollar.
Apart from the external pressure, Makwata added, inflation is also being driven by the cost of doing business in Zimbabwe, especially utilities tariffs.
Utilities, especially electricity, are highly priced and at the same time inefficient which is a double cost to manufacturers who are kept guessing when they would have power cuts.
There are companies losing out because they lose power at a time when raw materials are already in the production chain and they may not be reused.
“There are times when it is better to have higher electricity tariffs with efficiency,” added Makwata.
Most local companies are not competitive because of the high electricity tariffs and inefficiency.
Robertson also concurred saying government should fix the infrastructure so as to improve the efficiency of the local industry.
Local industries are less competitive compared to South Africa, for example, and it explains why unit prices are usually at par.
It costs less than US$2 to produce a kilogramme of chicken in Brazil and South Africa, yet it is almost double locally.
These disparities are a result of the structural weaknesses in the local economy which do not promote efficiency.
In Zimbabwe, it costs producers as much as US$0,93 to make a US$1, while in other countries it costs significantly less, around US$0,60 to make a dollar.
A producer in Zimbabwe would pay US$0,12 for every dollar they borrow while in some countries it is like free money with the highest being US$0,05 for a dollar.
This high cost of doing business has relegated Zimbabwe into a retail outlet of more efficient producers like Brazil and South Africa and it comes at a cost as the country becomes a net importer.
Makwata said it was only after addressing these factors contributing to local inflation that external pressures are eliminated.
Improved capacity utilisation, Makwata added, would mean that local companies meet the demand and there will be no need to import, thus ending the influence of external inflation.
Capacity utilisation increased from an average 10% at the beginning of last year to around 3 % by September, but this trend has stopped. Increased capacity utilisation, economic analysts say, can be sustainable if the producers are doing so efficiently and competitively.


Leonard Makombe

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