Adoption of the multiple currency system in February 2009 resulted in the Zimbabwe dollar’s hyperinflation era coming to an end, as people gained lawful access to foreign currency, which is now local by certain standards.
Stashes of currency “externalised” in foreign bank accounts suddenly became accessible as the market started formally absorbing the multicurrency regime which actually saved the economy from descending into unmanageable chaos. Even those who often pretend to be more patriotic than others and would want to cling onto symbols of Zimbabwe’s sovereignty — including the now defunct local dollar — had no choice but to embrace foreign currencies for their own and the nation’s survival.
While Zimbabweans were still trying to adjust to the formal use of foreign currencies, local companies went into an import overdrive and all manner of once scarce goods flooded the market and shops, while prices stabilised.
However, the new era of perceived plenty has also brought with it new circumstances whilst at the same time exposing certain realities about Zimbabwean companies.
For a long time, most companies could not refurbish their plants and equipment and could therefore not meet the rapidly expanding demand for goods and services. The companies were operating at between 15% and 20% capacity, whilst a few were within the 30% range. Most goods in the country, from essentials like cooking oil, tinned foods to potato crisps, were imported in huge quantities.
Companies such as Olivine and Cairns, for instance, faced a plethora of challenges trying to restore basic viability in view of a flood of cheaper imports and problems of recapitalisation, as well obsolete machinery and equipment.
As corporate Zimbabwe tried to restore normalcy in the market, most companies lost the urgency to generate real foreign currency as they used to. With the US dollar virtually replacing the liquidated Zimbabwean dollar as the national currency, few companies are now working hard to build foreign currency reserves.
US dollars earned from trading locally can not strictly be considered as foreign currency as this is now merely a new medium of exchange since Zimbabwe adopted the multicurrency systems, with the US dollar dominating the market.
“The country needs to generate money from outside in order for wealth to grow,” said a leading fund manager. “Money generated from local trade is simply a medium of exchange being circulated, not foreign currency.”
The fund manager said businesses in the country have suddenly lost the urge to innovate by developing export markets and offshore operations which was imperative for long-term survival before the multicurrency system.
“Foreign currency generation strategies disappeared from boardroom discussions and day-to-day meetings. The real tragedy in all this is that all Zimbabwean companies think that it is the next guy’s problem to export and earn ‘foreign currency’ for their needs because of the multicurrency regime,” he said.
Prominent economic analyst Eric Bloch thinks the reason most Zimbabwean companies are not exporting has nothing to do with the availability of foreign currency locally.
Bloch said Zimbabwean companies found themselves seriously undercapitalised because their entire capital base was eroded during the hyperinflationary era when plant and equipment depreciated and could not be replaced.
“Zimbabwean companies do not have the funding they need to retool so that their production reaches levels at which they can compete against foreign firms,” said Bloch.
“Their volumes are low and there are no economies of scale to talk about.“
He said the country needs a combination of import controls through a sound tariff regime, whilst exports are aggressively promoted via appropriate incentives.
“We need to introduce high tariffs on those goods that are available locally so that people can still have access to imported substitutes, but traders compete on quality rather than price,” he said.
Bloch said the government must implement measures to make the economy more liquid, but needs to do this by attracting more foreign investment.
“We also need realistic export incentives such as at the 15% export retention scheme that we used to have. For example, China gives back 180% of wage costs to some of its exporters as an incentive as soon as they dispatch goods. They virtually have zero labour costs. Zimbabwe has to offer export incentives within the scope and realm of agreements such as the WTO (World Trade Organisation),” Bloch said.
University of Zimbabwe Graduate School of Business Professor Tony Hawkins said the multicurrency was a “breath of fresh air”.
“It was a breath of fresh air and brought the realisation that firms had to be efficient to compete. Companies could no longer rely on a constantly depreciating Zimbabwe dollar to give them an edge in export markets or to price imports out of the market. Instead, firms had to switch from price-setters to price-takers,” he said.
Hawkins said that firms like Delta, recognised strategies to exploit temporary distortions, such as buying Ariston, were not viable long-term strategies for a beverage firm.
“Delta has since gone back to its core business and that is a useful strategy. In the past, when it diversified it was less successful,” he said.
Hawkins, however, said it was true that because foreign currency can now be obtained from the bank, firms are less focused on generating their own hard currency.
Zimbabwe has always relied on a relatively small number of export-driven firms, mostly in mining and agriculture, along with tourism. The manufacturing sector has never been able to produce significant exports to generate foreign currency, except cotton, sugar and ferrochrome, he said.
Hawkins argues export growth will depend on international competitiveness and on exploiting comparative advantage. Zimbabwe’s advantage lies mostly in minerals and agriculture, but farm competitiveness was seriously damaged by land reform while mining competitiveness is being undermined by the indigenisation policy. Electricity supply problems and escalating input costs, including rising wages, are exacerbating the situation.
Hawkins said resorting to import controls to bridge the trade deficit gap and balance of payments imbalances is a bad idea and unsustainable because of the treaty obligations under trade agreements with Sadc, Comesa and the WTO. Import controls, he said, breed uncompetitive firms with high costs. They also foster corruption and impose a burden on an already over-stretched public service.
Hawkins said export promotion is a better option but the government is operating under very tight budget constraints and it is not easy to suggest incentives that do not cost the fiscus, either in terms of reduced revenues or increased spending. He suggested making the country an attractive low cost investment destination would boost exports and inward revenue flows in the medium to long term.