HomeOpinionRitesh Anand Column: Zim must focus on sectors it is good at

Ritesh Anand Column: Zim must focus on sectors it is good at

This week we take a closer look at the Confederation of Zimbabwe Industries (CZI) annual survey released a few weeks ago. Zimbabwe is experiencing structural regression, with worsening de-industrialisation and the informalisation of the economy. There is little doubt that Zimbabwe’s manufacturing sector has been in structural decline for sometime now.

Ritesh Anand

We need to appreciate that the issues are not cyclical, but rather structural in nature. We can no longer compete on the international market, especially China, in certain industries. We cannot be good at manufacturing everything. We need to specialise and concentrate in areas where we have some competitive advantages.

During the hyperinflationary era, manufacturers struggled with lack of foreign exchange and the impracticality of developing long-term strategic plans. They were also unable to invest in new machinery. Hyperinflation also decimated the balance sheets of most companies.

Post-dollarisation manufacturers had to deal with a different set of challenges. This time it wasn’t a shortage of foreign currency, but rather the cost of money. The cost of money in Zimbabwe is high given the perceived country risk. Manufacturers were forced to borrow short-term money at extremely high rates (sometimes as high as 35% per annum) in order to rebuild their balance sheets. They could support this rate during the initial rebound in the economy between 2009 and 2011.

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Growth, however, slowed sharply in 2012 and manufactures started to buckle under the pressure of a slowing economy and debt burden. While interests rates have declined, they remain stubbornly high at 10% to 15%, especially when you factor in the deflationary environment Zimbabwe finds itself in. Interest rates need to fall further and growth needs to be restored if Zimbabwe is to stem the decline.

While the Governor of the Reserve Bank of Zimbabwe (RBZ), John Mangudya, has urged the banks to lower interest rates, most banks have been reluctant to do so. Banks have become accustomed to high interest rate margins given the lack of non-interest income causing the lowering of rates unprofitable for most banks.

The establishment of Zimbabwe Asset Management Company (Zamco) has, however, indirectly played a role in lowering rates last year as it is prepared to reschedule secured non-performing loans (NPLs) over five to 10 years at much lower interest rates of 6%-10%.

The RBZ governor’s efforts need to be supported by economic and investment reforms. Government needs to create a conducive environment for businesses to prosper. Zimbabwe needs to implement reforms that attract investment.
Without the necessary economic and investment reforms, Zimbabwe is unlikely to recover.

The CZI report states that capacity utilisation has declined marginally from 36,5% in 2014 to 34,3% in 2015. Post-dollarisation it peaked at 52% in 2012, but has been declining since then. Among key challenges manufacturers currently face in Zimbabwe are low domestic demand; capital constraints; antiquated machinery and machine breakdown; competition from imports; high cost of doing business; and unreliable service provision.

Furthermore manufacturers face significant infrastructural challenges. These include power shortages; poor road infrastructure; inefficient rail network; and poor transport infrastructure to access ports.

The acute power shortages are of grave concern. Economies cannot function without power. I expect power shortages to reduce GDP by at least 1-2% per annum.

Unfortunately, there are no short-term solutions to Zimbabwe’s power problem. Power projects require significant capital and take a long time to develop. Short-term solutions like solar are both expensive and do not provide a lasting solution to an ever-increasing need for power. This has compounded the burden on manufacturers.

Some manufacturers have resorted to using generators, which have significantly raised the cost of production. How do we expect our manufacturers to be competitive given these challenges? Furthermore, the strengthening US dollar, particularly against the rand, has made Zimbabwe significantly less competitive within the region.

The outlook for manufacturing in Zimbabwe is certainly bleak and I expect more firms to collapse over the next 18 months unless something significant changes. Capacity utilisation is likely to fall further in 2016 to below 30% if nothing changes.

Zimbabwe needs to focus on manufacturing in sectors where it has a competitive advantage and clearly define those areas. We live in a global village and cannot compete with the world, especially China. Government needs to feel the weak pulse of the industry and get a better appreciation of the challenges facing manufacturers. Only then can we develop sensible turnaround strategies.

We cannot be great at everything. Let’s understand what we are good at and how best we can develop those industries. Government has talked about the creation of special economic zones, but has failed to create centres of manufacturing excellence.

The CZI Manufacturing Sector Survey 2015 makes for depressing reading, but highlights the key issues facing manufacturers in Zimbabwe. The solutions are simple. Let’s focus on the things we are good at and develop centres of excellence. Protectionist policies only help in the short-term and serve to distort the market. In a dynamic and increasingly competitive global environment we need to specialise in areas in which we can be good at.

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